From the beginning of the Blog we’ve made our position on “cy pres” class action distributions plain – we hate them. We had hopes that the United States Supreme Court would deep six the whole concept in Frank v. Gaos, 139 S. Ct. 1041 (2019), but as we guessed here, lack of standing was another dispositive ground, and unfortunately for our hopes that was the ground the Court took. Id. at 1046. Only one justice went on record as advocating disapproval of the cy pres award on the merits and rejection of the purported class action altogether. Id. at 1047-48 (Thomas, J., dissenting).
We haven’t blogged about cy pres since, but we do today to alert our readers to another appeal that could provide a vehicle for abolishing, or severely limiting, that baseless doctrine. The case – having nothing to do with prescription medical products – is Krakauer v. Dish Network, LLC, No. 21-1616, pending in the Fourth Circuit. Krakauer is unusual in that the class action at issue was tried, rather than settled. The court trebled the jury’s damage award. Krakauer v. Dish Network, LLC, 2020 U.S. Dist. Lexis 199112, at *3 (M.D.N.C. April 29, 2021). That resulted in an excessive judgment − after every class member who cared to come forward with a claim was satisfied, unclaimed funds from the final judgment in favor of the class totaled “approximately $11 million.” Id. at *4.
Rather than return this excessive exaction to the defendant, the court abandoned its adjudicatory role and instead assumed the mantle of judicial Santa Claus – a self-described “grantmaker.” Krakauer v. Dish Network, LLC, 2021 U.S. Dist. Lexis 82087, at *7 (M.D.N.C. April 29, 2021). Over the defendant’s objections, an ad hoc cy pres award system was created. The court “appointed a special master to help it evaluate potential cy pres recipients,” 2020 U.S. Dist. Lexis 199112, at *4, whereby “[t]he special master selected the organizations based on criteria developed from the Court’s previous orders and principles of sound grantmaking.” 2021 U.S. Dist. Lexis 82087, at *7.
Thus, the court seized the excessive part of the judgment (created by its trebling order), and used it to underwrite future litigation. Possible recipients were limited to:
Organizations that receive the award to benefit the class through their work on behalf of consumers injured by willful violators of the TCPA, for example by providing direct services, support, research, or advocacy for consumers.
Id. Krakauer glossed over the most serious problem with cy pres – that lack of any federal statute or rule conveying power on a district court to take money belonging to litigants and to award it to a stranger to the litigation. The only authority Krakauer invoked for a cy pres distribution was “the general equitable and discretionary powers of the court.” 2021 U.S. Dist. Lexis 82087, at *5. But what really happened is the judicial function being:
effectively transform[ed] . . . into a fundamentally executive role, because no longer is the court functioning as a judicial vehicle by which legal injuries suffered by those bringing suit are remedied. Instead, the court presides over the administrative redistribution of wealth for social good.
Martin H. Redish. et. al., “Cy Pres Relief & the Pathologies of the Modern Class Action: A Normative & Empirical Analysis, 62 Fla. L. Rev. 617, 641-42 (2010).
The defendant has appealed this decision, which effectively creates a self-funding litigation industry. Cy pres, in Krakauer, does not actually benefit anyone in the class. All identified class members have been paid, and the class members who opted not to claim their chunk of the judgment can’t conceivably be benefitted by money going to organizations devoted to promoting future litigation – since those individuals wanted nothing to do with this existing litigation. The only beneficiary is the litigation industry itself. Judge Posner got cy pres right over a decade ago:
The doctrine [of cy pres], or rather something parading under its name, has been applied in class action cases, but for a reason unrelated to the reason for the trust doctrine. . . . In the class action context the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scotfree because of the infeasibility of distributing the proceeds of the settlement (or the judgment, in the rare case in which a class action goes to trial) to the class members. There is no indirect benefit to the class from the defendant’s giving the money to someone else. In such a case the cy pres remedy is purely punitive.
Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781, 784 (7th Cir. 2004). See Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 480 (5th Cir. 2011) (Jones, J., concurring) (“[I]t is inherently dubious to apply a doctrine associated with the voluntary distribution of a gift to the entirely unrelated context of a class action”). In this particular instance, the judicial seizure of the excess judgment and it award to pro-litigation “charaties” is doubly punitive, since the excess was itself created by a punitive act – the initial trebling of the verdict.
The Supreme Court has been looking for a vehicle to review the lower courts’ use of cy pres principles in class action litigation for some time. See Marek v. Lane, 571 U.S. 1003, 1006 (2013) (Roberts, J., concurring in denial of certiorari). We hoped that Frank v. Gaos would be that vehicle, but that was not to be. One thing for sure, there is no standing issue here, since the defendant is the aggrieved party and the action stems from an adverse judgment rather than a settlement. “In contrast with cy pres distributions agreed to by the parties as part of a settlement, courts of appeals have greeted with more skepticism cy pres distributions imposed by trial courts over the objections of the parties.” In re Baby Products Antitrust Litigation, 708 F.3d 163, 172 n.7 (3d Cir. 2013).
We note that our colleagues at Lawyers for Civil Justice have filed an amicus curiae brief in support of the defendant’s appeal in Krakauer. We don’t think this one’s going away.