We’ve never liked the “cy pres” concept in the context of class actions. We opposed it (not terribly successfully) when the ALI was considering it.  We believe that taking money supposedly representing “damages” owed to class members and giving it to strangers is inherently substantive and thus not allowed by Fed. R. Civ. P. 23.  We also have yet to see any substantive source of court authority to do that.  To us, a cy pres settlement is an indicator of a lawsuit that should never have been brought, as it is an admission that even without any opposition the plaintiff is unable to prove damages or causation.  Cy pres is merely a dodge to make settlements look larger so that class counsel fees can likewise be inflated.

We have also noted the complete dearth of United States Supreme Court precedent supporting the use of cy pres in class actions, and further that the concurring opinion in the certiorari denial in Marek v. Lane, 134 S.Ct. 8 (2013), indicated interest on (at least) the part of Chief Justice Roberts in examining the validity of this doctrine.

We think that the split Ninth Circuit decision in In re Google Referrer Header Privacy Litigation, ___ F.3d ___, 2017 WL 3601250 (9th Cir. Aug. 22, 2017) (“GRHPL”), might just be the appropriate vehicle for seeking the Supreme Court review suggested in Marek.  Here’s why.

GRHPL had nothing to do with drugs or medical devices, but everything to do with cy pres abuse.  It was a privacy action that challenged the defendant’s storage and use of the search history of persons who had voluntarily used its free web searching algorithms.  Substantively this is, of course, complete garbage, since the quid pro quo of Google (and virtually every one of its chief competitors) making these search websites available for free is its ability to monetize the consumer preference data thereby created.

Would you rather pay to search the Internet?

We didn’t think so.

Enough on the merits. GRHPL was a privacy class action.  Those are never tried.  They are either dismissed or they settle.  This one settled, early, “before formal class certification.”  Id. at *3  The total settlement amount was $8.5 million – in return for a “release of the claims of the approximately 129 million people” who had used the defendant’s search capabilities over a period of almost eight years.  2017 WL 3601250, at *2.  The only other “benefit” for the class, if one could call it that, was the defendant “provide information on its website disclosing how users’ search terms are shared with third parties.”  Id.  As far as what the defendant actually did, the alleged violation that supposedly spawned the litigation, the GRHPL opinion mentioned no changes at all.  “Of the $8.5 million settlement fund, approximately $3.2 million was set aside for attorneys’ fees, administration costs, and incentive payments to the named plaintiffs.” Id. That’s right, class counsel and their hangers-on stood to receive 38% of a recovery that never came close to going to trial.  See id. at *3 (referring to settlement “at this early stage of litigation”).

That outcome was perfectly OK with the majority in GRHPL, which rejected the “view that the settlement should have been valued at a lower amount for the purposes of calculating attorneys’ fees simply because it was cy pres–only.”  Id. at *8.  This holding is, of course, in direct conflict with Judge Posner’s decision (discussed in our earlier post) that cy pres awards should be “excluded” altogether from counsel fee calculations because they “d[o] not benefit the class.” Pearson v. NBTY, Inc., 772 F.3d 778, 781, 784 (7th Cir. 2014).  Circuit conflicts such as this are the stuff of which Supreme Court review is made.

Having settled the litigation, what did the representative plaintiffs and class counsel do to provide recovery to the class itself?  Nothing.  Another thing that makes GRHPL an excellent candidate for Supreme Court review is the absence of other issues besides cy pres.  In this case 100% of the settlement went to “cy pres recipients” and 0% to the purported class:

The remaining $5.3 million or so was allocated to six cy pres recipients, each of which would receive anywhere from 15 to 21% of the money, provided that they agreed “to devote the funds to promote public awareness and education, and/or to support research, development, and initiatives, related to protecting privacy on the Internet.

Id.

The entire panoply of extreme cy pres abuse is present in GRHPL.  As we mentioned above, use of cy pres is an admission that even when the defendants cease to oppose the litigation, plaintiffs are unable to prove basic elements of any cause of action – causation and damages.  If this case were not a class action, it would have been dismissed.  Here, however, “the district court found . . . the settlement fund was non-distributable.” Id. at *3.  The Ninth Circuit however was perfectly willing to allow “cy pres-only settlement[s]”:

because the proof of individual claims would be burdensome or distribution of damages costly.  We have never imposed a categorical ban on a settlement that does not include direct payments to class members.

Id. (citation and quotation marks omitted).

We support such a “categorical ban.”  The inability of even unopposed plaintiffs to figure out who was injured and how much is a strong indicator that litigation is not the answer to the alleged problem.  In GRHPL, “each class member was entitled to a paltry 4 cents in recovery − a de minimis amount if ever there was one.” Id. at *4.  As to that situation, however, the United States Supreme Court has held:

[T]he venerable maxim de minimis non curat lex (“the law cares not for trifles”) is part of the established background of legal principles against which all enactments are adopted, and which all enactments (absent contrary indication) are deemed to accept.

Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214, 231 (1992) (string citation to five earlier Supreme Court cases omitted).  The kinds of cases epitomized by GRHPL should be the province of government regulators, not private attorneys pocketing almost 40% of the settlement proceeds and giving the rest of it away to their friendly third parties.  We agree with the objectors, whose position was “if the settlement fund was non-distributable, then a class action cannot be the superior means of adjudicating this controversy.” Id. at *4.  The Ninth Circuit contrary position implicitly assumed, however, that litigation is always “superior” to non-litigation.  That is judicial triumphalism of the worst sort.  Lawyers and judges are not indispensable.  Disputes can be resolved in other ways.  There are some things that regulators are better at, and situations where would-be litigants can’t show causation or damages – what ordinary litigants must  prove – are one such example.

Then there were the cy pres recipients themselves – particularly the law schools, described as the “usual suspects” – given money for “promoting privacy protection on the Internet” and “educat[ing] the class about online privacy risks.” Id. at *5.  In other words, this all-cy pres settlement is a classic example of another form of litigation abuse, specifically the litigation industry using money supposedly belonging to “victims” (whose damages can’t be proven) to perpetuate itself.  Here, the cy pres awards would fund advocacy organizations (AARP and the World Privacy Forum), which turn around and file pro-plaintiff amicus briefs in other litigation (search for their names within the same paragraph as “amicus” and you’ll see we’re right).  They also fund specialty clinics at law schools to train still more lawyers and invent more expansive liability theories, all for the purpose of pursuing still more unprovable class actions.

Beyond that, all three of the law schools just happened to have pre-existing relationships with both class counsel and the defendant.  Specifically:

[Defendant] has in the past donated to at least some of the cy pres recipients, three of the cy pres recipients previously received [its] settlement funds, and three of the cy pres recipients are organizations housed at class counsel’s alma maters.

Id. at *5.  Such favoritism is precisely the kind of abuse that the ALI cautioned against when (over our objections) it chose to open the door to cy pres, despite the utter lack of recognized judicial power to give absent class members’ money to non-litigants.  “A cy pres remedy should not be ordered if the court or any party has any significant prior affiliation with the intended recipient that would raise substantial questions about whether the selection of the recipient was made on the merits.”  Principles of the Law of Aggregate Litigation §3.07, comment b (ALI 2010) (cited at 2017 WL 3601250, at *5).

Again, the majority in GRHPL sped right through the flashing yellow light.  Repeated receipt of cy pres money from the same defendant was excused because better education of lawyers (to bring more lawsuits) was viewed positively.  Id. at *6 (“Given that, over time, major players such as [defendant] may be involved in more than one cy pres settlement, it is not an abuse of discretion for a court to bless a strong nexus between the cy pres recipient and the interests of the class over a desire to diversify the pick via novel beneficiaries that are less relevant or less qualified”).  Giving away money that supposedly belongs to the class to the law schools counsel attended was also OK because, what the hey, everybody does it:

The claim that counsel’s receipt of a degree from one of these schools taints the settlement can’t be entertained with a straight face. Each of these schools graduates thousands of students each year. . . .  The court affirmatively analyzed the issue and was cognizant of the claim of a potential conflict.  All class counsel swore that they have no affiliations with the specific research centers.  Class counsel repeated that attestation at the final settlement approval hearing. . . .  The district court found “no indication that counsel’s allegiance to a particular alma mater factored into the selection process.”

Id. at *6.  And if you really believe that. . . .  Well, a number of courts (including the Ninth Circuit) have pointed out “[w]hat we know as men and women we must not forget as judges.” Larson v. Dumke, 900 F.2d 1363, 1369 (9th Cir. 1990); see also United States v. Blackburn, 461 F.3d 259, 264 (2d Cir. 2006); Henderson v. Frank, 155 F.3d 159, 164 (3d Cir. 1998); United States v. Jefferson, 925 F.2d 1242, 1253 n.13 (10th Cir. 1991). Not one, but all three, of the law school cy pres recipients just happened to be the alma maters of class counsel.  That strains credibility past the breaking point.

We’re not the only ones. In the words of the dissent in GRHPL:

Our precedent requires that district courts must be particularly vigilant not only for explicit collusion, but also for more subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations. In our case, we have a cy pres-only settlement.  That alone raises a yellow flag.  Furthermore, we have a class settlement before formal class certification.  That raises another yellow flag.  Lastly, we have almost half of the settlement fund, several million dollars, being given to class counsel’s alma maters. To me, that raises a red flag.

2017 WL 3601250, at *10.

The only members of the class who received any payment at all were – you guessed it – the named class representative. The settlement paid “$15,000 in incentive awards to the three named plaintiffs.” Id. at *3.  The remaining 129 million or so class members received zilch.

We think this is a case that should go to the United States Supreme Court.  One problem with the Ninth Circuit is precedent.  “Objectors would also have us ignore our prior endorsement of cy pres awards.”  GRHPL, 2017 WL 3601250, at *4.  The Supreme Court doesn’t have that problem.  Justice Roberts is already looking for a case to consider whether cy pres should be allowed at all.  We don’t think it should, and further believe that courts have no substantive power to take money from litigants and hand it out to uninjured third party bystanders, charitable or otherwise.  GRHPL created a circuit split (unacknowledged), and if the Court takes a look at GRHPL, it will see the full spectrum of abuse that cy pres awards allow to occur.  Given that background, the chances are good that a majority of the justices be willing to inter cy pres once and for all.  Bad facts can sometimes make good law, and we hope GRHPL might be one of those instances.

Regular blog readers may recall that, every year, we eagerly await a Monday and Tuesday right around February 14th.  This has nothing to do with Valentine’s Day (though we like a dozen roses and a box of chocolates as much as the next person.)  No, at this time every year (for the past eighteen or so) we cross our fingers that there is no blizzard, beg everyone in our work life to cover any emergencies, and head to New York for the Westminster Kennel Club Dog Show.  This year was the 141st annual show, and, as always, it was a mecca for all things dog.  As we ate breakfast in our hotel, we were visited by Mobius, a red Doberman so tall he had to lean down to attempt to taste our complimentary make-it-ourselves waffle.  To board the shuttle from the Hotel Pennsylvania (worthy of its own post) to Piers 92 and 94 for the daytime breed judging, we had to step over “Sky,” a 140-pound Greater Swiss Mountain Dog sprawled in the aisle of the bus, calmly oblivious to accidental bumps and kicks and happily kissing anyone who asked.  We live for this stuff, even if our chosen favorite almost never wins.

For the atmosphere is rarified. A few years ago, the show stopped being “champions only” and admitted “class dogs” – dogs still working their way through point-earning breed classes to achieve their championships – for the first time.  But, save for the infrequent upset, the group competition (the televised portion, in which the single winner of each breed competes against the winners from the other breeds in its “group” – sporting, herding, toy, etc.) is dominated by the very top-winning show dogs in the country.  Last year, we fell in love with a gorgeous German Shepherd Dog named Rumor.  She was a heavy favorite to win it all (“Best in Show”), but was upset by C.J. the German Shorthaired Pointer and settled for Reserve Best – second place.  And she retired, to raise beautiful puppies and live the life of a cherished house pet.

But, alas, said puppies did not get made on the first attempt. And, come January, Rumor’s owner/handler decided to give her one more shot at the big one.  So she “came back out,” showed at ten shows in January, and took one more run at the Garden.  And, this time, after upsetting the favorite, Preston the Puli, to take the Herding Group, she won it all.  It was very, very cool to witness.  And we already can’t wait ‘til next year.

And there was a blog-worthy lesson to be gleaned from it all (at least if you stretch a little): if you haven’t achieved everything you want, think about taking another shot.  And H.R. 985, a bill that passed the House Judiciary Committee this week, would pick up where CAFA left off (and then some) to correct still-rampant abuse of the system by class action and MDL plaintiff lawyers, to the detriment of our clients, the judicial system as a whole, and all too often, to the plaintiffs the lawyers ostensibly represent.

Under “Purposes,” the bill states: “The purposes of this act are to – (1) assure fair and prompt recoveries for class members and multidistrict litigation plaintiffs with legitimate claims; (2) diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system; and (3) restore the intent of the framers of the United States Constitution by ensuring Federal court consideration of interstate controversies of national importance consistent with diversity jurisdiction principles.”  Worthy goals all, if a trifle ambitious. The bill’s key points read like a set of nesting boxes – just when you think you’ve opened the last, there is another present inside.  Here are some highlights:

Class Actions

  • Injury allegations: this provision requires a court to deny certification unless “the party seeking to maintain such a class action affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative.” This is ascertainability something for which we’ve advocated, and also something that our side tried unsuccessfully to get fixed through the Federal Rules Committee. Thus, the judiciary had its chance to fix this. Nothing happened, so now Congress is poised to step in. About time.
  • Conflicts of interest: this provision requires class counsel to state, in the body of the complaint, “whether any proposed class representative or named plaintiff in the complaint is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action) or has any contractual relationship with . . . class counsel” and shall “describe the circumstances under which each class representative or named plaintiff agreed to be included in the complaint and shall identify any other class action in which any proposed class representative or named plaintiff has a similar role.”
  • Attorneys’ fees: “[N]o attorneys’ fees may be . . . paid . . . until the distribution of any monetary recovery to class members has been completed,” and “[u]nless otherwise specified by Federal statute, . . . the portion of any attorneys’ fee award to class counsel . . . shall be limited to a reasonable percentage of any payments directly distributed to and received by class members [and in] no event shall the attorneys’ fee award exceed the total amount of money distributed to and received by all class members.” We particularly like this because it would effectively put an end to cy pres, against which we’ve railed for years. By limiting the denominator for fee awards to “payments directly distributed to and received by class members” it prevents cy pres sums from being used to inflate fee awards.

There are other provisions, requiring stringent accounting provisions for settlement funds forbidding certification of issue classes unless all relevant Rule 23 prerequisites are satisfied (another thing our side tried first to fix through a change to Rule 23), and most significantly providing for severance of misjoined plaintiffs for purposes of jurisdictional determinations. This legislative elimination of fraudulent misjoinder is a key point, since it addresses the multi-plaintiff complaints we love to hate.

We note that since the “effective date” of this act provides for its application to all “pending” civil actions, cases currently in state court can be removed (or removed again) under the provision negating misjoinder as a means of preventing diversity-based removal to federal court.

Finally, in an issue close to our hearts as we daily encounter plaintiffs unwittingly victimized by so-called “litigation funders,” the bill provides, “In any class action, class counsel shall promptly disclose in writing to the court and all other parties the identity of any person or entity, other than a class member or class counsel of record, who has a contingent right to receive compensation from any settlement, judgment, or other relief obtained in the action.” A sunshine law for third-party funding is something else for which we’ve advocated.

Multidistrict Litigation:

  • Proof of exposure and injury: We were thrilled to see a “Lone Pine”-esque provision build into the MDL portion of the bill. It provides, in pertinent part, “In any coordinated or consolidated pretrial proceedings . . . , counsel for a plaintiff asserting” a claim seeking redress for personal injury [in the MDL] shall make a submission sufficient to demonstrate that there is evidentiary support (including but not limited to medical records) for the factual contentions in the plaintiff’s complaint regarding the alleged injury, the exposure to the risk that allegedly caused the injury, and the alleged cause of the injury . . . within 45 days after the civil action is transferred to or directly filed in the proceedings. That deadline shall not be extended. Within 30 days after the submission deadline, the judge . . . shall [determine] whether the submission is sufficient and shall dismiss the action without prejudice if the submission is found to be insufficient.” Thirty days later, in the continued absence of a satisfactory submission, the action is to be dismissed with prejudice. Not long ago, we advocated for amending the MDL statute to require early factual disclosure, with dismissal as the sanction for not disclosing enough to satisfy Rule 8. This is the functional equivalent.
  • Trial Prohibition (“waiving Lexecon”): MDL judges “may not conduct any trial in any civil action transferred to or directly filed in the proceedings unless all parties to the civil action consent to trail of the specific case sought to be tried.” This provision would remove the threat of MDL trials as a tool to force defendants to settle. It is something else for which we have advocated.
  • Ensuring Proper Recovery for Plaintiffs: MDL plaintiffs “shall receive not less than 80 percent of any monetary recovery obtained in that action by settlement, judgment or otherwise.”

While most of the press coverage seems to focus on class actions, to us the removal and MDL provisions are at least as important. The vast bulk of our professional life is spent in the mass tort space – mostly MDLs these days, with the occasional class action thrown in. We have become accustomed (but never inured) to plaintiffs without injuries herded by counsel who are their friends or bosses into mass actions in which they don’t belong. On the other end of the spectrum, we encounter severely injured plaintiffs who will recover next to nothing because lawyers and litigation funders own most or all of the plaintiffs’ stakes in the inevitable settlements. And, at every turn, we sit across the table from tanned and affluent plaintiff attorneys who are the only ones apparently immune to the vagaries of the system and who are the sole beneficiaries of its inequities. H.R. 985, as drafted, attempts to address many of these issues. We do have questions. Who defines “the same type and scope of injury,” for example? And we have doubts: can a bill possibly survive the powerful plaintiff attorney lobby when it attempts to resurrect the integrity of mass litigation by hitting those attorneys squarely in their pocketbooks? But we heartily and excitedly support this bill, and we know that some of its provisions are way, way better than none. We will keep you posted.

We can’t stand “cy pres” distributions of class action settlement funds to non-litigants.  We’ve blogged about this benighted doctrine many times.  We fought against cy pres at in the ALI, and we’ve been fighting against it through Lawyers for Civil Justice in the context of federal rules amendments.

Sure, cy pres can be useful in resolving this or that class action once our clients are unfortunate enough to have become embroiled.  But we firmly believe in the “build it and they will come” theory – that making class actions easier to settle make them easier to bring, because 99% of all class actions (at least those seeking $$$) are brought as strike suits to settle, rather than to litigate.  A cy pres award is a sure-fire indicator of litigation that should never have been brought – because even after settlement, without any opposition from the defendant(s), a cy pres request is an admission that the plaintiffs still can’t prove damages and causation with respect to the absent class members.  They can’t even win a walkover.  Outside the class action area, that would mean “case dismissed” (and maybe sanctions).  As a class action, it means “write a check.”

There is no basis for cy pres in substantive law (outside of a couple oddball statutes), and there’s nothing more “substantive” than taking money supposedly owed to absent class members and giving it to non-litigant charities. Since it’s substantive, there’s also no possible basis for it in Fed. R. Civ. P. 23, since court rules can’t change substantive law.  Cy pres a racket – designed primarily to inflate attorney fee awards − and while the charities might do good work, call us the Grinch, because we don’t think the litigation industry should be funding charities with other people’s money extorted through litigation threats.

Here’s the latest example of cy pres abuse occurring in the context of bogus litigation that should never have been brought, Koby v. ARS National Services, Inc., ___ F.3d ___, 2017 WL 359670 (9th Cir. Jan. 25, 2017).  This isn’t a drug/device case.  Thankfully, between the FDCA no private right of action rule (which, regrettably has a food loophole) and the rejection of personal injury class actions, we don’t encounter all that many of them anymore against drug/device clients.  Instead, Koby is a Fair Debt Collection Practices (“FDCP”) action, and as you might expect from the introduction, a bottom-feeding FDCP action at that.

Supposedly the defendant violated the FDCP at some point a decade or so ago when its employees left messages that did not fully identify themselves. This issue was later fixed, but the class action supposedly includes “some four million people nationwide.”  Koby, 2017 WL 359670, at *1.  Predictably, nobody in the class was actually harmed by what appears to have been a technical FDCP violation (quickly fixed), so only statutory damages were sought.  Theoretically that could have been a lot (4M x $1000), but because ARS was a small company, the 1% of net worth statutory cap limited recovery to $35,000. Id. at *1-2.

You do the math.

Continue Reading More Cy Pres Abuse in California Class Action Litigation

In addition to being on the warpath about cy pres class action settlements, we try to keep an eye on various other issues related to the much-abused Fed. R. Civ. P. 23.  First, we’re pleased as punch to let you know that all the really awful things that the Federal Judicial Conference’s Rule 23 Subcommittee was contemplating doing (rejecting/watering down ascertainability, recognizing issue classes, writing cy pres into Rule 23, and eliminating offers of judgment) have all been dropped.  You can read about it here.  Only comparatively minor settlement-related issues (opt-outs, notice, objectors, approval) remain on the Subcommittee’s agenda.

There are also two recent, and pending, petitions for certiorari of note raising class action-related issues.  One of them, Wal-Mart Stores, Inc. v. Phipps, No. 15-597 (U.S., filed Nov. 6, 2015), is a spin-off of the employment-related litigation that produced Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).  Having lost Dukes, plaintiffs have tried to regroup by filing separate, smaller class actions.  Given how long the Dukes litigation was pending, the statute of limitations becomes a serious problem for these newer, still quite large class actions.  Hence the issue of “stacking” the tolling effect of successive class actions under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), is a major issue.  We’ve been aware of stacking attempts for some time, but the courts had largely gotten it right – until now.  The Phipps petition is from the first court of appeals decision ever to allow stacking as a general rule.  Hence, the question presented is:

Whether the Sixth Circuit erred in concluding, in conflict with the decisions of seven other Circuits, that statutory limitations periods applicable to the claims of absent and unknown persons can be extended indefinitely by filing successive (or “stacked”) class actions.

More information, including links to all filed documents, is available on SCOTUSBlog, here.  Full disclosure – Bexis and his firm are filing an amicus brief for the Product Liability Advisory Council (“PLAC”)  in the Phipps matter.

Continue Reading Class Action Issues at the Supreme Court (and Elsewhere)

This is a guest post prepared by Rachel Weil of Reed Smith, who has graced us with guest posts before and, we hope, will do so again.  This post concerns the latest of several recent appellate decisions that have imposed limits on the questionable practice of cy pres distributions in class action settlements.  As always, Rachel deserves all the credit, and whatever blame accrues from her post.

*********

Readers of this blog are familiar with our antipathy toward the remedy – or non-remedy – known as cy pres. If not, recollections can be refreshed here.  “Cy pres” is a French term that roughly translates to “next best” or “as near as possible.”  When class counsel can’t or won’t identify all class members to whom damages are owed, cy pres purports to allow the court to award remaining settlement funds to third parties – usually charities.  These funds are commonly included in the “lodestar” used in the calculation of class counsel’s fee.  “Next best” means, in theory, that non-class member recipients of settlement funds have some logical nexus to the litigation.  In practice, nothing in Rule 23 governs cy pres distributions and there is no institutional mechanism for vetting proposed recipients or ferreting out conflicts of interest.  As a result, class counsel and judges have been known to steer cy pres funds to charities they support or that provide benefits to them (or bestow honors on them), notwithstanding the charities’ lack of any relationship to the settled litigation.

In recent years, real pundits – actual judges − have chimed in to question cy pres awards and related practices.  See Marek v. Lane , 134 S. Ct. 8 (2013) (Justice Roberts, in a concurrence in a denial of certiorari, commenting that a differently-postured petition might have afforded the Court the opportunity to address “fundamental concerns” about the use of cy pres remedies in class action litigation); Holtzman v. Turza, 728 F.3d 682 (7th Cir. 2013) (Judge Easterbrook rejecting trial judge’s unilateral decision to seize residue of a settlement and award it to Legal Aid as “cy pres”); Cf Redman v. Radio Shack, 768 F.3d 622 (7th Cir. 2014) (non-“cy pres” decision condemning inflation of denominator used in calculation of attorneys’ fees by including funds not actually received by class members) (Judge Posner, this time).

Continue Reading Guest Post – Sayonara, Cy Pres

We posted not too long ago about a Seventh Circuit decision by Chief Judge Posner that we thought had favorable implications for reining in the steadily metastasizing concept of “cy pres” in class action litigation.  That opinion, Redman v. RadioShack Corp., 768 F.3d 622 (7th Cir. 2014), prohibited any sum that did not “benefit the class” from being included in the calculation of attorneys’ fees in a class action settlement.  Although a cy pres award was not at issue in Redman, the implications (to us at least) seemed obvious.  Funds not paid to class members do not benefit the class.

Judge Posner made that explicit last week in Pearson v. NBTY, Inc., ___ F.3d ___, 2014 WL 6466128 (7th Cir. Nov. 19, 2014).  Indeed, he thought it was “obvious,” just like we did:

The [trial] judge excluded, however, both the cy pres award of $1.13 million in calculating the benefit to the class, for the obvious reason that the recipient of that award was not a member of the class, and the injunction, which he valued at zero, which was proper too.

Id. at *2.  So, in the Seventh Circuit at least, it’s improper to use funds paid to non-class members via cy pres to calculate the fee that class action plaintiff lawyers are allowed to receive under the “common fund” doctrine.

And there’s more.

Continue Reading Judge Posner Drops the Other Shoe on Cy Pres

We missed a day this week, so here’s an extra post to make up for it.

This opinion, Redman v. RadioShack Corp., Nos. 14‐1470, et al., slip op. (7th Cir. Sept. 19, 2014), doesn’t even mention cy pres, but its rationale could be saying (like we have), “cy pres, no way.”

Redman was a coupon settlement with the usual pathetic – less than one half of one percent – response rate to the settlement notice (itself sent to only 5 million of the estimated 16 million class members).

Slip op. at 7.  It involved something called the Fair and Accurate Credit Transactions Act, but that doesn’t matter for present purposes.  The settling parties claimed that this pathetic response was the same as acquiescence in the settlement’s terms, but Judge Posner saw through that easily:

The fact that the vast majority of the recipients of notice did not submit claims hardly shows “acceptance” of the proposed settlement: rather it shows oversight, indifference, rejection, or transaction costs.  The bother of submitting a claim, receiving and safeguarding the coupon, and remembering to have it with you when shopping may exceed the value of a $10 coupon to many class members.

Slip op. at 7.

But even that (although interesting for other reasons) doesn’t matter for present purposes.

What’s interesting to us is the number that Judge Posner does on the attorney fee request made by class counsel.

Wisely, class counsel (unlike some other settlements we can recall) didn’t even attempt to use the value of theoretical, but unsought coupons.  Counsel did, however, use the full face value of the coupons ($830,000), even though various factors (again not relevant to our point, but including that no change was given for less-than-face-amount uses) made them worth less than face value to the class who filled out the forms to get them.  Slip op. at 11-12.  Judge Posner pointed out, id. at 12, that the restrictions “chipping away” at the value of these coupons were “even more egregious” than in Eubank v. Pella Corp., 753 F.3d 718 (7th Cir. 2014), a settlement he had famously denounced as “scandalous.”  The nominal face value of the coupons, therefore, could not be used as part of the denominator for determining the reasonableness of class counsel’s fee request.

[W]hile we don’t know how much $830,000 of coupons would be worth to the class, we can be confident that it would be less than that nominal amount, doubtless considerably so. And we note that were the value only $500,000 − and it may indeed be no greater – the agreed‐upon attorneys’ fee award would be the equivalent of a 67 percent contingency fee.

Redman, slip op. at 14.

Counsel also sought to inflate the denominator for purposes of their fee request by including “administrative costs.”  Id. at 10.  That wasn’t proper either, because those costs did not represent any “value received” by the class at all, since none of that sum went into the pockets of class members:

[T]he roughly $2.2 million in administrative costs should not have been included in calculating the division of the spoils between class counsel and class members.  Those costs are part of the settlement but not part of the value received from the settlement by the members of the class. The costs therefore shed no light on the fairness of the division of the settlement pie between class counsel and class members.

Id. (emphasis added).  To treat “every penny” of administrative costs as “value” to the class was “perverse”:

[It] eliminated the incentive of class counsel to economize on that expense − and indeed may have created a perverse incentive; for higher administrative expenses make class counsel’s proposed fee appear smaller in relation to the total settlement than if those costs were lower.

Id. at 10-11 (emphasis added).

The only sums properly included in the denominator for purposes of determining the reasonableness of a class action fee request are “benefit to the class,” meaning “what the class members received”:

The ratio that is relevant to assessing the reasonableness of the attorneys’ fee that the parties agreed to is the ratio of (1) the fee to (2) the fee plus what the class members received.  At most they received $830,000. That translates into a ratio of attorneys’ fees to the sum of those fees plus the face value of the coupons [case-specific calculation omitted].  Computed in a responsible fashion by substituting actual for face value, the ratio would have been even higher because 83,000 $10 coupons are not worth $830,000 to the recipients.

Slip op. at 11 (emphasis added).

Cy pres?  No way!

Cy pres awards, like the “administrative costs” excluded in Redman, do not go into the pockets of class members – not one cent.  Indeed, cy pres awards are even further removed from being “benefit to the class” because, as Judge Posner acknowledged (but found insufficient), some of the costs at least were to give “notice to the class.”  Id. at 10.  Cy pres distributions, which take money supposedly belonging to class members and give it to non-class members (such as organizations devoted to fomenting more litigation, or class counsel’s law school) are the antithesis of “benefit to the class.”  Far from being sums “received by class members,” cy pres distributions take money away from the class and give it to supposedly deserving bystanders.

Whether or not courts should ever have the power to redistribute money belonging (if at all) to a class to persons not even in the class, under Judge Posner’s reasoning in Redman, there’s no way cy pres distributions can properly be considered in evaluating the reasonableness of a fee request.  The same “perverse incentive” exists, maybe even more strongly, with cy pres.  It’s an easy way to inflate the denominator artificially with sums that do not benefit the class – particularly when actually distributing the same money to class members would give rise to additional “administrative costs” that are themselves improper to include in that same denominator.

Although we would prefer to abolish cy pres outright as an abuse of judicial power, removing cy pres sums from the denominator in fee calculation strikes us as the next best alternative, since we believe that without the “perverse incentive” so aptly identified by Judge Posner, cy pres distributions would be few and far between.

It is probably not a coincidence that two of the smartest judges in the land, Alex Kozinski (Chief Judge of the Ninth Circuit) and Jed Rakoff (District Judge in the Southern District of New York), have gone on record criticizing certain proposed litigation settlements.  Rakoff shook up Wall Street when he rejected a Citigroup settlement with the SEC, finding it “neither fair, nor reasonable, nor adequate, nor in the public interest.” Kozinski’s critique of a settlement was equally strident, but even more newsworthy because he and his wife filed as class objectors to the Nissan Leaf battery settlement.  Kozinski expressed unhappiness that the parties agreed to the settlement before any discovery of company internal documents.  The case is in the Central District of California, which is part of the Ninth Circuit, where Kozinski is Chief Judge.  As you might imagine, Kozinski’s objection made things a bit sticky.  A couple of C.D. Cal. judges recused themselves from the case.

We can understand why steely-minded types such as Rakoff and Kozinski might have problems with settlements.  Settlements are messy.  They are illogical.  Parties are striving for rough justice, trying to reduce uncertainty and expense.  At the same time, each party is trying to get the best deal it can get.  Or at least the lawyer is.  Those lawyers are serving diverse constituencies.  Problems of agency and moral hazard abound.  Settlements, perhaps more than any other area of the law, are like sausage or legislation, where the less you know about process, the better.  We are reminded of Ambrose Bierce’s definition of “litigation” in The Devil’s Dictionary:  a machine that you go into as a pig and come out as a sausage.   (Hmmm.  Now we are hungry.)

For all of our carping about plaintiff lawyers, settlements are one area where we freely acknowledge that their job is tougher than ours.  How they balance the competing demands of their clients, with different degrees of merit, exposure, injury, commitment, and, frankly, sanity, is a mystery to us.  We are happy for it to remain so.

We can understand how some settlements seem bizarre or unfair.  Some seem like nothing so much as a dollar delivery device for opportunistic plaintiff lawyers.  When we were in law school, we were surprised to receive a notice that we were part of a class settlement.  It was an antitrust case over airline ticket pricing.  (Law firms handed out flybacks like nickels in the mid-80’s.)   We ultimately received a coupon for a $100 credit against a full-fare ticket.  Back then, we never-ever purchased full-fare tickets.  We either bought supersavers, or boarded People Express flights where we actually paid on board.  Not to put too fine a point on it, the settlement was worthless to us.

Then again, there has to be a reason why plaintiffs, defendants, and, yes, the overwhelming majority of judges, want cases to settle.  Almost nobody is in love with uncertainty.  Litigation is indecently expensive.  It gobbles up legal fees and court resources. Even for plaintiffs who end up getting what seems to be a pittance, money now is better than money later, and definitely better than money never.  All of which is to say that we see settlements as perhaps the best example of that old Oliver Wendell Holmes bromide about the life of the law being experience, not logic.  And for the record, we think there are good reasons on both sides to settle a case before undertaking hyper-expensive discovery of internal company documents.   Supreme Court Justice Joseph Story urged parties to make an end to litigation, so “that suits may not be immortal, while men are mortal.”  Ocean Ins. Co. v. Fields, 18 F. Cas. 532, 539 (C.C.D. Mass. 1841).  Justice Story knew nothing, of course, about discovery of electronically stored information (ESI).  Lucky him.  Without a doubt, ESI discovery is something that reminds us of our mortality.  It even makes us grateful for it.

We embarked on today’s sermon after taking a look at the settlement in Mason v. Heel, Inc., 2014 U.S. Dist. LEXIS 58257 (S.D. Cal. March 13, 2014).  That settlement might cause the more cynical among us to have a supercilious (from the Latin supracilia – raised eyebrows) moment. The case was a nationwide class action alleging that the defendant’s promotion of its homeopathic products was deceptive, in violation of the usual panoply of California statutes (17200, False Advertising Law, Consumer Legal Remedies Act), as well as breach of warranties and violation of the federal Magnuson-Moss Warranty Act.  Parse that last sentence even a little and you can guess at our stratospheric skepticism.  A total of $1 million got tossed into the settlement pot.  That is a nice, round number.  To Dr. Evil, it seemed like all the money worth asking for, even if you were in the position of extorting the whole world.  Speaking of Dr. Evil, the plaintiff lawyers asked for 30%, and ended up getting ‘only’ 25%.  Each plaintiff could receive up to $150 by submitting proofs of purchase, and up to $100 by signing a claim form under penalty of perjury.  The class representative received $3500 as an “incentive.” If funds remain after all valid claims get paid, 50% would go out pro rata to claimants and 50% would go into a cy pres award to Consumers Union.  So everyone can feel virtuous.  (We have on prior occasions mentioned, in that measured, low-key, thoroughly adorable way we have, how much we hate cy pres provisions.  We consider them prima facie proof that the leading ingredient in the case is bat guano.) The defendant agreed to provide a disclaimer that its products had not been evaluated by the FDA and that the products are homeopathic dilutions.  The defendant also agreed not to say that the products are “natural,” or “clinically proven,” or “doctor recommended.”

The court found the settlement to be “fair, reasonable, adequate, in the best interests of the Class, and free from collusion.” Mason, 2014 U.S. Dist. LEXIS 58257 at *3.   Understandably, it was important to the court that the parties had hashed things out in front of a well-respected mediator (a retired judge) and that no class members had lodged an objection.

Of course, if this settlement somehow goes up on appeal, it would be in front of the Ninth Circuit.  Good luck to the lawyers if they draw Chief Judge Kozinski on the panel.

We’ve made no bones on this blog about our distaste for the “cy pres” rationale that keeps finding its way into class action litigation. Indeed, we consider resort to cy pres as a virtually conclusive indication that the litigation in question is bogus.  Our philosophy is “Cy Pres – No Way!

For those of you new to all this, “cy pres” is the name given to schemes – virtually exclusively in class actions – whereby courts take money supposedly belonging to class members that class counsel can’t or won’t (due to expense) identify and give it to non-class members (mostly charities) who were not damaged in any way by the claimed conduct of the defendants. We know of no legal power invested in the judiciary to take money away from supposedly injured litigants and give it to persons who are essentially bystanders.  There are methods of doing this.  When done privately, it’s called “theft.”  Publicly, it would involve the powers to tax, appropriate, and levy fines, which belong to branches of government other than the judiciary.  We further believe that use of cy pres to facilitate class actions violates the Rules Enabling Act, since procedural rules (such as Rule 23) can’t change the substantive law.  There’s not much more “substantive” than taking money supposedly belonging to injured litigants and giving it to non-parties.

When we raised these objections in the context of the ALI’s Aggregate Litigation project, we felt like we were expectorating into a hurricane.  Most of the other changes we fought for were ultimately accepted, but not on the cy pres front.

But lately we’re more optimistic.  There have been three favorable developments in recent months.  First, there are indications that the Supreme Court may at last have taken interest in the questionable underpinnings of cy pres awards.  In Marek v. Lane, 134 S.Ct. 8 (2013), Chief Justice Roberts observed, while otherwise concurring in the denial of certiorari, that had the objectors to a class action settlement challenged the validity of cy pres generally, rather than case-specific attributes of this particular award, the Court might well have been interested:

 [T]he parties earmarked [all the money left over after counsel fees] for a “ cy pres ” remedy . . . because distributing [it] among the large number of class members would result in too small an award per person to bother.  The cy pres remedy agreed to by the parties entailed the establishment of a new charitable foundation. . . .

[Petitioner’s] challenge is focused on the particular features of the specific cy pres settlement at issue.  Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.  This Court has not previously addressed any of these issues. Cy pres remedies, however, are a growing feature of class action settlements.  In a suitable case, this Court may need to clarify the limits on the use of such remedies.

Id. at 9 (statement of Roberts, C.J. concurring) (emphasis added).  We doubt that Chief Justice Roberts – indeed, any chief justice – would issue a public statement like this unless he thought he had the votes to do something about it. The message from the Chief in Marek seems quite clear. Counsel should preserve existential objections to cy pres – such as those raised here on DDLaw – and the Court may well address them in some future, hopefully near term future, case.  We encourage our readers to do< this.  Yes, cy pres makes it easier to settle class actions for nuisance value.  But the problem is “Build It, and They Will Come.”  By making class actions easier to settle, it increases the likelihood of their being brought in the first place.  We believe that if class action plaintiffs are not allowed to shirk their burden of proving causation and damages, a lot of these bogus claims will either go away entirely, or be returned to the responsibility of public law enforcement and regulatory agencies where (if at all) they belong.

The enforcement powers of the state?  That’s a good segue to the second favorable recent cy pres development.  Historically, funds that could not be given to proper claimants – for whatever reason – eventually escheated to the state after a greater or lesser
period of time.  Currently, most states are having trouble raising sufficient revenues to pay for the services they provide.  Thus the State of Texas successfully argued that cy pres could not be used in derogation of that state’s escheat laws:

The cy pres, or next best use, doctrine is an equitable doctrine adopted from the context of charitable trusts and allows the court to distribute funds which cannot be economically distributed to individual class members, or when a balance remains after individual distribution. . . .  [A]a trial court’s discretion to distribute unclaimed funds through the application of cy pres does not authorize the court to disregard State property law. . . .  [T]o the extent that the distribution violates the Act, the trial court abused its discretion and the settlement agreement provisions are void.

State v. Highland Homes, Ltd., ___ S.W.3d ___, 2012 WL 2127721, at *11-12 (Tex. App. June 13, 2012) (citation omitted).  That case was appealed to the Texas Supreme Court − Highland Homes Ltd. v. The State of Texas, No. 12-0604, and in August the court agreed to decide whether judicial cy pres class action settlement provisions are void to the extent that they are an end run around duly enacted escheat statutes.  See here.  Argument was held in November.  See here.  The petitioners argued that restricting cy pres would result in more trials.  We think that’s wrong, at least in everything but the shortest of terms.  Rather, requiring plaintiffs to prove the causation and damages elements of their cases will result in fewer bogus class actions being filed.

Third, there is at least the prospect of revising Fed. R. Civ. P. 23 to restrict or do away with cy pres settlements.  In August, the Lawyers for Civil Justice submitted a proposal to the Rule 23 Subcommittee of the Civil Rules Advisory Committee.  Actually, LCJ submitted two alternative proposals.  See LCJ Comment at 8-13, 22-23.  LCJ’s first (and preferred) proposal would flatly prohibit settlements seeking to distribute funds to non-class members, and it would enforce the prohibition by deeming class counsel making such an offer to be inadequate, because they would be giving their clients’ money away.  The second proposal would severely limit the practice (in addition to creating needed conflict of interest rules for cy pres recipients), by removing the true economic incentive behind them – no payment not made to a class member could be used in calculating any class counsel’s fee award.

The LCJ’s proposal is only the beginning of what would be a long and arduous process of amending the federal rules.  We can’t say now that the committee will even take the proposal seriously.  But the creation of actual language for formal rules is a big step forward.  If Justice Roberts gets what he was looking for in Marek, a rule change could either be unnecessary or essential.  Just about anything would be preferable to the current Wild-Wild-West – that is to say, virtually standardless − use of cy pres as it exists today.

This month, we’ve seen a couple of cases dealing with class action settlements and neither of them, frankly, leaves us with much confidence in the process.  We’re referring to Dennis v. Kellogg Co., ___ F.3d ___, 2012 WL 2870128 (9th Cir. July 13, 2012), and In re Budeprion XL Marketing & Sales Litigation, 2012 WL 2527021 (E.D. Pa. July 2, 2012).

The Ninth Circuit Dennis (we’d add “the Menace” to the name) case involved food, not drugs. It is a poster child for the abuse of “cy pres” distribution in a class action settlement − so much so that even the Ninth Circuit, notoriously liberal on such things, couldn’t stomach it.  California has become a center of food class action litigation, and in this particular instance the charge was that the defendant advertised certain cereals as “scientifically proven to improve children’s cognitive functions for several hours after breakfast.”  2012 WL 2870128, at *1.  For present purposes it doesn’t matter whether the allegation has any merit or not, since the action was settled.

But what a settlement:

  • A “claims-made” fund of $2.75 million where class members able to prove their purchases could get up to $15 (three boxtops) in refunds.  Anything left over would be distributed cy pres to “charities chosen by the parties and approved by the court.”  Id. at *2.
  • An in-kind cy pres distribution of “$5 million worth” of the defendant’s food “to charities that feed the indigent,” with valuation apparently left to the defendant (although this is not clear).  Id.
  • The defendant would refrain from making the challenged claim for three years, but would be allowed to make a related claim of “11% better attentiveness” proven by “clinical studies.”  Id.
  • Counsel fees for class counsel of $2 million.  Id.

According to class counsel, the total amount of refunds paid from the claims-made fund was $800,000.  Id. at *2 n.1.  Even though this figure was unverified and counsel had every incentive to overstate the payout, we’ll take it as face value.

Thus, of the nominal $9.75 million in value that purportedly changed hands (we’ll pass over the interesting discussion of the “value” of $5 million in-kind contribution, its tax deductibility, and whether the donation would have been made in any event, see id. at *7), all of $800,000 went to the supposed class.  That’s a little more than 8%.

The attorneys for the class took home two and a half times more dollars than did the entire class.  Divided by the hours the class attorneys spent, they received an hourly rate of $2100 − that’s right, over two-thousand dollars an hour.  2012 WL 2870128, at *1.

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