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
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!”
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.
We’ve said before (in commenting on the ALI’s aggregate litigation principles) that we don’t like the “cy pres” concept. For one thing, it makes us look dumb. We’re not even sure how the blasted term’s supposed to be pronounced. If you ask three lawyers, you’re likely to get four possible pronunciations, from “sigh pray” to…