State Passes Mandatory Cy Pres Law

Oregon has enacted controversial legislation affecting damages in class actions in the state.  House Bill 2700 was recently signed into law by Gov. Brown, following passage on largely party lines.

The law addresses the not uncommon situation of leftover class action funds.  Sometimes unclaimed funds will revert to the defendant, which makes sense given the purpose of compensatory damages is to compensate persons injured by wrongful conduct. Sometimes the unclaimed funds are allocated in a form of "cy pres," which we have posted about before.

Oregon's new plan is for half of unclaimed or unpaid damages in Oregon class actions to be paid to the state bar's Legal Services Program and the other half to a court-determined entity that benefits the "interests" of class members -- so partly a tax, and partly a cy pres distribution.

The law says it is effective immediately, including for pending actions.  Any amount awarded as damages or to be paid in settlement that the court finds either hasn’t been timely claimed by class members, or when it is simply “not practicable” to pay the full amount to class members, must be distributed in the following fashion:  “At least 50 percent of the amount not paid to class members" must be paid “to the Oregon State Bar for the funding of legal services provided through the Legal Services Program.”  The "remainder of the amount not paid to class members” must be handed over to an entity chosen by the court for purposes that are “directly related to the class action or directly beneficial to the interests of class members.”

Class action observers have noted that cy pres awards are often used by class counsel to enhance the appearance of benefit recovered in the case in order to justify a higher fee award. Another huge problem is that use of cy pres can eliminate the incentive for class counsel to ensure that all absent class members, the allegedly injured parties,  get the compensation they have been awarded or earned in settlement.  Trying to enhance funding for Legal Services programs seems like a great goal, but this does not seem like a wise way to do it. 

Eighth Circuit Clarifies Cy Pres Rules for Settlements

The  Eighth Circuit last week issued an opinion with a set of new guidelines regarding "cy pres' disbursements in settlements. See In re BankAmerica Corp. Sec. Litig. (Oetting v. Green Jacobsen P.C.),  No. 13-2620 (8th Cir., 1/8/15).

Following the 1998 merger of NationsBank and BankAmerica to form Bank of America Corporation, shareholders filed multiple class actions around the country alleging violations of federal and state securities laws. The cases were transferred by the Judicial Panel on Multidistrict Litigation to the Eastern District of Missouri.  The transferred cases were resolved when the court approved a $490 million global settlement.  See In re BankAmerica Corp. Sec. Litig., 210 F.R.D. 694, 704-05, 714 (E.D. Mo. 2002), and 227 F. Supp. 2d 1103 (E.D. Mo. 2002). After an initial and then a second distribution, motion was made to distribute cy pres the remainder of the “surplus settlement funds” to three St. Louis area charities suggested by class counsel. The district court granted the motion over various objections. Objectors appealed the cy pres distribution, and the court of appeals reversed in the opinion for today's post.

In recent years, some federal district courts have approved disposed of unclaimed class action settlement funds after distributions to the class by making “cy pres distributions.” The term cy  pres is derived from the Norman French expression "cy pres comme possible," which means "as near as possible." The cy pres doctrine originated as a rule of construction to save a testamentary charitable gift that would otherwise fail, allowing ‘the next best use of the funds to satisfy the testator’s intent as near as possible.’” In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir.2001).

Such distributions “have been controversial in the courts of appeals.” Powell v. Ga. Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997). Indeed, some courts have criticized or restricted the practice. See, e.g., Ira Holtzman, C.P.A. v. Turza, 728 F.3d 682, 689-90 (7th Cir. 2013); In re Baby Prods. Antitrust Litig., 708 F.3d 163, 172-73 (3d Cir. 2013); In re Lupron, 677 F.3d at 29-33; Nachshin, 663 F.3d at 1038-40; Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 473-82 (5th Cir. 2011); In re Katrina Canal Breaches Litig., 628 F.3d 185, 196 (5th Cir. 2010); Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 434-36 (2d Cir. 2007); Wilson v. Sw.Airlines, Inc., 880 F.2d 807, 816 (5th Cir. 1989).  Recently, echoing these views, Chief Justice Roberts noted “fundamental concerns surrounding the use of such remedies in class action litigation” while nonetheless agreeing with the denial of certiorari in Marek v. Lane, 134 S. Ct. 8, 9 (2013).

The American Law Institute addressed the issue of Cy Pres Settlements in § 3.07 of its published Principles of the Law of Aggregate Litigation (2010). The ALI has recommended:

A court may approve a settlement that proposes a cy pres remedy . . . .The court must apply the following criteria in determining whether a cy pres award is appropriate:

(a) If individual class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable, settlement proceeds should be
distributed directly to individual class members.
(b) If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.
(c) If the court finds that individual distributions are not viable based upon the criteria set forth in subsections (a) and (b), the settlement may utilize a cy pres approach. The court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class. If, and only if, no recipient whose interest reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve
a recipient that does not reasonably approximate the interests being pursued by the class.

Given what it saw as a substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases, the 8th Circuit then concluded it was time to clarify the legal principles for the doctrine, relying in great measure on the ALI principles.

First, said the court, because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible only when it is not feasible to make further distributions to class members, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution. Here, said the court, from the perspective of administrative cost, a further distribution to the class was in fact feasible. The district court thus erred in finding that further distributions would be so “costly and difficult” as to preclude a further distribution; that type of inquiry must be based primarily on whether “the amounts involved are too small to make individual distributions economically viable.” ALI § 3.07(a).

Second, a cy pres distribution is not authorized by declaring, as class counsel did in this case, that all class members submitting claims have been satisfied in full. It is not true that class members with unliquidated damage claims in the underlying litigation are “fully compensated” by payment of the amounts allocated to their claims in the settlement. In this case, the district court approved (not atypically) a global settlement in which plaintiffs would recover only a percentage of the damages that they sought.  The settlement notice to the class stated: “the settling parties disagree as to both liability and damages, and do not agree on the average amount of damages per share that would be recoverable by any of the Classes.” Thus, the notion that class members were fully compensated by the settlement  was speculative, at best, said the court of appeals.

Third, the court rejected any contention that the cy pres distribution must be affirmed because the district court is bound by language in the settlement agreement, such as a clause stating that the balance in the settlement fund “shall be contributed” to non-profit organizations “determined by the court in its sole discretion.” Distribution of funds at the discretion of the court is not a traditional Article III function. More importantly, a proposed cy pres distribution must meet the standards governing cy pres awards regardless of whether the award was fashioned by the settling parties or the trial court.

Fourth, the court held that, unless the amount of funds to be distributed cy pres is de minimis, a district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient. This gives class members a voice in choosing a “next best” third party and minimizes any appearance of judicial overreaching. See In re Baby Prods., 708 F.3d at 180; ALI § 3.07(c), cmt b (encouraging courts to “solicit input from the parties” regarding cy pres recipients).

Fifth, when a district court concludes that a cy pres distribution is appropriate after applying the foregoing rigorous standards, such a distribution must be for the next best use, for indirect class benefit, and for uses consistent with the nature of the underlying action and with the judicial function. Any unclaimed funds should be distributed for a purpose as near as possible to the legitimate objectives underlying the lawsuit, the interests of class members, and the interests of those similarly situated. Applying this standard here, the court of appeals concluded that while the recipient here was unquestionably a worthy charity, it was not necessarily the “next best” recipient of unclaimed settlement funds in this nationwide class action. A district court must carefully weigh all considerations, including the geographic scope of the underlying litigation, and make a thorough investigation to determine whether a recipient can be found that most closely approximates the interests of the class.

The order was thus vacated. On remand, if any settlement funds remain after an additional distribution to the class, and if the district court concludes after proper inquiry that a cy pres award is still appropriate, the district court was directed to select next best cy pres recipient(s) more closely tailored to the interests of the class and the purposes of the underlying litigation.

 

Court Rejects Settlement Because of Cy Pres Issues

A federal court recently rejected a proposed settlement of an economic loss class action because of the details of its cy pres component.  See In re Hydroxycut Mktg & Sales Practices Litig. (Dremak v. Iovate Health Scis. Grp.),  No. 09-cv-1088 (S.D. Cal. 11/19/13).

The “Settlement Class” was defined as including those persons who purchased various Hydroxycut  Products between May 9, 2006 and May 1, 2009, inclusive.The settlement relief consists of a $10 million Cash Component and a $10 million Product Component. Settlement Class Members who opted to receive cash were to receive $25 for each Hydroxycut Product they purchased.  In lieu of cash, Settlement Class Members could elect to receive a Product Bundle for
each purchase of a Hydroxycut Product. Any amount remaining in the Cash Component after payment of Notice and Claim Administration Expenses, and Eligible Cash Claims would constitute the “Residual Settlement Amount.”  If any funds remained after six years from the Effective Date of the deal, the remainder was to be paid out pursuant to the cy pres doctrine to certain types of organizations (such as ones promoting community-based solutions for common and preventable diseases like cancer, heart disease, diabetes, obesity, and asthma).

The cy pres doctrine allows a court to distribute unclaimed or non-distributable portions of a class action settlement fund to indirectly benefit the entire class. See Six Mexican Workers v. Ariz.Citrus Growers, 904 F.2d 1301, 1305 (9th Cir. 1990). When employing the cy pres doctrine, unclaimed funds should be put to their next best use, e.g., for “the aggregate, indirect, prospective benefit of
the class.” Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011). The Ninth Circuit has held that cy pres distribution must be “guided by (1) the objectives of the underlying statute(s); and (2) the interests of the silent class members.” Six Mexican Workers, 904 F.2d at 1307. A cy pres distribution is an abuse of discretion if there is “no reasonable certainty” that any class member
would benefit from it. Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2012).  A court should not find that a settlement is fair, adequate, and reasonable unless the cy pres remedy accounts for the nature of the plaintiffs’ lawsuit, the objectives of the underlying statutes, and the interests of the absent class members.

Generally, a district court can approve a class action settlement if the court finds that the settlement is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e). When the settlement is reached before formal class certification, settlement requires a higher standard of fairness and a more probing inquiry than may normally be required under Rule 23(e).

Here, the court concluded that the cy pres remedy did not satisfy the standards for cy pres relief set forth by the Ninth Circuit. and denied the motion for final approval of the settlement.  The court found that the proposed cy pres distribution in this proposed settlement did not benefit the class. At the hearing, defendant's counsel explained that under a separate master settlement agreement governing the personal injury cases in the multi-district litigation, personal injury claimants are to be paid out of a $14 million settlement fund. And cy pres distributions for personal injury claimants in this action reduce the amount that Iovate must pay into the personal injury fund, yet, said the court, providing no additional benefit to the personal injury claimants and no benefit at all to the class members who suffered no personal injury.

The court rejected the argument that causing a benefit in the form of "facilitating settlement" in this action or the separate personal injury actions is the type of “indirect benefit” that cy pres remedies are meant to provide. The focus, said the court, should be on whether the funds themselves are being used for the benefit of the class.

The cy pres remedy was also problematic, said the court, because it allowed for a disproportionate distribution of settlement funds to personal injury claimants. In doing so, the cy pres remedy fails to take into account the interests of the majority of absent class members who did not suffer any personal injury, and the nature of this action, which mostly concerned alleged unfair competition, consumer protection, and product warranty claims, not personal injury liability.

Because of the expenses and claims, it appeared that more than half the settlement might be used for cy pres distribution to the personal injury claimants. The court expressed concern that so little of the sizeable settlement fund directly benefitted the class. Under the terms of the settlement, most of the fund could be channeled into cy pres distribution.  The American Law Institute’s Principles of the Law of Aggregate Litigation provide that where a settlement involves individual distributions to class members and there are funds remaining after the distributions, the settlement should
presumptively provide first for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair. See ALI Principles § 3.07(b) (2010).

Thus, the court found that the cy pres distribution was not guided by the interests of the class
members.  It appeared to the court that the cy pres relief was being used as a vehicle to help settle the personal injury cases, not to provide an indirect prospective benefit to the entire class.  The court also contrasted that class counsel was seeking $5 million in fees based in part on a percentage of the total fund.


 

House Hearing on CAFA- Seven Years Later

A topic near and dear to the hearts of readers of MassTortDefense was the subject of a recent hearing by a subcommittee of the U.S. House Judiciary Committee. Entitled "Class Actions Seven Years After the Class Action Fairness Act,” the hearing was designed to address what has worked with the law, what has not, and what Congress overlooked when it passed CAFA.

Witnesses included a plaintiff-side attorney, who typically complained about CAFA's impact on consumer fraud class actions, and Professor Redish from Northwestern, who talked about the need for legislative revision of the use of so-called “cy pres” awards in class action proceedings in particular.

Rep. Trent Franks (R-Ariz.) is the chairman of the Subcommittee on the Constitution, and has expressed concern over the ability of plaintiffs to engage in a new form of forum shopping under CAFA, filing cases in particular federal circuits they think are more hospitable to class actions.

John Beisner, who typically represents defendants in class actions, testified on behalf of the U.S. Chamber Institute for Legal Reform; he noted that a small number of judicial rulings have ignored Congress’s intent behind this landmark legislation, meriting further legislative attention. From imposing a heightened “legal certainty” standard on defendants with respect to CAFA’s amount-in-controversy requirement to broadly construing CAFA’s narrow exceptions to federal jurisdiction, these rulings run afoul of CAFA’s presumption in favor of federal jurisdiction. Second, he argued that Congress should also assess certain troubling aspects of federal class action jurisprudence that were not affected by CAFA. These issues include: (1) efforts by a small number of federal courts to loosen the requirements of Rule 23; (2) the increasing use of cy pres settlements to support large fee payouts to class counsel; and, he noted, (3) judicial approval of class actions that encompass substantial numbers of uninjured individuals (that is, persons who lack Article III standing).