Cy pres: Boon or Benefit?

by Stephen Gardner

As foretold by Deepak Gupta’s 11/27 post, here is a brief response to the November 26 New York Times article that discussed charitable payments of leftover class action settlement funds (known in the class action biz as “cy pres,” mostly because Law French always sounds fancier than English).

In short, the article does a great job of articulating the problems a few folks see with cy pres distributions, but not so much in reflecting the many positives about cy pres.

(Disclosure time: My organization, the Center for Science in the Public Interest, has received a few cy pres awards, and I have as a class action lawyer given many hundreds of thousands of dollars to suitable charities. My long-held professional bias is strongly in favor of cy pres payments, and my more recent institutional bias complements that bias. I was also a primary author of the Class Action Guidelines issued by the National Association of Consumer Advocates, one chapter of which addresses and supports cy pres distributions.

(Thus, my long-held professional bias is strongly in favor of cy pres payments, and my more recent institutional self-interest complements that bias.

(But I’m right, regardless.)

First, a quick summary of cy pres, just in case you don’t want to read the Times article (which you really ought to do, as it is a very well-written summary of cy pres concepts, better than I am likely to achieve.

In class actions that settle for payment of money by the defendant, it is frequently the case that money is left over after checks have been mailed to the class members. This may be because it was necessary to use claim forms, which always results in limited distribution to class members (but which are sometime necessary if it is functionally impossible to locate all class members up front — such as in refunds for products purchased at retail). Or it could be because checks that were mailed to class members without claim forms come back because (1) people move and (2) the United States Postal Service is woefully incompetent and disinterested in forwarding mail.

Thus, there’s still money in the pot.  As the Times article noted, there are limited choices for distributing this money:

1. Give it back to the defendant. This is just a bad idea. End of discussion.
2. Give it to the public coffers — effectively providing for an escheat. While not as spectacularly bad as giving it back to the defendant, it is still a poor solution because it will not even indirectly benefit the class members in specific. It’s what my daddy calls throwing it down a rat hole.
3. Set up a second distribution to the class members who already got money in the first round. Depending on a number of factors, this might be a good option. However, as a rule, it is often either economically inefficient to spend the money on a second distribution of small amounts of money, or could result in a limited set of class members receiving many times over their actual damages (or even treble damages).
4. Use cy pres.

Because I reject Choice 1 and Choice 2 as a matter of principle, and because Choice 3 is not always possible, the only remaining choice is cy pres. Kind of like being on the horn of a unilemma™.

In the Times article, the otherwise-often-correct Professor Sam Issacharoff calls judicial supervision of cy pres “an invitation to a wild corruption of the judicial process.”

With all respect, it’s really more of an invitation for judges to do their job right.

A class action is just plain different from other lawsuit settlements, in many ways, but the relevant distinction here is that the judge has an affirmative duty to insure that the settlement is fair, adequate, and reasonable to the class members.

This is the judicial process, and allowing judges to do their jobs is in no way a corruption of it. In fact, refusing to consider cy pres just because Prof Issacharoff and a few folks at the American Law Institute (go read the Times article now if you don’t know what I’m talking about; do I have to do everything for you?) don’t like cy pres much is too much restriction on the judge’s duty to watch out for class members’ interests. It requires the judge to wear blinders.

Instead of rejecting cy pres completely, it is far better to use cy pres where appropriate, using a few principles. (For a detailed discussion of cy pres pros and cons, look at the Class Action Guidelines mentioned above, starting at page 27.)

First Principle: When humanly possible, structure the settlement to insure that there are no leftover funds after distributing money to the class.

Second Principle: If there is leftover money, first consider a second distribution to the class members who already got money, in keeping with the Third Principle:

Third Principle: If the cost of distributing the money is more than the amount to be distributed, all those funds should be distributed by cy pres. Because it’s wasteful and silly to mail out checks for $3.98.

Fourth Principle: Money distributed as cy pres should never never NEVER go to any entity affiliated in any way with the defendant. This is effectively giving the money back to the defendant.

Fourth Principle, part two: As a general rule, it’s okay for cy pres money to go to an entity with which class counsel has a relationship, absent any direct benefit or quid pro quo to class counsel in exchange for the payment. The latter situation is effectively graft. (CSPI has served as counsel in settlements where cy pres payments are made, but has steadfastly refused to accept any cy pres itself in those cases.) But, absent graft, it’s foolish to eliminate good groups just because the class counsel has some relationship to the entity. For example, in one case where I was one of many class counsel, we gave money (lots, over $400K) to the legal aid program that was the successor to the one where I started out as a lawyer. It wasn’t because I used to work there, but because the defendant was based in Texas and ripped off poor people, and because that program was one of the best legal aid programs in the country (something that only happened after I left) . In that same case, the National Consumer Law Center received an equal amount, despite the fact that at the time I was Of Counsel to the Center (although that fact was so irrelevant to my own thinking that it did not occur to me until the day of the fairness hearing, when I realized it and informed the judge, who awarded the money anyway).

The American Law Institute draft discussed in the Times article (which you still haven’t read, have you?) says much the same thing — that money should go to class members where feasible. Of course, “feasible” is one of those words that means different things to different folks at different times, but the test is not “possible” but rather “worth doing.”

And sometimes, the cost and effort required to distribute settlement funds just ain’t worth doing, and that’s where cy pres excels.

Comments

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The American Law Institute draft discussed in the Times article (which you still haven’t read, have you?) says much the same thing — that money should go to class members where feasible. Of course, “feasible” is one of those words that means different things to different folks at different times, but the test is not “possible” but rather “worth doing.”

[cy pres]

Thought this cy pres website link might be helpful:
http://www.ohiolawyersgiveback.org

[Steve Gardner]

I don't know how you could find the largest cy pres fund--there's no centralized reporting.

Funds generally range from low five figures to the low six, but I've seen funds that are over a million.

I myself may hold the record for the smallest fund, in a public housing utility overcharge case where we provided for cy pres distribution of any settlement money that could not be distributed to class members. Because we were so successful in distributing money to class members, the remaining cy pres was less than five bucks. It's the only time I've sent a cy pres check with an apology.

[patrick perotti]

how could i find out the largest cy pres fund ever distributed in one case?

thank you for your assistance.

patrick perotti
pperotti@dworkenlaw.com