By Kathryn Harrigan Christian, D. Matthew Allen, and Jaret J. Fuente, Carlton Fields
Courts approving class action settlements often review how the parties have provided for settlement funds that either (1) cannot be distributed to individual class members because, for example, proof of individual claims is burdensome or distributing damages is costly; or (2) remain unclaimed following distribution to class members who make claims.1 There are several ways in which such funds can be distributed, including pro rata distribution to class members; reversion to the defendant; escheat to the government; or cy pres distribution.2 This article focuses on cy pres distribution.
A cy pres distribution is a distribution for the indirect prospective benefit of the class. Typically, the parties attempt to find the “next best use” of funds that remain after a class action settlement has been fully administered.3 “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.’”4 The phrase “cy pres” comes from the Norman French expression “cy pres comme possible,” meaning “as near as possible.”5
Cy pres distributions provide a practical method for dealing with unclaimed settlement funds and can provide indirect compensation to the class through, for example, future price reductions or distribution of funds to entities that provide services to the class.6 In cases where the recovery for each class member is so small that the class members may not take the time to make a claim against a settlement fund, or distribution is otherwise impractical, some courts have found that cy pres distributions can provide a compensatory remedy to the class.7 Cy pres distributions can also serve the purpose of deterrence and voluntary compliance where, for example, parties cannot agree on a beneficiary of settlement funds.8 For defendants, cy pres awards can provide compensation that simultaneously operates as a charitable contribution—a tax deduction in disguise. Further, courts and parties resort to cy pres distributions when they wish to avoid (i) returning the funds to a defendant who has been found liable, or who agreed it was liable; and (ii) increasing the pro-rata share of the class members who file claims, potentially giving those class members a windfall.9
Cy pres distributions also can serve to fund important charitable and social causes. Cy pres distributions to such diverse organizations as community development projects,10 the American Red Cross,11 legal aid entities,12 and other charitable groups and organizations13 have been approved. Several states specifically provide for legal services programs, among others, to receive cy pres distributions, either by court rule or statute.14
Cy pres distributions are not without critics. Some have suggested that the concept of cy pres should not be extended from the testamentary context to the class action context because the “class action cy pres presents a dramatically different situation from the normal unclaimed property context.”15 Courts have noted that cy pres awards can provide a windfall to nonmembers of the class and members who have already recovered;16 are sometimes considered punitive;17 present possible judicial ethics problems;18 can unreasonably inflate plaintiffs' attorneys' fee awards,19 and may even be unconstitutional.20 One court summarized its view of cy pres distributions as follows:
(i) class actions are disputes between parties and the money damages should remain among the parties, rather than be distributed to some third party; (ii) it is unseemly for judges to engage in the selection of third party beneficiaries and to distribute class action damages to third parties; (iii) judges are often not in the best position to choose a charitable organization that would best approximate the unpaid class members' interests; and (iv) the doctrine encourages charitable organizations, and plaintiffs' lawyers, to lobby the court for cy pres awards.21
Citing these and other concerns, some courts have disapproved proposed cy pres awards in settlement agreements.22
Cy pres beneficiaries must be carefully chosen to account for (1) the nature of the lawsuit, (2) the objectives of the underlying claims; and (3) the interests of silent class members, including their geographic diversity.23 For example, the Ninth Circuit requires a cy pres award be “guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members, and must not benefit a group too remote from the plaintiff class.”24 In the Ninth Circuit, there must be a nexus—an actual connection—not just between the class and the cy pres beneficiary, but between the claims alleged in the case and the cy pres beneficiary.25
That is, the cy pres award must bear “a direct and substantial nexus to the interests of absent class members and thus properly provide[ ] for the ‘next best distribution’ to the class.”26 Some courts consider factors such as the cy pres beneficiary's history of sound fiscal management, the strength of its governance and leadership, and the extent of services performed and number of people served, as well as any red flags such as adverse publicity or governmental investigations.27
Some have suggested that a uniform test needs to be adopted for determining the standards to be applied in formulating cy pres distributions.28 For example, Section 3.07 of the American Law Institute's November 18, 2008, Council Draft No. 2 of the Principles of the Law of Aggregate Litigation provides that a court may approve a settlement that proposes a cy pres settlement subject to three criteria:
Some courts have referred to these principles in evaluating cy pres distributions.30 One district court within the Eleventh Circuit set forth the following approach:
1) determine that a reasonably diligent effort has been made to locate class members who are the direct beneficiaries of the class action settlement; (2) assure that existing identified class members have been fully compensated; (3) have the attorneys who represented the parties in the action that produced the settlement fund present recommended recipients of the left-over cy pres funds; (4) scrutinize the recommendations to reasonably assure that the recipients are legitimate and established organizations with a track record demonstrating that they can accomplish the purpose of the distribution; and (5) approve distributions that will, as closely as reasonably possible, accomplish the purposes of the class action that produced the settlement remainder fund. 31
So what is a litigant to do when framing a cy pres distribution in a class action settlement agreement? Here are some considerations in light of recent cases:
D. Matthew Allen is a shareholder at Carlton Fields, where he practices class action litigation, including antitrust law, deceptive trade practice law, insurance litigation, appellate law, and general business disputes. Allen is available at firstname.lastname@example.org.
Jaret J. Fuente is also a shareholder, and represents businesses and professionals in commercial and tort litigation, including class actions, mass torts, and multi-district litigation in the construction and products manufacturing industries. Fuente can be reached at email@example.com.
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This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
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