Congress and courts examine use of cy pres relief in class action lawsuit settlements

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by Michael Heygood

Class actions lawsuits were designed to provide a mechanism by which persons, whose injuries are not large enough to make pursuing their individual claims in the court system cost efficient, are able to bind together with persons suffering the same harm and seek redress for their injuries. Without class actions, a great deal of wrongdoing would go uncorrected. Consumers would be wrongly “nickel-and-dimed” but, because each individual injury would be too small to justify individual legal proceedings, the wrongdoer would be able to keep doing wrong (and keep pocketing the money).

Some businesses and business groups—such as the U.S. Chamber of Commerce—consistently pursue changes to class action procedure that are designed to make it more likely businesses who cheat consumers will not be held accountable in any manner reasonably related to their total wrongful income. Instead, the U.S. Chamber and others pursue policies that would effectively result in businesses who cheat thousands of consumers out of a nickel here and a dime there only having to answer to those very few individuals (if any) who pursue individual lawsuits or arbitration claims.

Seven years ago, Congress enacted the Class Action Fairness Act (“CAFA.”). The Subcommittee on the Constitution of the U.S. House of Representatives Judiciary Committee recently held a hearing on potential amendments to CAFA.

Testifying to the subcommittee on behalf of the U.S. Chamber of Commerce was John Beisner, a Skadden Arps lawyer who “represents defendants in a number of areas, including the pharmaceutical, tobacco, automobile and financial-services industries.”* Part of his testimony—as well as other testimony presented on behalf of the U.S. Chamber—concerned the use of cy pres relief in class action settlements.

A “cy pres” award occurs when funds from a settlement or judgment that belong to the class are distributed instead to organizations for the benefit of the class. In a common application of cy pres in class actions, a fixed settlement fund exceeds the amount paid out because not all eligible class members submitted claims. The leftover amount is paid to particular charities rather then being returned to the defendant.

Although the anti-consumer forces that are attacking the use of cy press awards often claim they are trying to help consumers, the reality is that no genuine consumer advocacy group agrees. For example, according to the National Association of Consumer Advocates:

We believe that distributing class funds directly to class members is the best use of these funds, but when this is not feasible or when there are additional funds available, a cy pres distribution to a non-profit organization is appropriate when they provide an indirect benefit to absent members of the class or to further the purposes of the statutes that formed the basis for the underlying litigation. For instance, a case that challenges predatory lending practices that result in houses being foreclosed upon could be appropriate for residual funds to be distributed to non-profit organizations that address foreclosure prevention work. Unclaimed funds in class actions are certainly better served with non-profit groups than the defendants claiming these residual funds for themselves, the very people who admitted to misconduct or unlawful activity against the class action members.

Whether Congress amends CAFA or not, the federal courts of appeal are already closely examining cy pres awards. In Dennis v. Kellogg Co., No. 11-55674, at 8119 (9th Cir. July 13, 2012), the Ninth Circuit reversed certification of a settlement class, and remanded the case for further proceedings because the settlement provided for a nebulous cy pres award that the Court held was “not sufficiently related to the plaintiff class,” and because the attorneys’ fee award was excessive.

The plaintiffs alleged that Kellogg falsely advertised the nutritional value of one of its cereals. The parties’ settlement agreement provided a fund of $2.75 million for distribution to class members on a claims-made basis—with any unclaimed portion being donated to “charities chosen by the parties and approved by the Court.” Kellogg also agreed to distribute $5.5 million “worth” of food items to charities to feed the indigent, and to pay class counsel’s attorneys’ fees and costs up to $2 million.

The Ninth Circuit’s held the cy pres portion of the settlement was “not sufficiently related to the plaintiff class” because the charities to receive any unclaimed funds were not identified, and because the recipients of the food donation—the indigent—bore no relation to the class members.

In Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), the class members were divided into subclasses by their claims for ease of distribution. The members of one subclass did not claim all of their funds and the settlement agreement did not address what should happen to the unclaimed funds.

The district court ordered the remaining funds to be distributed to a charity under cy pres, and several members of another subclass sued, claiming that the funds should instead be redistributed to them. The Fifth Circuit concluded that when the terms of a settlement agreement are “insufficient to overcome the presumptions that the settlement provides for further distribution to class members, there is no occasion for charitable gifts, and cy pres must remain offstage.”

Since the funds belonged to the class as a whole, they could not be said to be unclaimed, and had to be returned to the remaining class members. If parties want unclaimed funds to be distributed to a charity, they need to ensure their agreement properly provides for that.

The First Circuit looked at the issue in In re: Lupron Mktg. & Sales Practices Litig., Nos. 10-2494; 11-1329, 2012 U.S. App. LEXIS 8263 (1st Cir. Apr. 24, 2012). Medical patient consumers, insurers and private health care providers alleged fraud in the overcharging for the medication Lupron which is used to treat prostate cancer, among other things.

In re Lupron involved a $150 million settlement, of which $40 million was allocated to consumers. The settlement agreement provided that all unclaimed funds would go into a cy pres fund to be distributed at the discretion of the trial judge. Consumers were allowed more than four years to file their claims, but despite these efforts, only about 11,000 individuals filed claims, given the high mortality rate among members of the class.

At the conclusion of the claims process, approximately $11.4 million remained unclaimed. The court decided to make a cy pres award of all of the unclaimed settlement funds to Dana Farber/Harvard Cancer Center. In determining that the district court did not abuse its discretion, the First Circuit adopted the “reasonable approximation test.”

As to whether cy pres distributions reasonably approximate the interests of the class members, the Court set forth a number of factors it considered, but which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipients.

Heygood Orr & Pearson is actively involved in representing consumers in class action litigation. We will be keeping an eye on the House Judiciary Subcommittee and, of course, the federal courts for developments in cy pres relief and other aspects of class action law.

If you have any questions about the Class Action Fairness Act or how to pursue a class action, contact the lawyers at Heygood, Orr & Pearson by calling toll-free at 1-877-446-9001, or by filling out our free online case evaluation form.

*Testimony of John H. Beisner On Behalf of the U.S. Chamber Institute for Legal Reform Before the Subcommittee on the Constitution of the Committee on the Judiciary United States House Of Representatives, June 1, 2012.