In Wednesday’s arguments for the case, Frank v. Gaos , several justices criticized the fact that the $8.5 million deal settling privacy claims against Google would pay millions to attorneys and charities, but nothing to consumers. Attorneys from the underlying Gaos v. Google case have argued that it would be infeasible to mete out the award to a prospective 130 million-person size class, so earmarked the money for six separate charities instead.
Such arrangements, called cy pres deals, involve class action settlements in which a portion of the funds are allocated to nonprofits when the parties and the judge have agreed the money can't be feasibly distributed to class members. While the breadth of the high court’s ultimate ruling remains to be seen, the scrutiny of these deals indirectly threatens a system that the American Bar Association estimates sends approximately $15.5 million every year to legal aid service organizations.
In debating the designation of charities as the next best recipients for the funds, several justices questioned whether the indirect benefits of cy pres — pronounced "sigh pray" — settlements runs afoul of Rule 23(e) of the Federal Rules of Civil Procedure, which requires that class action settlements be “fair, reasonable, and adequate.”
“And at the end of the day, what happens? The attorneys get money, and a lot of it. The class members get no money whatsoever. And money is given to organizations that they may or may not like and that may or may not ever do anything that is of even indirect benefit to them,” Justice Samuel Alito said during arguments. “So how can — how can such a system be regarded as a sensible system?”
Small But Valuable FundsWhile often delivered in the form of small payouts from leftover pots of settlement funds after a claims process, money from cy pres deals can be windfalls for lean-operating legal aid organizations, according to several amici briefs that had urged the high court to preserve cy pres as a tool.
The amount of funding legal aid organizations receive from cy pres deals varies widely from year to year. A review of tax return forms from the last three years for several nonprofits that disclosed cy pres contributions, including the Legal Aid Society of New York and Greater Boston Legal Services, showed cy pres usually accounted for less than 10 percent of an organization's budget. Last year, the Legal Foundation of Washington used $321,900 in cy pres awards to help close a budget shortfall, according to the organization's annual report.
But at Wednesday's oral arguments, Chief Justice John Roberts questioned whether it’s appropriate to hand out funds to charities — which may make political or other speech — that class members have not approved. Justices Alito and Brett Kavanaugh also questioned whether indirect benefits for third-party organizations are better than direct benefits for at least some class members.
Justice Kavanaugh even chewed on petitioners’ suggestion that a lottery system would be preferable to not giving anything to claimants just because the class size is so large.
“Isn't it always better to at least have a lottery system than that one of the plaintiffs, one of the injured parties gets it, rather than someone who's not injured? Why isn't that always more reasonable?,” Justice Kavanaugh said.
The plaintiffs in the underlying case, however, fought back against the criticism of using charities to provide indirect relief to class members.
“When you have a possibility of getting millions of dollars of indirect relief, it is better, it is fair, reasonable, and adequate, to get that when the alternative is likely nothing or the nominal equivalent of nothing,” Jeffrey Lamken, a MoloLamken LLP attorney representing the plaintiffs, told the justices.
Justice Sonia Sotomayor pointed out that the Google settlement at issue is a rare all-cy pres deal and that there have only been a handful of such deals in recent years. She also questioned petitioner Theodore Frank, who represented himself, on claims that cy pres is rampantly abused in class action deals.
“You do point to some potentially abusive situations, but in all those situations, it's the cases where the circuit court rejected a cy pres award. It seems like the system is working, not not working,” Justice Sotomayor said.
Frank argued that the Ninth Circuit’s blessing of the Google settlement creates a “perverse” incentive to divert money away from clients and to third-parties and that courts’ too-welcoming embrace of cy pres have led to counsel making it too hard for class members to file claims for their slice of the pie. He argued cy pres funds should not be used in calculations for attorneys' fees.
In the Google deal, $2.15 million went to class counsel, $5.3 million to internet privacy nonprofits, and the rest was used for administrative costs payments to the named plaintiffs.
High Potential for Narrow RulingExperts watching the case say they can't predict whether the high court will ultimately use the fight over the settlement as a vehicle to make a broad ruling on cy pres, or instead decide the case based on other issues raised in the appeal.
Chief Justice Roberts previously expressed interest in weighing in on the growing use of largely cy pres settlements when declining a 2013 appeal of a similar deal involving Facebook. Much of Wednesday, however, was spent, not on the question presented to the court about whether cy pres deals violate Rule 23, but on whether the plaintiffs in the underlying Gaos v. Google case have standing following the high court’s landmark decision in Spokeo Inc v. Robins .
The standing issue might “muck up the case” and push the justices to punt on the issue of whether cy pres violates Rule 23, said Jonah Knobler, a Patterson Belknap Webb & Tyler LLP attorney who regularly represents class action defendants. Instead, the court could rule on the standing question, remand the case to the lower court or decide the petition was improvidently granted, Knobler said.
The U.S. Solicitor General’s office, which represents the interests of the federal government before the U.S. Supreme Court, argued the standing issue should be revisited given the court’s 2016 Spokeo decision holding that plaintiffs need to allege more than just the violation of a statute to have standing to sue.
“It seems like there’s a decent chance they won’t decide the merits here,” Knobler said. “But I’m not that worried the issue will continue to be unresolved, because there are other cases in the pipeline.”
Knobler expects that even if the court does rule on the cy pres question, it will likely take the form of narrower resolution on the all-cy pres award, rather than a broad stroke dismissal of the use of cy pres to do away even with residuals.
“Generally, with exceptions, the court likes to rule in steps and not cause earthquakes,” Knobler said.
For now, many legal aid and advocacy groups are watching and hoping that the court does not rein in the use of cy pres distribution as the next best use of class action settlement funds.
“The cy pres doctrine provides courts with an indispensable framework for distributing these funds in a way that benefits absent class members and consumers as a whole while also effectively serving the disgorgement and deterrence goals of consumer protection statutes,” said Stuart Rossman, director of litigation at the National Consumer Law Center.
While all rules can be abused, Rossman believes existing guidelines governing the use of cy pres in the courts have been working.
“In deciding this case, we believe that the court should be mindful of the implications for low-income consumers of unduly hampering class actions, which constitute the most effective — and very often the sole — means of vindicating their rights as enshrined in consumer protection statutes,” Rossman said.
--Additional reporting by Jimmy Hoover. Editing by Pamela Wilkinson.
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