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Cy Pres Awards Are The Best Answer

By John Campbell | January 6, 2019, 8:02 PM EST

John Campbell %>
John Campbell
In Frank v. Gaos, the U.S. Supreme Court is considering the appropriate role of cy pres awards in class actions. Cy pres awards occur when money a defendant is obligated to pay to class members is unclaimed, or when distribution of funds to the class is impracticable. In those cases, after the judge confirms the money can’t be distributed to the class, the judge orders the residual money distributed to one or more nonprofit organizations. The judge must conclude that distribution to those organizations will provide a related benefit to the class members, and that overall, the resolution is fair, adequate and reasonable.

In Frank, the lawsuit was against Google, alleging that it violated consumer laws prohibiting the distribution of its users’ search terms to third parties. Money could not be realistically distributed to the class (the cost of mailing exceeded the amount that would be returned). So, the court approved the distribution to various cy pres recipients who agreed to use the money received on initiatives relating to internet privacy.

Some corporations and other interested parties argue that the cy pres distribution is inappropriate and have seized on Frank as a chance to eliminate cy pres awards. Specifically, they argue that the distribution of funds to nonprofit organizations violates the rights of the absent class members. The argument is wrong on many levels and ignores the fact that prohibiting cy pres awards creates far more problems than it solves. Namely, eliminating cy pres awards would reduce the deterrent effect of class actions, harm honest companies, decrease compliance with the rule of law, and overall, erode confidence in the judicial system as a mechanism for righting wrongs. It simultaneously would be a reason to celebrate for corporations that violate the law. Without cy pres awards, defendants will be partially or completely immunized in many cases.

To understand the issue more fully, it is useful to consider how a cy pres award occurs. There are two requisite conditions: (1) The defendant must be obligated to pay a specific sum, and (2) it must be impracticable to distribute all of the money to the class members. The defendant can be obligated to pay either because (a) it settled the case and agreed to a certain amount, or (b) because a verdict was entered against the defendant at trial. Money may be unclaimed by the class when checks mailed to them are not cashed or not all class members can be found. Other times, distribution may be entirely impracticable in cases in which the cost of distributing the benefit to the class is comparable to, or sometimes exceeds, the benefit itself. This occurs, particularly in cases with large classes, because there can be significant costs for updating the addresses of thousands of people, designing notice, printing notice, mailing notice, building a website, creating a toll-free number and paying a company to accomplish these tasks.

There are a variety of reasons why maintaining the long-established practice of allowing cy pres awards is the most appropriate use of residual funds.

First, and perhaps most important, the choice of how to distribute the money ultimately is decided by the judge — not the parties and not the attorneys. The judge decides, considering all the information available, which nonprofit organizations are most likely to advance the interests of the absent class members. Most federal judges do this by relying on American Law Institute Principles of the Law of Aggregate Litigation (Section 3.07) which provides guidelines for how to handle cy pres distribution. Indeed, that section, assembled by a variety of class action experts, concludes that “cy pres is preferable to other options available to a court when direct distributions are not viable.” Consistent with this opinion, the Advisory Committee on Civil Rule’s Subcommittee on Rule 23, the rule authorizing class actions, recently rejected new cy pres amendments to Rule 23, expressly concluding that judges already have appropriate guidance available and routinely follow it. Indeed, the 2018 version of Rule 23 contains an official committee note suggesting that parties should plan for unclaimed funds in their settlement agreements and should provide the court with suggestions for distribution.

Second, parties who oppose cy pres awards fail to note that the alternative to a cy pres is to either (1) return the money to the defendant (called reverter), or (2) have the money escheat to the state. Returning the money to the defendant should be a nonstarter. The defendant either (a) agreed to pay the money, or (b) was ordered to pay by a court as a result of a jury verdict or bench trial. This happens only after a defendant is sued for allegedly violating the law. If the defendant receives a reverter, the defendant escapes fulfilling its end of the bargain and, more troublingly at the macro level, the economic disincentive to break the law is reduced or eliminated.

Escheating the money to the state is no solution either. It makes it even less likely money will benefit class members, as there is no class in which every member of the state has a claim. The result is that the very problem that allegedly concerns those opposed to cy pres awards — the idea that the money might be used for purposes that don’t align with the class’ interests — is amplified.

Third, in the cases in which returning money to the class is entirely impracticable, the defendant could escape liability altogether. In some cases, the amount taken from any single class member is very small. For this hypothetical, let’s assume $1. The cost of distributing that amount back to class members may exceed the refund, making distribution impossible. For example, if it costs $1.10 to administer the settlement per class member, it would be economically impossible to mail $1 checks. In those cases, if cy pres were prohibited there would be no way to cause the defendant to pay back money illegally obtained. This would be true even if the case went to trial and even if a jury determined the company broke the law.

This immunization effect is particularly troubling. It reduces the economic disincentive to cheat, damaging the free market. In particular, it handicaps honest companies who choose not to pad their bottom line with illegal gains. Simultaneously, immunizing defendants diminishes the rule of law. Having laws on the books that can’t be enforced is a characteristic of many struggling countries. The U.S. should not willfully join their ranks.

Finally, the best way to consider whether the well-established cy pres policy works is not to consider a parade of hypothetical horribles, invented to color the issue. The better way is to view an average, real-world example. I’ll offer one from my time in practice.

I was involved in a series of lawsuits against payday lenders. They charged an APR of 469 percent. They made loans that routinely trapped borrowers in debt cycles on which the lender recovered many multiples of the loan amount. We alleged the loans violated the law. Some of the lenders ultimately agreed to settle the claims, returning money to the class. Checks were sent to class members. Some class members did not cash the checks and some class members could not be found. This left money in the fund — money the defendant agreed to pay after extensive negotiations. We petitioned the court to distribute the remainder to legal services — an organization that represented low-income individuals, often in financial disputes about payday loans, debt collection and other financial issues. The court distributed the money and the legal services organization was able to add staff that worked on issues that directly and indirectly benefited our class members. In the absence of the cy pres vehicle, the money would have been returned to the payday lender instead.

The takeaway is this: The perfect can’t be the enemy of the good. It is true that not every cy pres will be perfectly distributed, but it is equally true that eliminating cy pres awards is a net negative. It prevents judges from making case-specific decisions, immunizes defendants, neuters various laws meant to protect us all, and makes it harder for the free market to reward good actors while discouraging illegal behavior.

John Campbell is a professor at the University of Denver Sturm College of Law. He is co-founder and co-director of the Denver Empirical Justice Institute.

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