James R. Browning U.S. Court of Appeals Building, which houses the 9th U.S. Circuit Court of Appeals.
Photo by Ken Lund.Advocates of class-action lawsuits have long argued that they administer “rough justice” for plaintiffs who might otherwise have no means of redress.
I have written in this space before, on more than one occasion, about the problems with this line of reasoning. The principal beneficiaries of class-action suits are usually attorneys, while class members often get pennies, if they even bother to claim their awards. But when settlement funds go to a third, uninjured party, justice is not so much rough as absent.
These arrangements have been facilitated by “cy pres,” a legal doctrine that gives the courts power to modify a charitable gift or bequest when it is impossible to carry out the gift’s original terms. For instance, if a charitable trust is established expressly to fight a disease that is later successfully eradicated, the trust may be able to legally redirect resources to fighting a different malady. In this sense, cy pres has a useful application.
This benign doctrine has been hijacked for less-than-benign purposes by class-action attorneys. In the class-action context, cy pres has been used to distribute settlement funds to charities or other organizations that supposedly benefit class members indirectly. In cases where the class of plaintiffs is truly massive or otherwise hard to reach, lawyers have argued that it simply isn’t feasible to compensate the people on whose behalf they are bringing the suit. Instead, they direct the money to a research foundation or a university doing work to fight whatever supposed injustice the case centered around.
It takes little reflection to see serious problems with this arrangement. We will doubtless hear about many of them in detail now that the U.S. Supreme Court has said it will take up Frank v. Gaos, a case that centers on whether an award that provides no direct relief to class members can be “fair, reasonable, and adequate,” as any settlement that binds class members is legally required to be. The case is on the court’s autumn docket.
Chief Justice John Roberts has previously indicated that he would be interested in having the high court consider class-action settlements with cy pres awards, as he mentioned as an aside in a 2013 ruling. Whether the justices find any circumstances under which it is fair to bypass even attempting to compensate class members remains to be seen, but it seems to me that the odds are against it.
Frank v. Gaos concerns a class-action complaint in which plaintiffs alleged that Google had violated the privacy of some 129 million class members. Google settled the matter for $8.5 million. Of that sum, $3.2 million went directly to the attorneys. Class members got none of the remaining award; instead it went to organizations that agreed to use the money to promote “public awareness and education” or to support “research, development and initiatives related to protecting privacy on the internet.”
Ted Frank, a class member who petitioned the Supreme Court to review these settlement arrangements, wrote in an opinion column for The Wall Street Journal: “… the money is going to a variety of charities affiliated with Google and the plaintiffs’ attorneys, essentially allowing the lawyers to double-dip in the settlement fund. Class counsels Michael Aschenbrener and Kassra Powell Nassiri graduated, respectively, from Chicago-Kent and Harvard Law. Both institutions happened to receive funds in the settlement.”
Frank and others have pointed out that even when cy pres awards don’t go directly to institutions affiliated with the defendant, attorneys involved in the case or even the judge approving the award, they still create an inherent conflict. When attorneys have the choice between sending out 1 million $5 checks to anonymous individuals and handing over a $5 million donation to a high-profile charity, preferably while smiling for the camera, the temptation to do the latter is obvious.
Meanwhile, the corporate defendant has a built-in incentive to settle on these terms. Except for the very few class members who opt out, such a settlement generally clears the defendant of potential liability. Frank mentioned in his column that Google made no material change to its practices, meaning it effectively wrote an $8.5 million check to make this problem permanently untouchable for a huge swath of users. And the arrangement gives defendants and class counsel common cause in the sense that both want to reach a quick and amiable settlement, regardless of the good that settlement does, or fails to do, for class members.
The 9th U.S. Circuit Court of Appeals upheld an award that gave absent class members “no money, no alteration of the defendant’s allegedly injurious conduct, not even coupons” because it held that a cy pres settlement is acceptable even in instances where it is technically possible to make payments to class members. But, as the petitioners pointed out, decisions in other circuits have recognized that such settlements require special scrutiny because they can encourage both tacit and explicit collusion between corporate defendants and the plaintiffs’ attorneys. Other circuit decisions have also recognized that third-party cy pres awards are not appropriate when there are reasonable opportunities to compensate class members directly.
As Frank said in his Journal column, “When other appellate courts have applied the correct standard and agreed that attorneys shouldn’t get paid unless their clients do, lawyers have magically discovered ways to get money to class members, even when the payment per class member was as small as it is in our current case.”
Settlements like Google’s also pose a First Amendment issue, as The Cato Institute observed in a friend-of-the-court brief. In effect, a cy pres award forces class members to make donations to organizations that may or may not represent their individual views or priorities. The organizations that receive these awards may even engage in political speech or activity that class members would not knowingly support. At a minimum, the brief suggests, a cy pres award should require a change from opt-out to opt-in participation among class members in order to avoid violating individuals’ First Amendment rights.
Cases that end in cy pres settlements essentially turn the court system into a legislative body, making appropriations based on policies and priorities of the courts’ and parties’ choosing, funded by business shareholders, insurance companies and higher prices paid broadly across society. It seems fairly likely that the Supreme Court as currently constituted will rein in this behavior, but it will be interesting to see whether this proves true and, if so, how and to what extent.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book
Looking Ahead: Life, Family, Wealth and Business After 55.
Posted by Larry M. Elkin, CPA, CFP®
James R. Browning U.S. Court of Appeals Building, which houses the 9th U.S. Circuit Court of Appeals.
Photo by Ken Lund.
Advocates of class-action lawsuits have long argued that they administer “rough justice” for plaintiffs who might otherwise have no means of redress.
I have written in this space before, on more than one occasion, about the problems with this line of reasoning. The principal beneficiaries of class-action suits are usually attorneys, while class members often get pennies, if they even bother to claim their awards. But when settlement funds go to a third, uninjured party, justice is not so much rough as absent.
These arrangements have been facilitated by “cy pres,” a legal doctrine that gives the courts power to modify a charitable gift or bequest when it is impossible to carry out the gift’s original terms. For instance, if a charitable trust is established expressly to fight a disease that is later successfully eradicated, the trust may be able to legally redirect resources to fighting a different malady. In this sense, cy pres has a useful application.
This benign doctrine has been hijacked for less-than-benign purposes by class-action attorneys. In the class-action context, cy pres has been used to distribute settlement funds to charities or other organizations that supposedly benefit class members indirectly. In cases where the class of plaintiffs is truly massive or otherwise hard to reach, lawyers have argued that it simply isn’t feasible to compensate the people on whose behalf they are bringing the suit. Instead, they direct the money to a research foundation or a university doing work to fight whatever supposed injustice the case centered around.
It takes little reflection to see serious problems with this arrangement. We will doubtless hear about many of them in detail now that the U.S. Supreme Court has said it will take up Frank v. Gaos, a case that centers on whether an award that provides no direct relief to class members can be “fair, reasonable, and adequate,” as any settlement that binds class members is legally required to be. The case is on the court’s autumn docket.
Chief Justice John Roberts has previously indicated that he would be interested in having the high court consider class-action settlements with cy pres awards, as he mentioned as an aside in a 2013 ruling. Whether the justices find any circumstances under which it is fair to bypass even attempting to compensate class members remains to be seen, but it seems to me that the odds are against it.
Frank v. Gaos concerns a class-action complaint in which plaintiffs alleged that Google had violated the privacy of some 129 million class members. Google settled the matter for $8.5 million. Of that sum, $3.2 million went directly to the attorneys. Class members got none of the remaining award; instead it went to organizations that agreed to use the money to promote “public awareness and education” or to support “research, development and initiatives related to protecting privacy on the internet.”
Ted Frank, a class member who petitioned the Supreme Court to review these settlement arrangements, wrote in an opinion column for The Wall Street Journal: “… the money is going to a variety of charities affiliated with Google and the plaintiffs’ attorneys, essentially allowing the lawyers to double-dip in the settlement fund. Class counsels Michael Aschenbrener and Kassra Powell Nassiri graduated, respectively, from Chicago-Kent and Harvard Law. Both institutions happened to receive funds in the settlement.”
Frank and others have pointed out that even when cy pres awards don’t go directly to institutions affiliated with the defendant, attorneys involved in the case or even the judge approving the award, they still create an inherent conflict. When attorneys have the choice between sending out 1 million $5 checks to anonymous individuals and handing over a $5 million donation to a high-profile charity, preferably while smiling for the camera, the temptation to do the latter is obvious.
Meanwhile, the corporate defendant has a built-in incentive to settle on these terms. Except for the very few class members who opt out, such a settlement generally clears the defendant of potential liability. Frank mentioned in his column that Google made no material change to its practices, meaning it effectively wrote an $8.5 million check to make this problem permanently untouchable for a huge swath of users. And the arrangement gives defendants and class counsel common cause in the sense that both want to reach a quick and amiable settlement, regardless of the good that settlement does, or fails to do, for class members.
The 9th U.S. Circuit Court of Appeals upheld an award that gave absent class members “no money, no alteration of the defendant’s allegedly injurious conduct, not even coupons” because it held that a cy pres settlement is acceptable even in instances where it is technically possible to make payments to class members. But, as the petitioners pointed out, decisions in other circuits have recognized that such settlements require special scrutiny because they can encourage both tacit and explicit collusion between corporate defendants and the plaintiffs’ attorneys. Other circuit decisions have also recognized that third-party cy pres awards are not appropriate when there are reasonable opportunities to compensate class members directly.
As Frank said in his Journal column, “When other appellate courts have applied the correct standard and agreed that attorneys shouldn’t get paid unless their clients do, lawyers have magically discovered ways to get money to class members, even when the payment per class member was as small as it is in our current case.”
Settlements like Google’s also pose a First Amendment issue, as The Cato Institute observed in a friend-of-the-court brief. In effect, a cy pres award forces class members to make donations to organizations that may or may not represent their individual views or priorities. The organizations that receive these awards may even engage in political speech or activity that class members would not knowingly support. At a minimum, the brief suggests, a cy pres award should require a change from opt-out to opt-in participation among class members in order to avoid violating individuals’ First Amendment rights.
Cases that end in cy pres settlements essentially turn the court system into a legislative body, making appropriations based on policies and priorities of the courts’ and parties’ choosing, funded by business shareholders, insurance companies and higher prices paid broadly across society. It seems fairly likely that the Supreme Court as currently constituted will rein in this behavior, but it will be interesting to see whether this proves true and, if so, how and to what extent.
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