Cy pres success

What to do when steering class-action money to charities

Above and Beyond

Latonia Haney Keith

Latonia Haney Keith is McDermott Will & Emery’s firmwide pro bono counsel. She manages the firm’s pro bono practice and represents charitable organizations and disadvantaged individuals and families.

Since the cy pres doctrine was first introduced into class-action litigation in the 1970s, federal courts have approved cy pres awards to charities or other nonprofit organizations in thousands of class-action cases.

Over the last two years, however, cy pres awards in class actions have attracted increased and multi-faceted attacks from academics, judges, practitioners and professional objectors.

Critics have argued that cy pres awards violate the Rules Enabling Act, constitutional due process and Article III’s case-or-controversy requirement. Though the federal courts have not accepted such attacks on this important mechanism, they have rejected or overturned awards that reflect a misapplication of the cy pres doctrine within the particular circumstances of the case.

So, if you have just settled a big class action that is likely to involve residual funds and are contemplating a cy pres award, here are a few simple rules to avoid or defeat objections to your settlement and secure court approval.

Compensate class members first

Before making a cy pres distribution, you should first distribute settlement funds to the class members.

Relying on the American Law Institute’s Principles of Law of Aggregate Litigation, courts typically require that settlement funds remaining after an initial distribution should be redistributed to other class members (even those in different subclasses).

If further distributions are not practical or too small to make individual distributions economically feasible, courts then use their discretion to order a cy pres distribution.

An interesting development in this area pertains to the use of the cy pres doctrine in consumer class actions that are increasingly involving large classes with modest recovery potential (i.e., individual recovery of less than the cost of mailing out the checks).

In such instances, defendants are more frequently settling cases in which they agree to change a contested practice and pay an amount to identified charities. Though critics argue that these are sham settlements, courts such as the 9th U.S. Circuit Court of Appeals in the recent Facebook case (which was denied cert by the U.S. Supreme Court) have approved such settlements in recognition of the fact that often, even if such cases go to judgment, the maximum recovery is so small that class member distribution is not feasible.

Avoid cy pres awards that will attract objectors

Professional objectors and certain law firms are anxious to file objections on behalf of class members for grants of cy pres awards to dubious organizations.

Federal court decisions make clear that cy pres awards should go to organizations that reasonably approximate the interests of the class and therefore increasingly overturn awards to organizations that have no relationship to the class or the underlying litigation.

When selecting cy pres recipients, avoid awards to organizations in which counsel, the judge or a party has some interest. And avoid placing the judge in the uncomfortable position of picking charities for you.

Take into account the geographic composition of the class

As class-action lawsuits are usually brought and resolved in one particular court for reasons related to the parties or the subject matter, it is understandable that counsel and the parties may have an inclination to make cy pres awards to local organizations.

In a national class action, however, it is important — as some appellate courts have articulated — to ensure that at least a portion of the cy pres award is granted to national organizations.

Direct cy pres awards to legal services or pro bono groups

A recognized approach to avoid granting awards to dubious organizations is directing cy pres awards to pro bono and legal services organizations, which have long been recognized by federal and state courts as appropriate beneficiaries of cy pres distributions.

Such awards are granted based on one of the common underlying premises for all class actions: to make access to justice a reality for people who otherwise would not be able to obtain the protections of the justice system.

An interest of every class member in any class action is access to justice for a group of litigants who, on their own, would not realistically be able to seek recovery — either because it would be too inefficient to adjudicate each injured party’s claim separately or because it would be cost-prohibitive for each injured party to file separate claims.

Moreover, at least a dozen states, including Illinois, have adopted statutes or rules requiring that part (between 25 and 50 percent), of any class-action residue is directed to legal services or pro bono organizations.

In sum, following the above recommendations and, ideally, documenting any potential cy pres award in your settlement agreement will help avoid potential pitfalls and facilitate settlement approval without engendering objectors or a skeptical judge.