Article by Lyle Washowich, Esq. and Gerard Hornby
Trial courts play a unique role in class action settlements. Under Federal Rule of Civil Procedure 23, among other things, federal district courts must review a proposed class action settlement for its fairness, reasonableness, and adequacy. Cy pres distributions – that is, distributions involving the payment of settlement proceeds to nonparties, typically charities or interest groups – require careful monitoring by the district courts. While, historically, cy pres distributions had only been made to non- or third parties after the distribution of settlement funds to class members (with the cy pres distributed as the remainder of any unpaid or uncashed settlement proceeds), a recent evolution has seen the consummation of class action settlements where most – if not all – of the settlement proceeds are paid to cy pres recipients only.
These cy pres settlements, also known as “fluid recovery,” require scrutiny under Rule 23. On the one hand, cy pres distributions in general may be appropriate when it is impracticable or economically infeasible to distribute settlement money to class members, such as when members “cannot be located, decline to file claims, have died, or the parties have overestimated the amount projected for distribution.”[1] On the other hand, cy pres settlements and/or distributions that divert settlements to entities that have little-to-no relation to the underlying lawsuit, provide no direct compensation to class members, or pose a potential conflict of interest between class counsel and their clients may be inappropriate.
In 2019, the United States Supreme Court in Frank v. Gaos sidestepped an opportunity to decide the propriety of cy pres class action settlements.[2] The case arose out of claims brought against Google for allegedly violating the Stored Communications Act by disseminating private information to third parties. The parties negotiated a class action settlement agreement requiring that Google pay $8.5 million in total under the settlement ($6.5 million after costs and fees). However, none of the money was to be distributed to non-named plaintiff or absent class members. Rather, it would primarily be given to six cy pres recipients selected by class counsel and Google to promote public awareness and education and to support research, development, and initiatives related to protecting privacy on the Internet.[3] The district court approved the class action settlement agreement, finding it preferable to the $6.5 million being distributed to 100 million class members, providing approximately 6.5¢ each. But five class members challenged the cy pres distribution, appealing to the Ninth Circuit Court of Appeals – which affirmed the settlement. Vacating the Ninth Circuit’s decision, the Supreme Court remanded the case to the district court on standing grounds only, leaving the issue of cy pres settlements unresolved. However, critics of cy pres agreements found some solace in the dissenting opinion of Justice Clarence Thomas, who argued that the “cy pres-only arrangement failed several requirements of Rule 23” and “strongly suggests that the interests of the class were not adequately represented.”[4]
The Third Circuit Court of Appeals waded into the debate in In re: Google Inc. Cookie Placement Consumer Privacy Litigation.[5] This case arose from allegations that Google, the same defendant in Gaos, created a web browser cookie which tracks an internet user’s browsing activity. The parties’ subsequent settlement agreement provided that Google would pay $5.5 million (1) toward class counsel’s fees and costs, (2) for incentive awards for named class representatives, and (3) for data privacy organizations – without directly compensating any non-named plaintiff class members.
The Third Circuit sought to determine whether a cy pres settlement can satisfy Rule 23’s fairness requirement. Disagreeing with the non-named class members’ contention that these settlements are unfair per se, the Third Circuit found that such agreements are sometimes proper. However, it warned against district courts only treating such settlements with a cursory analysis – as occurred in the case. The Third Circuit criticized the district court for failing to scrutinize the settlement and pointed to the district court only spending four sentences analyzing its fairness.
More troubling, though, was the district court’s conclusory treatment regarding the absent class member’s objection to the pre-existing relationship between Google, class counsel, and the cy pres recipients. The Third Circuit was particularly troubled that one class counsel sat on a cy pres recipient’s Board and Google was a regular donor to four other recipients. Rather than laying down a specific standard in determining whether a prior relationship undermines a class action settlement agreement, the Third Circuit focused on the district court’s dismissal of the objection without any analysis or evidentiary hearing.
To address this, the Third Circuit used the opportunity to hold what a district court must do when a cy pres settlement is challenged on the basis of a pre-existing relationship. In these circumstances, the district court must consider whether cy pres recipients have significant prior affiliation(s) with any party, class counsel, or the court, and whether any affiliation would raise substantial questions as to whether the selection of the cy pres recipients was made on the merits. The Third Circuit’s decision demonstrates that prior relationships are not automatically disqualifying for a cy pres settlement, but that the trial court’s failure to scrutinize them can be. After all, the court must act as the fiduciary and gatekeeper for absent class members.
Other circuit courts have taken a less stringent approach, such as the Ninth Circuit in Lane v. Facebook, Inc., affirming the trial court’s assessment of a cy pres settlement, even when the defendant’s Director of Public Policy sat on the charity recipient’s board.[6] The Ninth Circuit held that district courts do not require “that settling parties select a cy pres recipient that the court or class members would find ideal,” that settlement agreements are the offspring of compromise requiring concessions from both parties, and that it was proper for the district court in that instance to not undermine the settlement negotiations by second-guessing the parties’ decisions. There, the defendant Facebook was merely ensuring that the funds would not be used in a way that harms Facebook – an “unremarkable result of the parties’ give-and-take negotiations.”[7] The Ninth Circuit further found the cy pres settlement bore “a direct and substantial nexus to the interests of absent class members and thus properly provides for the ‘next best distribution’ to the class.”[8] The United States Supreme Court denied review of the Lane decision, but in a separate opinion attached to the denial of certification, Chief Justice John Roberts issued veiled criticism of cy pres settlements and their growing presence in class actions. The Chief Justice foreshadowed that “[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies.”[9]
With the increased attention that these type of class action settlements are receiving, the Third Circuit’s recent decision to scrutinize the district court in In re: Google Inc. Cookie Placement Consumer Privacy Litigation appears to be a probable signifier of things to come on this issue.
[1] In re Baby Prod. Antitrust Litig., 708 F.3d 163, 169 (3d Cir. 2013).
[2] Frank v. Gaos, 586 U. S. ____ (2019).
[3] These institutions included, among others, Carnegie Mellon University and the law schools at Harvard, Stanford and Chicago-Kent.
[4] Id. (Clarence, J. dissenting).
[5] 934 F.3d 316 (3d Cir. 2019).
[6] 696 F.3d 811 (9th Cir. 2012).
[7] Id.
[8] Id.
[9] Marek v. Lane, 571 U.S. 1003 (2013).