Cy Pres: Benevolent Solution or Lever for Collusion?

When does a charitable contribution pique the interest of state consumer protection watchdogs?  When the contribution comes at the expense of a compensatory payment to consumers.  That is precisely the scenario prompting attorneys general from sixteen states to join in an amicus brief supporting a petition for certiorari to the Supreme Court.  At issue is whether the Supreme Court should accept a case that would enable it to provide guidance on when, if ever, district courts should authorize cy pres in the context of class action settlements.

Cy pres principles are being applied with increasing regularity in class action settlements when direct compensatory payments to large classes of plaintiffs would be either economically infeasible or unduly burdensome to administer.  For example, the 9th Circuit recently affirmed a “cy pres-only” award of approximately $5.3M to third-party charities, with no direct compensatory payments to class members.   The court rejected arguments that the cy pres-only settlement award was unfair to class members and proclaimed that district courts may approve such settlements as long as they are free from collusion.

Invoking their roles as guardians of the consumer, the attorneys general, led by Mark Brnovich and the Office of the Arizona Attorney General, filed an amicus brief in support of Supreme Court review of this cy pres-only award.  The brief suggested that this case is a vessel by which the Supreme Court can intercede to protect consumers and also resolve disagreement among the federal circuit courts.  The AGs advanced two main arguments in support of their petition.

First, according to the AGs, sanctioning perfunctory judicial review of such awards could amplify the risk of collusion between defendants and class counsel to the detriment of the class.  Cy pres-only settlements may actually misalign the interests of the class and class counsel.  Corporate defendants are more likely to agree to larger damage amounts if they can pay those damages to third party-charities and reap the goodwill benefits.  And, class counsel are unlikely to resist large third-party charitable payments because a larger payment justifies more robust attorneys’ fees.  So, this scenario benefits everyone… except class members.  It is therefore no surprise that state AGs have taken a keen interest in this trend.

Second, the AGs emphasized the need for the Court to resolve a circuit split and eliminate the risk of forum shopping by class counsel.  Circuit courts have indeed applied varying and conflicting levels of scrutiny in their reviews of cy pres settlement awards.  For example, in contrast to the 9th Circuit approach, the 3d Circuit has employed a “direct benefit approach” to cy pres, which calls for consideration of “the degree of the direct benefit provided to the class.”  District courts in the 3d Circuit are required to engage in fact-finding in order to value the degree of benefit to the class and are guided by the principle that “direct distributions to the class are preferred over cy pres.”  Likewise, the 5th, 7th, and 8th Circuits have all adopted standards relegating cy pres to a true last resort in payouts of settlement damages.

The AGs opined that this case would provide the Court with the ideal opportunity to speak comprehensively and decisively on the use of cy pres in class action settlements.  Surprisingly, however, the AGs did not affirmatively endorse any particular standard of review.  We will apprise you of future activity on this petition.

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