For those of you new to all this, “cy pres” is the name given to schemes – virtually exclusively in class actions – whereby courts take money supposedly belonging to class members that class counsel can’t or won’t (due to expense) identify and give it to non-class members (mostly charities) who were not damaged in any way by the claimed conduct of the defendants.
We know of no legal power invested in the judiciary to take money away from supposedly injured litigants and give it to persons who are essentially bystanders. There are methods of doing this. When done privately, it's called "theft." Publicly, it would involve the powers to tax, appropriate, and levy fines, which belong to branches of government other than the judiciary. We further believe that use of cy pres to facilitate class actions violates the Rules Enabling Act, since procedural rules (such as Rule 23) can’t change the substantive law. There’s not much more “substantive” than taking money supposedly belonging to injured litigants and giving it to non-parties.
When we raised these objections in the context of the ALI’s Aggregate Litigation project, we felt like we were expectorating into a hurricane. Most of the other changes we fought for were ultimately accepted, but not on the cy pres front.
But lately we’re more optimistic. There have been three favorable developments in recent months. First, there are indications that the Supreme Court may at last have taken interest in the questionable underpinnings of cy pres awards. In Marek v. Lane, 134 S.Ct. 8 (2013), Chief Justice Roberts observed, while otherwise concurring in the denial of certiorari, that had the objectors to a class action settlement challenged the validity of cy pres generally, rather than case-specific attributes of this particular award, the Court might well have been interested:
[T]he parties earmarked [all the money left over after counsel fees] for a “ cy pres ” remedy . . . because distributing [it] among the large number of class members would result in too small an award per person to bother. The cy pres remedy agreed to by the parties entailed the establishment of a new charitable foundation. . . .
[Petitioner’s] challenge is focused on the particular features of the specific cy pres settlement at issue. Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on. This Court has not previously addressed any of these issues. Cy pres remedies, however, are a growing feature of class action settlements. In a suitable case, this Court may need to clarify the limits on the use of such remedies.
Id. at 9 (statement of Roberts, C.J. concurring) (emphasis added). We doubt that Chief Justice Roberts – indeed, any chief justice – would issue a public statement like this unless he thought he had the votes to do something about it.
The message from the Chief in Marek seems quite clear. Counsel should preserve existential objections to cy pres – such as those raised here on DDLaw – and the Court may well address them in some future, hopefully near term future, case. We encourage our readers to do this. Yes, cy pres makes it easier to settle class actions for nuisance value. But the problem is “Build It, and They Will Come.” By making class actions easier to settle, it increases the likelihood of their being brought in the first place. We believe that if class action plaintiffs are not allowed to shirk their burden of proving causation and damages, a lot of these bogus claims will either go away entirely, or be returned to the responsibility of public law enforcement and regulatory agencies where (if at all) they belong.
The enforcement powers of the state? That’s a good segue to the second favorable recent cy pres development. Historically, funds that could not be given to proper claimants – for whatever reason – eventually escheated to the state after a greater or lesser period of time. Currently, most states are having trouble raising sufficient revenues to pay for the services they provide. Thus the State of Texas successfully argued that cy pres could not be used in derogation of that state’s escheat laws:
The cy pres, or next best use, doctrine is an equitable doctrine adopted from the context of charitable trusts and allows the court to distribute funds which cannot be economically distributed to individual class members, or when a balance remains after individual distribution. . . . [A]a trial court’s discretion to distribute unclaimed funds through the application of cy pres does not authorize the court to disregard State property law. . . . [T]o the extent that the distribution violates the Act, the trial court abused its discretion and the settlement agreement provisions are void.
State v. Highland Homes, Ltd., ___ S.W.3d ___, 2012 WL 2127721, at *11-12 (Tex. App. June 13, 2012) (citation omitted). That case was appealed to the Texas Supreme Court − Highland Homes Ltd. v. The State of Texas, No. 12-0604, and in August the court agreed to decide whether judicial cy pres class action settlement provisions are void to the extent that they are an end run around duly enacted escheat statutes. See here. Argument was held in November. See here. The petitioners argued that restricting cy pres would result in more trials. We think that’s wrong, at least in everything but the shortest of terms. Rather, requiring plaintiffs to prove the causation and damages elements of their cases will result in fewer bogus class actions being filed.
Third, there is at least the prospect of revising Fed. R. Civ. P. 23 to restrict or do away with cy pres settlements. In August, the Lawyers for Civil Justice submitted a proposal to the Rule 23 Subcommittee of the Civil Rules Advisory Committee. Actually, LCJ submitted two alternative proposals. See LCJ Comment at 8-13, 22-23. LCJ’s first (and preferred) proposal would flatly prohibit settlements seeking to distribute funds to non-class members, and it would enforce the prohibition by deeming class counsel making such an offer to be inadequate, because they would be giving their clients’ money away. The second proposal would severely limit the practice (in addition to creating needed conflict of interest rules for cy pres recipients), by removing the true economic incentive behind them – no payment not made to a class member could be used in calculating any class counsel’s fee award.
The LCJ’s proposal is only the beginning of what would be a long and arduous process of amending the federal rules. We can’t say now that the committee will even take the proposal seriously. But the creation of actual language for formal rules is a big step forward. If Justice Roberts gets what he was looking for in Marek, a rule change could either be unnecessary or essential. Just about anything would be preferable to the current Wild-Wild-West – that is to say, virtually standardless − use of cy pres as it exists today.