United States: Cy Pres Abuse Poster Child

Last Updated: September 12 2017
Article by James Beck

We've never liked the "cy pres" concept in the context of class actions. We opposed it (not terribly successfully) when the ALI was considering it. We believe that taking money supposedly representing "damages" owed to class members and giving it to strangers is inherently substantive and thus not allowed by Fed. R. Civ. P. 23. We also have yet to see any substantive source of court authority to do that. To us, a cy pres settlement is an indicator of a lawsuit that should never have been brought, as it is an admission that even without any opposition the plaintiff is unable to prove damages or causation. Cy pres is merely a dodge to make settlements look larger so that class counsel fees can likewise be inflated.

We have also noted the complete dearth of United States Supreme Court precedent supporting the use of cy pres in class actions, and further that the concurring opinion in the certiorari denial in Marek v. Lane, 134 S.Ct. 8 (2013), indicated interest on (at least) the part of Chief Justice Roberts in examining the validity of this doctrine.

We think that the split Ninth Circuit decision in In re Google Referrer Header Privacy Litigation, ___ F.3d ___, 2017 WL 3601250 (9th Cir. Aug. 22, 2017) ("GRHPL"), might just be the appropriate vehicle for seeking the Supreme Court review suggested in Marek. Here's why.

GRHPL had nothing to do with drugs or medical devices, but everything to do with cy pres abuse. It was a privacy action that challenged the defendant's storage and use of the search history of persons who had voluntarily used its free web searching algorithms. Substantively this is, of course, complete garbage, since the quid pro quo of Google (and virtually every one of its chief competitors) making these search websites available for free is its ability to monetize the consumer preference data thereby created.

Would you rather pay to search the Internet?

We didn't think so.

Enough on the merits. GRHPL was a privacy class action. Those are never tried. They are either dismissed or they settle. This one settled, early, "before formal class certification." Id. at *3 The total settlement amount was $8.5 million – in return for a "release of the claims of the approximately 129 million people" who had used the defendant's search capabilities over a period of almost eight years. 2017 WL 3601250, at *2. The only other "benefit" for the class, if one could call it that, was the defendant "provide information on its website disclosing how users' search terms are shared with third parties." Id. As far as what the defendant actually did, the alleged violation that supposedly spawned the litigation, the GRHPL opinion mentioned no changes at all. "Of the $8.5 million settlement fund, approximately $3.2 million was set aside for attorneys' fees, administration costs, and incentive payments to the named plaintiffs." Id. That's right, class counsel and their hangers-on stood to receive 38% of a recovery that never came close to going to trial. See id. at *3 (referring to settlement "at this early stage of litigation").

That outcome was perfectly OK with the majority in GRHPL, which rejected the "view that the settlement should have been valued at a lower amount for the purposes of calculating attorneys' fees simply because it was cy pres–only." Id. at *8. This holding is, of course, in direct conflict with Judge Posner's decision (discussed in our earlier post) that cy pres awards should be "excluded" altogether from counsel fee calculations because they "d[o] not benefit the class." Pearson v. NBTY, Inc., 772 F.3d 778, 781, 784 (7th Cir. 2014). Circuit conflicts such as this are the stuff of which Supreme Court review is made.

Having settled the litigation, what did the representative plaintiffs and class counsel do to provide recovery to the class itself? Nothing. Another thing that makes GRHPL an excellent candidate for Supreme Court review is the absence of other issues besides cy pres. In this case 100% of the settlement went to "cy pres recipients" and 0% to the purported class:

The remaining $5.3 million or so was allocated to six cy pres recipients, each of which would receive anywhere from 15 to 21% of the money, provided that they agreed "to devote the funds to promote public awareness and education, and/or to support research, development, and initiatives, related to protecting privacy on the Internet.

Id.

The entire panoply of extreme cy pres abuse is present in GRHPL. As we mentioned above, use of cy pres is an admission that even when the defendants cease to oppose the litigation, plaintiffs are unable to prove basic elements of any cause of action – causation and damages. If this case were not a class action, it would have been dismissed. Here, however, "the district court found . . . the settlement fund was non-distributable." Id. at *3. The Ninth Circuit however was perfectly willing to allow "cy pres-only settlement[s]":

because the proof of individual claims would be burdensome or distribution of damages costly. We have never imposed a categorical ban on a settlement that does not include direct payments to class members.

Id. (citation and quotation marks omitted).

We support such a "categorical ban." The inability of even unopposed plaintiffs to figure out who was injured and how much is a strong indicator that litigation is not the answer to the alleged problem. In GRHPL, "each class member was entitled to a paltry 4 cents in recovery − a de minimis amount if ever there was one." Id. at *4. As to that situation, however, the United States Supreme Court has held:

[T]he venerable maxim de minimis non curat lex ("the law cares not for trifles") is part of the established background of legal principles against which all enactments are adopted, and which all enactments (absent contrary indication) are deemed to accept.

Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214, 231 (1992) (string citation to five earlier Supreme Court cases omitted). The kinds of cases epitomized by GRHPL should be the province of government regulators, not private attorneys pocketing almost 40% of the settlement proceeds and giving the rest of it away to their friendly third parties. We agree with the objectors, whose position was "if the settlement fund was non-distributable, then a class action cannot be the superior means of adjudicating this controversy." Id. at *4. The Ninth Circuit contrary position implicitly assumed, however, that litigation is always "superior" to non-litigation. That is judicial triumphalism of the worst sort. Lawyers and judges are not indispensable. Disputes can be resolved in other ways. There are some things that regulators are better at, and situations where would-be litigants can't show causation or damages – what ordinary litigants must prove – are one such example.

Then there were the cy pres recipients themselves – particularly the law schools, described as the "usual suspects" – given money for "promoting privacy protection on the Internet" and "educat[ing] the class about online privacy risks." Id. at *5. In other words, this all-cy pres settlement is a classic example of another form of litigation abuse, specifically the litigation industry using money supposedly belonging to "victims" (whose damages can't be proven) to perpetuate itself. Here, the cy pres awards would fund advocacy organizations (AARP and the World Privacy Forum), which turn around and file pro-plaintiff amicus briefs in other litigation (search for their names within the same paragraph as "amicus" and you'll see we're right). They also fund specialty clinics at law schools to train still more lawyers and invent more expansive liability theories, all for the purpose of pursuing still more unprovable class actions.

Beyond that, all three of the law schools just happened to have pre-existing relationships with both class counsel and the defendant. Specifically:

[Defendant] has in the past donated to at least some of the cy pres recipients, three of the cy pres recipients previously received [its] settlement funds, and three of the cy pres recipients are organizations housed at class counsel's alma maters.

Id. at *5. Such favoritism is precisely the kind of abuse that the ALI cautioned against when (over our objections) it chose to open the door to cy pres, despite the utter lack of recognized judicial power to give absent class members' money to non-litigants. "A cy pres remedy should not be ordered if the court or any party has any significant prior affiliation with the intended recipient that would raise substantial questions about whether the selection of the recipient was made on the merits." Principles of the Law of Aggregate Litigation §3.07, comment b (ALI 2010) (cited at 2017 WL 3601250, at *5).

Again, the majority in GRHPL sped right through the flashing yellow light. Repeated receipt of cy pres money from the same defendant was excused because better education of lawyers (to bring more lawsuits) was viewed positively. Id. at *6 ("Given that, over time, major players such as [defendant] may be involved in more than one cy pres settlement, it is not an abuse of discretion for a court to bless a strong nexus between the cy pres recipient and the interests of the class over a desire to diversify the pick via novel beneficiaries that are less relevant or less qualified"). Giving away money that supposedly belongs to the class to the law schools counsel attended was also OK because, what the hey, everybody does it:

The claim that counsel's receipt of a degree from one of these schools taints the settlement can't be entertained with a straight face. Each of these schools graduates thousands of students each year. . . . The court affirmatively analyzed the issue and was cognizant of the claim of a potential conflict. All class counsel swore that they have no affiliations with the specific research centers. Class counsel repeated that attestation at the final settlement approval hearing. . . . The district court found "no indication that counsel's allegiance to a particular alma mater factored into the selection process."

Id. at *6. And if you really believe that. . . . Well, a number of courts (including the Ninth Circuit) have pointed out "[w]hat we know as men and women we must not forget as judges." Larson v. Dumke, 900 F.2d 1363, 1369 (9th Cir. 1990); see also United States v. Blackburn, 461 F.3d 259, 264 (2d Cir. 2006); Henderson v. Frank, 155 F.3d 159, 164 (3d Cir. 1998); United States v. Jefferson, 925 F.2d 1242, 1253 n.13 (10th Cir. 1991). Not one, but all three, of the law school cy pres recipients just happened to be the alma maters of class counsel. That strains credibility past the breaking point.

We're not the only ones. In the words of the dissent in GRHPL:

Our precedent requires that district courts must be particularly vigilant not only for explicit collusion, but also for more subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations. In our case, we have a cy pres-only settlement. That alone raises a yellow flag. Furthermore, we have a class settlement before formal class certification. That raises another yellow flag. Lastly, we have almost half of the settlement fund, several million dollars, being given to class counsel's alma maters. To me, that raises a red flag.

2017 WL 3601250, at *10.

The only members of the class who received any payment at all were – you guessed it – the named class representative. The settlement paid "$15,000 in incentive awards to the three named plaintiffs." Id. at *3. The remaining 129 million or so class members received zilch.

We think this is a case that should go to the United States Supreme Court. One problem with the Ninth Circuit is precedent. "Objectors would also have us ignore our prior endorsement of cy pres awards." GRHPL, 2017 WL 3601250, at *4. The Supreme Court doesn't have that problem. Justice Roberts is already looking for a case to consider whether cy pres should be allowed at all. We don't think it should, and further believe that courts have no substantive power to take money from litigants and hand it out to uninjured third party bystanders, charitable or otherwise. GRHPL created a circuit split (unacknowledged), and if the Court takes a look at GRHPL, it will see the full spectrum of abuse that cy pres awards allow to occur. Given that background, the chances are good that a majority of the justices be willing to inter cy pres once and for all. Bad facts can sometimes make good law, and we hope GRHPL might be one of those instances.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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