Money for nothing: SCOTUS could stop class action funds from being steered to non-parties

By: Daniel Fisher

The U.S. Supreme Court heard arguments yesterday in a case that could end cy pres, the practice of steering money in class action settlements to organizations with absolutely no connection to the underlying lawsuit.

Proponents say cy pres – it translates roughly into “as good as” – has noble roots in ancient Roman law and accomplishes the goal of compensating class members when it’s impractical to actually send them a check. Opponents say cy pres has much more recent and intellectually dishonest roots and has evolved into a sneaky way to pay plaintiff lawyers more than they’re due while rewarding charities they may have a personal connection with.

Competitive Enterprise Institute attorney Ted Frank will be arguing for himself in Frank v. Gaos as a member of a class of Google customers who received nothing from an $8.5 million settlement of privacy litigation that paid plaintiff lawyers $2.2 million in fees.

The U.S. Court of Appeals for the Ninth Circuit approved the settlement anyway.

With the support of conservative groups and a number of Republican-leaning states, Frank argues the lawyers didn’t even try to compensate their supposed clients and instead agreed to steer more than $5 million to a handful of charities that Google already supported or were associated with colleges the lawyers attended.

“It’s a question of fairness, and whether lawyers have actually compromised the class by allocating money in a way that maximizes their own fees,” said Frank, who heads the Center for Class Action Fairness, which frequently represents objectors challenging class action settlements and the fees awarded to plaintiff lawyers.

Some critics, including Northwestern University Law School professor Martin Redish, have said cy pres may be unconstitutional because federal judges have no jurisdiction to award money to charities with no case or controversy before the court. But Frank isn’t making a constitutional argument today. Instead, he will rely on Rule 23 of the Federal Rules of Civil Procedure, which governs class actions in federal court and requires settlements to be both “fair” and “reasonable.”

When plaintiff lawyers negotiate a settlement that rewards an unrelated charity instead of their own clients – the class members – Frank says that is fundamentally unfair and unreasonable. Plaintiff lawyers are paid fees based upon the total value of the settlement, but that value is zero for class members who get nothing. The defendant company, meanwhile, gets something of great value: A judgment ending the litigation forever.

Making matters worse, Frank says, defendants often wind up handing money to charities they already support. In the Google case, for example, the search engine giant was accused of violating privacy laws by retaining search terms individuals used and selling that information to third parties. In the settlement, Google agreed to pay several groups, including the Stanford Center for Internet and Society, to which it has already donated millions. The “settlement,” Frank says, was really just a corporate contribution it probably would have made anyway.

“They give tons of money to Stanford every year,” Frank said. “If they change the accounting entries, it’s not costing them anything.”

Cy pres has been around as a legal concept since Roman days and was a familiar tool in English trust and estate law to deal with terms in wills that could no longer be practically fulfilled (racially discriminatory scholarship funds, for example, or money for treating a disease that was no longer common). Instead of liquidating the trust, judges had the power to steer the money to another cause “as good as” the one specified in the will.

Cy pres reemerged in 1972 after the University of Chicago Law Review published a student letter suggesting the ancient mechanism might solve what was then a growing problem with class actions: Undistributable funds. The very basis of a class action is to bundle together claims that are too small for plaintiffs to pursue individually. One side effect is few individuals actually bother to fill out the paperwork to collect their winnings when the cases settle. Some estimates put the median level of participation at around 1%, meaning 99% of class members never receive anything.

The problem is compounded by the perverse incentives for lawyers on both sides in a class action. The defendant’s lawyers don’t care where the money goes, as long as they pay as little as possible for an end to the litigation. The plaintiff lawyers want to negotiate a settlement that looks as large as possible, so they can collect a percentage of it in fees.

Under current rules, they have no incentive to try to actually get the money to their clients and in fact have a disincentive to spend money on trying to reach class members if that cuts into their fee.

A cy pres-only settlement solves problems for both sides, allowing the company to pay settlement dollars toward causes it already supports while creating the illusion that class members have gotten money they will never actually receive. It can also provide other rewards to lawyers and even judges. Beyond steering money to colleges they support – or want their children to attend – cy pres payments can smell of outright conflict.

Oracle chairman Larry Ellison settled a California class action by paying $100 million to a charity selected by his company, even though Ellison has already pledged to give his wealth to charity. In a mass settlement of fen-phen cases in Kentucky, the judge approved steering tens of millions of dollars into a newly created charity with the judge and three plaintiffs’ lawyers as board members, plus $1 million to the alma mater of one of the lawyers, who then was rewarded with a $100,000-a-year no-show job.

No one has a precise count of the class action settlements that include cy pres payments, and Frank said many may be included in quiet agreements that are never disclosed to the class. Federal courts dispose of about 275,000 cases a year, with 350 of them class actions.

Opposing Frank and CEI is a broad selection of liberal-leaning states, consumer protection organizations and Google, which says the Supreme Court shouldn’t have taken this case in the first place because cy pres-only settlements are so rare – less than one a year – that they don’t merit the fuss.

The Google brief opens with a slap at Frank, describing him and co-objector Melissa Holyoak as “professional objectors,” and goes on to dismiss disagreement among federal appeals courts over cy pres as “a phony circuit split.”

Google says cy pres was a good solution in its case because the plaintiffs had little chance of success after the Supreme Court’s 2016 decision in Spokeo v. Robins, which ended so-called “no injury” class actions that were based on nothing more than the alleged violation of a statute. With a potential class of 129 million Google customers and only $5 million to distribute, the company says, administrative costs alone would have eaten up the proceeds before anyone got a penny.

It was typical of cases that “limp past the pleadings stage,” Google says, yet pose enough of a financial threat to be worth settling. Ruling against cy pres would “make these cases impossible to settle,” it says.

“There’s a variety of vested interests coming in saying you needed these devices to settle class actions,” Frank said. But affirming the Ninth Circuit would encourage future lawyers to short-change their clients by negotiating cy pres agreements to protect their fees, he said. “If the Supreme Court gives approval here, the floodgates may open,” he said.

The court’s conservative majority may agree, at least in the narrow case of settlements that involve only payments to unrelated charities.  Chief Justice John Roberts, in the 2013 decision Marek v. Lane, all but invited a test case over cy pres, saying “fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered” and “how to assess its fairness as a general matter.”