Imagine discovering that attorneys started a class-action lawsuit claiming your legal rights — and those of millions of other Americans — were violated, entitling each of you to at least $1,000 in damages.
But then, imagine that when the attorneys settle the case, they take all the money for themselves, plus a few other class members, and funnel the rest to pet causes favored by themselves and the big company you were suing.
Next week, the Supreme Court will hear a lawsuit challenging this sort of unfair settlement. Frank v. Gaos challenges the controversial use of a doctrine called “cy pres” (pronounced “sigh-pray”) to pay class-action settlement funds to those pet causes instead of the consumers whose claims are at issue.
The case, brought by my colleagues Theodore H. Frank and Melissa Holyoak at the Competitive Enterprise Institute, addresses the use of cy pres in a settlement arising from alleged privacy violations by Google. The settlement in Frank v. Gaos offered nothing whatsoever to class members while paying $2.1 million to attorneys and $5.3 million to third parties with no connection to the case — including class counsel’s alma maters and nonprofit organizations that were already being funded by Google anyway.
The doctrine of cy pres, short for the French phrase “cy pres comme possible,” or “as near as possible,” originated in trust law. It allows a court to reinterpret the terms of a trust to protect the creator’s intent when the original terms can’t be implemented. The current problem, however, arises from the more recent and improper use of cy pres in class actions like the one in this case.
The Supreme Court has a unique opportunity to fix this form of class-action abuse. Lower federal courts have split over the doctrine’s proper application. In Frank v. Gaos, the 9th Circuit Court of Appeals held that even when it is possible for a settlement to pay class members directly, a court still may approve a cy pres-only settlement that pays class members nothing. Under the 9th Circuit’s rule, so long as a court determines it to be “infeasible” to make payments to every single class member, the court can approve a settlement paying all of the funds to cy pres. The problem is that under the rule, it will almost always be possible for the attorneys to claim infeasibility, leading to far more cy pres-only settlements coming at the expense of consumers.
Every other federal court of appeals to consider the issue has disagreed with this approach. The 5th, 7th, and 8th Circuits hold that cy pres is impermissible when the funds can feasibly be awarded to class members. The 2nd and 3rd Circuits similarly recognize that cy pres distributions should be limited. These decisions acknowledge that giving funds to a third party, instead of the class members who claimed harm in the first place, is wrong.
What’s worse, the use of cy pres pits the interests of class members against their own counsel, creating tremendous temptation for abuse. When the attorneys recover the same amount of fees regardless of whether the settlement funds go to class members or to their favorite pet causes or their law school, you can guess which one the lawyers will prefer.
Unfortunately, defendant companies also have reason to favor cy pres. They get a reputational boost from donating to their preferred pet causes. And if a company already donates to a particular group, as in this case, the settlement costs them nothing — they just change the labeling in the company’s accounting ledger. For class members, it’s a double injustice. Not only are they not getting the money they are owed, but that money is instead going to causes or groups they may disagree with.
The forthcoming Supreme Court decision offers hope of reform, both in the use of cy pres and in the class action system more broadly. Frank and Holyoak are asking the Court to adopt a standard that says any class settlement that pays class counsel an amount disproportionate to the actual and direct benefit to the class cannot be approved. And because cy pres is obviously of no benefit to the class, it can’t be counted in the calculus of whether a settlement is fair.
If the Court adopts this rule, cy pres-only settlements, like the one in Frank v. Gaos, will fail.
Lawyers are people, and people respond to incentives. Time and again, we have seen that when courts align the interests of class members and class attorneys, more money goes to the class members.
Imagine a class-action system designed to actually prioritize consumers who have been wronged.
Anna St. John is an attorney with the Competitive Enterprise Institute.
