What About the Merits – What, If Anything, Will the Supreme Court Do With Cy Pres-Only Class Action Settlements?

We have been talking about Frank v. Gaos, (No. 17-961), since the U.S. Supreme Court decided to tackle the extreme case of the use of the cy pres doctrine in the context of class action cases. The settlement is a cy pres-only agreement which called for distribution of all funds paid by the defendant directly to charitable organizations and plaintiffs’ attorneys (in the form of attorneys’ fees) and there was no attempt at all to distribute any funds to the plaintiff class. The Supreme Court oral argument was held in Gaos on October 31st and the Justices probed several aspects of the heart of the issue – when, if ever, is it appropriate to use cy pres in this context and what are the standards to be applied in that determination? However, the question of whether the class plaintiffs had standing to bring the privacy-based lawsuit against Google in the first instance was raised and stands as an obstacle to an immediate resolution of the merits of the case. The standing issue was not originally briefed before the Supreme Court, leaving the High Court probing whether remand was appropriate to illuminate the issue or whether they should dismiss the case as improvidently granted. On November 6, 2018, the Supreme Court ordered the parties to file supplemental briefing on standing to aid in its determination of whether to reach the merits of this case. We discussed several of the key points that shaped the discussion during oral argument regarding the standing issue in a companion post. Below, we highlight key points raised during argument regarding the merits of the appeal.

Class vs. Class Counsel?

Despite the open question regarding plaintiffs’ standing, the Justices thoroughly explored the merits of the case during oral arguments. Several themes dominated the discussion, beginning with Petitioner insisting that the requirement for class action settlements to be fair and reasonable calls for the alignment of class counsel’s interests with those of absent class members. Petitioner argued that, although 99% of class members typically do not make claims, providing the class with the opportunity to collect a direct benefit should be prioritized and class counsel cannot be rewarded for failure to provide a direct benefit. Therefore, any unclaimed portion of an award or settlement should be distributed to the members making claims and/or the claims process must be revised to simplify it and incentivize more members to file, etc.

Justices Ginsberg and Sotomayor questioned why it would be an abuse of discretion to approve the cy pres award when the estimated claim per class member in this case was as little as $0.67. But, cents add up to dollars and Petitioner argued the Ninth Circuit’s de minimis rule creates “perverse incentives” for class counsel to say that it is too difficult to get the award to the class:

in fact, the de minimis rule would take many settlements that are settling now for less than $1 per class member, for less than $2 per class member, that distribute tens of millions, even over $100 million to class members, it’s now appropriate under the Ninth Circuit’s rule to take all of that money and give it to the defendant’s favorite charity or the plaintiff’s favorite charity.

Petitioner advocated incentivizing class counsel by insisting that the attorneys do not get paid unless their clients do. The United States urged that the standard must “deter abuse of the class action device” and should require a “rigorous numerical analyses of feasibility and determin[ation of] fees based on actual relief to the class, not, as here, based on an inflated percentage or multiplier.”

Strange vs. Less Strange – Making Sense of the System

Does it make sense to approve cy pres-only settlement awards, especially in suits seeking to compensate the injured class? Why wouldn’t an alternative mechanism to distribute the award to class members make more sense? Justice Kavanaugh questioned the “strange” application of cy pres in this case and suggested there were more reasonable options:

why is it not always reasonable, more reasonable in this situation, which is a difficult one, to try to get the money to injured parties, either through pro rata distribution or some kind of lottery system?  Imperfect or strange as that may be, it seems to me potentially less strange or why isn’t it less strange than giving it to people who weren’t injured at all, who have affiliations with the counsel, and who in many cases don’t need the money?

And Justice Alito probed how it could possibly make sense to apply cy pres under the circumstances in Gaos:

from what happened in this case and cases like this, how can you say that it makes any sense? The purpose of asking for compensation, it’s not injunctive relief that would benefit a -­ benefit a broad class, but the purpose -­ benefit the public — it’s compensation for the — for the class members. And at the end of the day, what happens? The attorneys get money, and a lot of it. The class members get no money whatsoever. And money is given to organizations that they may or may not like and that may or may not ever do anything that is of even indirect benefit to them.

The ultimate question the Court will need to answer: “how can such a system be regarded as a sensible system?”

Congress vs. The Court

Amendments to Federal Rule of Civil Procedure 23 which governs class actions are pending before Congress, but they will not address the question presented by Gaos. Cy pres initially was identified as a front-burner issue for consideration, but it was ultimately removed from the agenda for this round of amendments. The Justices in Gaos probed whether this issue is more appropriately addressed in legislation or rules of procedure? Justice Sotomayor asked Petitioner: “So your position is that cy pres is okay, but we should write legislation in our opinion saying that we can’t pay class counsel for that….Or is the individual district court’s discretion appropriate until the Congress looks at this and decides?” Justice Kavanaugh questioned whether this should be left to Congress or the Rules Committee, and the United States pointed to the Rule 23 amendment process as supporting its position before the court: “The Rules Committee has essentially punted to the courts by saying the courts are actively looking at this issue, we’re not going to address it. Now they did amend the rule in various ways that I think support our approach by saying you should consider fees at the 23(e) stage, you can delay to see what the claims rate is, the court should be looking at the claims rate.”

If the High Court reaches the merits of the case after deciding the standing issue, it will be interesting to see if they resolve the question or pass the ball to Congress and/or the Rules Committee. We will keep you posted on developments.

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