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Archive for October, 2009

Over the past week, I have received two separate requests for comment on cy pres awards to charity in class action settlements.  Evidently it’s on readers’ minds, so I thought I’d give some thoughts on the subject here.

Cy pres distributions to charity are one of several ways of dealing with a common problem in class action settlements: unclaimed proceeds from a common fund.  Class settlement proceeds may go unclaimed for any number of reasons, but for the sake of simplicity, I’ll limit the discussion to funds that cannot be claimed because not all class members can be located or given notice of the availability of the settlement amount.  Amount the other possible ways to distribute these unclaimed amounts are 1) allow the funds to revert back to the defendant; 2) pay the unclaimed amounts pro rata to the plaintiffs who did participate in the settlement; or 3) allow the funds to escheat to the state.

An argument commonly made in favor or a cy pres distribution over the other possible methods is that it provides a social benefit that arguably counteracts the wrong alleged to have been done by the defendant and prevents the defendant from reaping the benefits of its misconduct.  The fallacy in this reasoning is that in the settlement context, the defendant hasn’t been found liable for anything.  It is simply agreeing to resolve the case by paying money rather than face the uncertainty, cost, and risk of litigation and trial.  As long as plaintiffs are given a full and fair opportunity to participate (a topic for another day), there is no reason that cy pres distributions are a superior way of dealing with unclaimed funds to allowing the defendant to retain the funds for the benefit of its shareholders, employees, policyholders, creditors, or other stakeholders. 

On the other hand, because a defendant agrees to a settlement willingly, it really can’t be argued that cy pres provisions are unfair to defendants.  So, from a purely practical point of view, there is little to criticize in the use of cy pres in class action settlements.  Cy pres provides one of several options for settlement structures that may be available to resolve a dispute without having to resort to a trial. Plaintiffs lawyers like cy pres provisions because they may justify a higher attorney’s fee percentage and because they can make the plaintiff’s lawyer look like Robin Hood.  A defendant may agree to the distribution because it wants the certainty of fund that limits its settlement exposure and because it may be able to take advantage of the PR benefits of having donated money to charity in resolving a lawsuit.

From a societal or public policy point of view, however, cy pres is open to serious criticism.  The civil justice system is intended to provide a forum for remedying private wrongs.  If those injured by an unfair or unlawful practice cannot be located to provide them a remedy, then why should the money be forfeited to others who have not suffered injury at all?  Given the high cost of litigation, cy pres is not a particularly efficient way of redistributing wealth.  Policing and punishing misconduct and consumer protection are functions that are probably more appropriately handled by regulatory and criminal authorities.  While cy pres distributions may provide a societal benefit, it might be more beneficial, and less costly to businesses, just to impose a tax on all large companies rather than allowing plaintiffs’ attorneys to pursue these benefits in the civil courts.

For the time being, however, cy pres has become an accepted procedure for dealing with unclaimed class action funds.  As long as it is allowed, class action lawyers and litigants should continue to consider it as one option among many in resolving class actions.

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Venkat Balasubramani over at Spam Notes has been covering developments in an interesting group of class actions against Blockbuster Video and Facebook.  The cases arise out of Facebook’s Beacon feature, which causes news feed stories to be automatically generated about users’ purchases and other actions with online partners like Blockbuster.  the plaintiffs in each of the cases allege violations of various privacy laws arising out of the use of the Beacon program. 

The first of the three actions was filed against Blockbuster in federal court in Texas.  A separate filing against Facebook and various of its online partners, including Blockbuster, followed in federal court in California.  The Texas plaintiffs later filed a similar case against Facebook in Texas.

The parties in the California case recently reached a settlement.  The settlement calls for Facebook to terminate the Beacon program and pay $9.5 million to a fund to be used to establish a “privacy foundation,” along with payment of administrative costs, incentive payments to the named plaintiffs, and attorneys’ fees.  If finally approved, the settlement would include a release of claims by users against both Facebook and its  affiliates, thus ostensibly resolving the claims in both Texas cases even though Facebook is the only named defendant in the California case. 

As Balasubramani reports, the court in the California case has preliminarily approved the settlement and denied attempts by the Texas plaintiffs to intervene.   The cases involve an interesting case study in the struggle between competing plaintiff groups.  The settlement also raises interesting questions about the use of cy pres awards to charity in lieu of direct payments to class members and the preclusive effect of a class settlement as to claims against defendants who do not contribute to the settlement consideration.

Check out Spam Notes for the latest developments as well as links to key filings and settlement documents.

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Robert J. Ambrogi of Legal Blog Watch posted this article today discussing the Supreme Judicial Court of Massachusetts’ decision holding in Donovan v. Phillip Morris USA, which recognized the viability of a claim seeking medical monitoring as a remedy for smokers who do not have lung cancer but have an increased risk of lung cancer due to their use of cigarettes.  As Ambrogi points out, the case is brought on behalf of a would-be class, but it has not yet been certified as a class action.  The court was careful to tailor its analysis of the sufficiency of the complaint to the present procedural posture of the case, pointing out that the issue should be considered as if it were a simple dispute between individual parties, not as a claim brought on behalf of a putative class of consumers, stating:

With respect to the first certified question the plaintiffs allege and argue that they seek not a remedy, but a court-ordered, court-supervised program of medical surveillance for early detection of lung cancer utilizing LDCT scans. They further contend that without this program they have no adequate remedy at law, and that injunctive relief establishing such a program is necessary. No class has been certified, and the first certified question asks only if the complaint states a cognizable claim under Massachusetts law. We therefore consider the question in the context of a dispute between two individuals, and leave the idea of a “program” to consideration of the question of class certification. See Hansen v. Mountain Fuel Supply Co., 858 P.2d 970, 977- 978 (Utah 1993), quoting Friends For All Children, Inc. v. Lockheed Aircraft Corp., 746 F.2d 816, 825 (D.C.Cir.1984) (when deciding “whether tort law should encompass a cause of action for diagnostic examinations without proof of actual injury, it is useful to step back from the complex, multi-party setting of the present case and hypothesize a simple, everyday accident involving two individuals”). We address only the named plaintiffs and their individual claims. We conclude that the plaintiffs have stated a claim under Massachusetts law for future medical expenses that may be satisfied by an adequate remedy at law.

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The cy pres doctrine has become a hot topic in class action circles in recent years.  For those not familiar with the concept as used in the class action context, cy pres awards are awards to third parties, typically charities, of unclaimed settlement funds or unclaimed portions of class action judgments.  (See this August 11, 2008 CAB entry discussing cy pres). 

In an intriguing new article entitled Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, Northwestern Law Professor Martin H. Redish examines the legal and constitutional implications of cy pres awards in class actions and offers an empirical analysis of trends in the use of the practice.  The link above will take you to an executive summary of the article at the Northwestern Law School Website, which in turn contains a link to a .pdf version of the full article.

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An international securities class action trial against French media conglomerate Vivendi International started today in the U.S. District Court for the Southern District of New York.  For a report on the trial’s first day, see this article by Larry Neumeister of the Associated Press.  The case is somewhat unique because the class consists of investors from several European countries, including France, England, and the Netherlands.  For previous CAB entries discussing the Vivendi case and other cases involving would-be, multi-national classes of  investors, see these posts dated July 31 and September 8, 2008.

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John B. Isbister, founder and chair of the ABA’s annual National Institute on Class Actions, graciously agreed to offer his insights into this year’s programs, the history of the event, and trends in class action litigation generally.  This year’s two programs are being offered in San Fransisco on October 30, 2009 and Washington, D.C. on November 20, 2009.  My Q & A with John follows.  Be sure to check out the links for sample audio clips from last year’s program.

What excites you most about this year’s Institute? 

There are a lot of changes in class action practice right now.  Hot issues include many of the issues that we are examining at the National Institute.  For example, the litigation about arbitration clauses with class action waivers and the changing law on class certification standards (the shift from “some showing” to preponderance of the evidence) will both be examined at the National Institute.  All of these changes are court driven; as opposed to many of the changes in the past that were a function of changes to Rule 23 and CAFA.  Court driven changes are things that can be affected by lawyers, so there is the opportunity for good lawyers to have a real  impact on how Courts deal with these issues.  We are very fortunate to have as speakers some of the best lawyers in the country who are dealing with these issues.  My hope is that the National Institute will make all of the people who attend better able to serve their clients and better handle these cutting edge issues.

Why the decision to split the Institute into two separate programs this year?

This is “customer driven.”  We wanted to do a program in California–an area that has a lot of class litigation.   However, we recognized that in today’s economy a California program probably would not attract many lawyers from the East Coast.  So we decided to do both an East Coast and a West Coast program to satisfy both markets.

Which one should I attend, the one in D.C. or the one in San Francisco? 

Both cover substantially the same material and both have a great faculty.  The difference is that the San Francisco National Institute has a program on California class actions.  If an attorney does a lot of California class actions, the San Francisco program will have a special attraction. For those who want a taste of what the Institute is like, we’ve recently posted audio from the rigorous analysis standard and consumer fraud class actions in federal court sessions at last year’s conference.

What do you see as the emerging trends in class action law?  

An increase in the difficulty in getting a class certified–primarily driven by the shift from “some showing” standard to the preponderance of the evidence burden of proof  standard.  I think this moves the discovery and litigation of a number of issues to the front of a case that at earlier times would have only been contested at trial.  This sets the stage for a battle of experts at the class certification stage, which is also something we’re covering online this month.  It also enables defendants, who traditionally are reluctant to go to trial in a class action to litigate these issues at a preliminary stage.  

How about trends in class action filings? 

While I think it is harder to get a class certified, I do not think this has slowed filings of class cases.  Class action plaintiffs’ lawyers continue to be creative in using this procedural device to look for ways to economically litigate large numbers of claims that probably could not be litigated on their own. The sub-prime/financial crisis sparked a record number of new class action filings.

This is the 13th year for the Institute.  Why do you think this program has been so successful for so long? 

We have consistently identified and addressed current issues in the area of class litigation.  We have also consistently attracted the best lawyers, academics and Judges to be on our facility.  This year we are again privileged to have Professor John C. Coffee open the program. Professor Coffee is one of the most quoted sources in the news on topics related to securities litigation, the financial crisis and class actions in those areas.  His presentation is an overview on developments in class litigation always gets  rave reviews and sets the stage for the rest of the day.  This year Professor Arthur Miller–the guy who wrote the book on civil procedure–will moderate a discussion with  three experienced federal Judges on current issues in class litigation.   John Beisner and Elizabeth Cabraser–two of the most respected defense and plaintiffs’ lawyers respectively will be together discussing changing class certification standards–you can’t get better speakers than those two.  Finally, this program is a great bargain. Attendees get a full day’s worth of CLE credit (including some ethics credit), they get to have lunch and network with other class action practitioners, and they get a great book of written material.  We  also have some nice discounts for members of the American Bar Association, and  particularly  members of the ABA Section of Litigation.

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