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Archive for August 11th, 2008

I’m not sure if it is by coincidence or not, but the use of the cy pres doctrine in class actions has been the subject of criticism from several different sources over the past couple of weeks.  Cy pres, loosely translated from its original French “cy-près,” means “as near as possible” or “as near as may be.”  The doctrine arises out of the law of charitable trusts, and gives a Court equitable discretion to modify a trust to allow trust proceeds to be given to alternative beneficiaries when it has become impossible to effectuate the express terms of the trust, and when to do so would be consistent with the settlor’s intent.  In the class action context, some courts have relied on the cy pres doctrine in distributing unclaimed funds to charities as opposed to allowing them to revert back to the defendant or paid to out as additional awards to class members who made a claim.

Last week, George Krueger and Judd Serotta of Blank Rome LLP published an op-ed in the Wall Street Journal entitled “Our Class-Action System Is Unconstitutional.”  The authors argue among other things that the use of the cy pres doctrine in distributing class action damages awards amounts to a “hidden tax” on American companies.  In another article, Jocelyn Kellam and Stuart Clark of Clayton Utz criticize a proposal to allow cy pres awards by courts in the Australian state of Victoria.  (See Previous ClassActionBlawg.com article here).  Overlawyered contributor Ted Frank has an entry today discussing a recent National Law Journal article quoting him that also discusses criticisms of cy pres awards in class actions.

In his often quoted opinion in Mirfasihi v. Fleet Mortgage Corporation, 356 F.3d 781 (7th Cir. 2004) (reprinted version available at http://bulk.resource.org/courts.gov/c/F3/356/356.F3d.781.03-1069.html), Judge Richard Posner provided the following commentary on the use of cy pres in class actions:

The doctrine, or rather something parading under its name, has been applied in class action cases, In re Mexico Money Transfer Litigation, supra, 267 F.3d at 748-49; Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1305 (9th Cir.1990); 4 Alba Conte & Herbert B. Newberg, Newberg on Class Actions § 11:20 (4th ed.2002), but for a reason unrelated to the reason for the trust doctrine. That [cy pres] doctrine is based on the idea that the settlor would have preferred a modest alteration in the terms of the trust to having the corpus revert to his residuary legatees. So there is an indirect benefit to the settlor. In the class action context the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement (or the judgment, in the rare case in which a class action goes to trial) to the class members. There is no indirect benefit to the class from the defendant’s giving the money to someone else. In such a case the “cy pres” remedy (badly misnamed, but the alternative term — “fluid recovery” — is no less misleading) is purely punitive.

It is important not to view this quotation in isolation from the rest of the opinion.  In reversing the trial court’s approval of a class action settlement, Judge Posner makes that remand is required because of the trial court’s failure to demonstrate that it fulfilled the “duty in a class action settlement situation to estimate the litigation value of the claims of the class and determine whether the settlement is a reasonable approximation of that value,” not because of the inclusion or exclusion of any particular settlement term or structure.

As Judge Posner intimates, the doctrine is much more commonly applied in the class action settlement context than in the context of a contested award of damages to a prevailing class of plaintiffs, which rarely happens under any circumstances.  As a result, some criticisms of the cy pres doctrine in class actions are tempered by the fact that a cy pres award is usually something that a settling defendant has agreed to allow, as opposed to something that has been forced upon it.  The best way for any individual defendant to avoid cy pres awards is to not agree to them.

In analyzing potential reforms, it still may be a legitimate criticism that allowing cy pres awards even in class action settlements has societal disadvantages because it allows class counsel to justify higher fee awards that might otherwise appear inflated in relation to the benefits provided to the true class members.  Thus, theoretically, abolishing cy pres awards could remove one possible incentive to pursuing class action litigation that, even if successful, has low likelihood of ever resulting in meaningful benefits to the actual members of the class.  But there are plenty of other creative settlement devices that commonly are used to justify large fee awards even in the face of a low payout to individual class members.  Consequently, it is unlikely that by itself, prohibiting cy pres awards in class actions would have any measurable impact on the number of class action lawsuits being filed or pursued in the U.S.

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