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.
More on Cy Pres
Posted in class action reform, Class Action Settlements, Class Action Trends, Commentary, tagged class action settlement, common fund, cy pres, payment to charity, reversion, settlement distribution on October 28, 2009 | 1 Comment »
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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