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Archive for October 28th, 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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