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Posts Tagged ‘class members’

Editor’s Note: The following is a post that I contributed to the Baker Hostetler Class Action Lawsuit Defense Blog.  Please be sure to visit the firm’s blog for more great class-action related content!

What to do with unclaimed settlement funds is a common problem facing class action litigants.  There are at least four methods of distributing unclaimed settlement funds:  (1) reversion of unclaimed funds back to the defendant; (2) payment to those claimants who did make claims on a pro rata basis; (3) letting the funds escheat to the state; and (4) a cy pres award to a charitable organization.  All of these methods have been the subject of criticism, but the practical reality is that something has to be done with funds from a class action settlement that are not claimed by class members.

Recently, the First Circuit Court of Appeals issued a decision that outlines the circumstances under which a court may approve a cy pres distribution of unclaimed settlement funds.  In In re: Lupron Marketing and Sales Practices Litigation, Case Nos. 10-2494, 11-1329 (1st Cir., Apr. 24, 2012), the parties had agreed to a provision that gave the trial court discretion on the distribution of any unclaimed funds from a settlement of claims alleging overcharging for the medication Lupron.  The Court had ordered that $11.4 million in unclaimed funds be distributed to a non-profit cancer center for the purpose of treating diseases for which Lupron was commonly prescribed.  Although the First Circuit expressed “unease with federal judges being put in the role of distributing cy pres funds at their discretion,” it found that the trial court had not abused its discretion.

In reaching this decision, the First Circuit adopted the “reasonable approximation” test for evaluating whether a district court’s cy pres award constitutes an abuse of discretion.  Under the “reasonable approximation” test, which had previously been applied by the Seventh, Eighth, and Ninth Circuits, the Court looks to whether the cy pres distribution is to a recipient that reasonably approximates the interests being pursued by the members of the class.  The Court listed a number of non-exclusive factors to be considered in making this determination:

(1)        the purposes underlying statutes claimed to have been violated;

(2)        the nature of the injury to the class members;

(3)        the characteristics and interests of the class members;

(4)        the geographic scope of the class;

(5)        the reasons why the settlement funds have gone unclaimed; and

(6)        the closeness of the fit between the class and the cy pres recipient.

The opinion more generally has an interesting discussion of some of the policy arguments for and against each potential alternative method of disposing of unclaimed funds.  Relying on the American Law Institute’s Principles of the Law of Aggregate Litigation, the First Circuit rejected the presumption suggested by the concurrence in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), that any residual funds in a class action settlement should be returned to the defendant.  The Court also cited the ALI Principles in rejecting escheat to the state as the preferred option of disposing of unclaimed settlement funds.  The opinion lists a variety of policy reasons why unclaimed funds should not be given pro-rata to the claimants who do participate, including that this method creates a windfall and leads to perverse incentives to prevent participation in a settlement by absent class members.

Like the Fifth Circuit’s decision in Klier last year, the First Circuit’s decision in In re: Lupron Marketing and Sales Practices Litigation illustrates the need for parties to be specific in the settlement agreement about the means of distributing unclaimed settlement funds.  Failure to take care in specifying how unclaimed funds are to be distributed can lead to additional unwanted and expensive litigation with objectors, and can force the court to make a public policy-driven decision that may be inconsistent with the desires of both parties to the settlement.

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The blog Wait A Second!, which covers civil rights issues in the Second Circuit, posted a synopsis today of a recent New York federal court decision in which a class action defendant was sanctioned as a result of communications with class members following a class certification order.   The case, Romano v. SLS Residential, Inc., 07 Civ. 2034 (SCR) (S.D.N.Y.), involves allegations of fraud and mistreatment of patients by a mental health care facility.  According to the synopsis, the court ordered the defendant to pay $35,000 in sanctions due to, among other things, the defendant’s actions in contacting class members and telling them that their mental health records would become part of the public record unless they opted out of the class.  The court also reportedly voided exclusion requests received following the improper contact and ordered corrective notice to be sent to class members.

The case appears to have involved particularly egregious conduct, but it serves as a more general reminder about the dangers of post-certfication contact with class members.  Certain types of contact cannot be avoided, especially where there is an ongoing relationship between the defendant and class members, but post-certification communications between a defendant and class members that involve the lawsuit itself are usually prohibited unless approved in advance by the court.  In fact, during the exclusion period following certification of a Rule 23(b)(3) class, there are certain restrictions even on what the attorneys appointed as class counsel may say to class members as they consider whether to opt out. 

Both Newberg on Class Actions and the Manual for Complex Litigation  provide extensive information on what types of communications with class members are permitted at each phase of a class action.  It is a good idea for a lawyer or party on either side of a class action to consult these sources and the authorities cited in them before undertaking to initiate contact with absent class members.

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