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| Mary Massaron |
Frank v. Gaos is a particularly egregious example of the use of cy pres in settlement proposals. The case alleges that a cy pres settlement between Google and class counsel for Google users violates Rule 23(e) of the Federal Rules of Civil Procedure, which requires class action deals to be "fair, reasonable, and adequate." The parties agreed to a settlement of $8.5 million, none of which will be distributed to absent class members. Instead, $15,000 will be distributed as "incentive awards" to the three named plaintiffs. Class counsel will walk away with fees of over $2 million. And Google buys peace for itself, and perhaps avoids ongoing negative publicity from the litigation.
The cy pres doctrine had its origins in law governing charities and trusts. In that context, courts have allowed property that was donated to a charitable cause or a trust to be used as "near as possible" to the original terms of the donation or trust. This makes sense. The donor has given the property to the charity or trust; if the precise purpose cannot be accomplished, the court uses it to do what the donor would likely have intended so that the trust won't fail or the charitable funds escheat to the state. Some years ago, a law review note suggested borrowing the doctrine to approve settlement payments to charities. And since then, its use has grown as settlements provide funds to charities, universities and lobbying groups that often have ties to the lawyers or parties in the case.
The question before the Supreme Court is whether such settlements can be approved as "fair, reasonable, and adequate" under Federal Rule of Civil Procedure 23. Not surprisingly, various justices questioned whether there is any benefit to the absent class members. Justice Samuel Alito asked whether any effort is made to determine whether class members want to make a contribution to the groups that would benefit from a cy pres award. Chief Justice John Roberts asked whether the absent class members' claimed injury would be meaningfully addressed by a contribution to the AARP. These questions underscore the problems with this troubling practice. Nowhere in the responses of those arguing before the court did anyone explain how these contributions provide a direct benefit to class members. The lawyers contended that the payments provide an "indirect benefit" but no one articulated the nature of that benefit, other than to suggest that the groups deal with privacy issues. Justice Alito commented:
"At the end of the day, what happens? The attorneys get money, and a lot of it. The class members get no money whatsoever. And money is given to organizations that they may or may not like and that may or may not ever do anything that is of even indirect benefit to them."
Although the constitutional problems raised by these awards was not explicitly discussed during the oral argument, multiple amici pointed out that cy pres payments raise serious concerns, particularly under the First Amendment. Among the groups given awards in Frank v. Gaos was the AARP, a group that has no apparent connection to the privacy internet interests at issue here, and one that engages in political activity and lobbying that may not be supported by the absent class members. Critics of cy pres contend that payments are often made to liberal or left-leaning causes, and note that some absent class members may view contributions to these groups an anathema. And obviously, absent class members may be equally upset to know that their recovery went to conservative groups.
Also troubling, the process raises serious concerns about the integrity of the system as a whole, with courts being transformed into extra-constitutional grant-writing entities. The practice of making cy pres payments to favored groups is rife with the potential for conflicts of interest. Chief Justice Roberts asked whether judges designate the beneficiaries when cy pres is used, and later asked Google's counsel, "[W]ould you agree with me that the district court should never be the one suggesting possible recipients of the funds of a settlement he has to approve?" In Frank v. Gaos grants were awarded to entities to which the defendant had previously given charitable contributions, to the alma matters of the lawyers, and to groups with little or no connection to the claimed interest of the absent class members. The notion that the lawyers for the parties and sometimes the judges can engage in a free-form granting writing process with moneys that are intended to compensate absent class members for giving up their claims is a strange one, and one that finds no support in law or logic.
The Supreme Court has the opportunity to address these troubling practices by holding that a settlement can never be seen as "fair, reasonable, and adequate" when it results in contributions given to entities that are not approved by absent class members, may have been chosen based on desires of and ties to the parties, the lawyers, and the court, and offer at best only a claimed indirect benefit.
Mary Massaron is a partner at Plunkett Cooney PC and former president of Lawyers for Civil Justice.
Disclosure: Lawyers for Civil Justice filed an amicus brief written by Massaron in support of the petitioners in Frank v. Gaos.
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[1] Frank v. Gaos
, Supreme Court No. 17-961.