An ancient doctrine.  A new twist on the good old cy pres doctrine lets judges redirect money that a defendant presumptively owes to a group of people — often members of a class in a class action — to other deserving folks.  That doesn’t sound good.  Why on Earth should a court divert funds from the people to whom the cash ought to belong?

Short answer:  Because the parties can’t find the beneficiaries through reasonable effort; the beneficiaries choose not to fill out and return paperwork (often a "proof of claim"); or the tiny amounts don’t justify the cost of distribution.

But, you say, if the beneficiaries won’t get the cash, what purpose does the litigation serve?  The Council of the American Law Institute answers thus:

The cy pres remedy — also known as "fluid recovery" — originated in the context of charitable trusts.  The concept was that, if the testator’s precise terms could not be carried out (for example, because a specific charitable organization no longer existed), the court could modify the trust in a manner that would best carry out the testator’s intent (for example, by selecting a similar charity).

Principles of the Law of Aggregate Litigation, Council Draft No. 1, comment a to section 3.07, at 209 (Nov. 19, 2007).

Ah.  The "remedy" aims to "best carry out" the purpose of the litigation.

Why should strangers benefit?  But that, too, strikes Blawgletter as problematic.  How can you justify a civil lawsuit that benefits — only or even mostly — strangers to it?

Under usual principles of "standing", you can’t.  But what happens if you do have a group, or class, who did suffer loss from a defendant’s wrongdoing?  Should the wrongdoer go free because few class members submit a proof of claim or because the cost of writing and mailing checks would consume the face amount?

The ALI says no.  We agree.  And we especially see little or no danger of abuse in cases that go to judgment or in ones that end in settlement and distribute residual funds in cy pres fashion after most of the money goes to class members.

Problem cases.  The worries come in lawsuits that settle for a purely cy pres remedy.  Because in those cases the rigor and discipline of litigation play a weaker role.  Class members may not care about funds they won’t receive.  Settling defendants probably just want to get the process over with.  Class counsel shift focus from maximizing the recovery to getting something for their efforts.  And judges have few guideposts on where to send the cy pres funds.

The ALI Council’s draft addresses the concerns in two principal ways.  First, by providing that residual settlement funds "should presumptively [go] . . . to participating class members unless the amounts involved are too small to make individual distributions economically viable".  Id. sec. 3.07(b).  Second, by allowing for (but not requiring) a "cy pres approach if the parties can identify a recipient involving the same subject matter as the lawsuit that reasonably approximates the interests being pursued by the class."  Id. sec. 3.07(c).

Attack the bar.  The American Enterprise Institute, on the other hand, sees cy pres as a problem of enriching "the plaintiffs’ bar":

[The Class Action Fairness Act] bases fee awards in coupon settlements on the actual redeemed value of the coupons; if coupons are donated to charity, those coupons cannot be used to calculate a fee award.  The same principle should apply when cash is involved.  Contingent-fee attorneys should be rewarded only for benefits going directly to the class.  Moreover, if a cy pres settlement benefits the plaintiffs’ bar directly or indirectly, that settlement should off set the contingent fees.  A $20 million cy pres award to Public Citizen or the Impact Fund should count as part of the attorneys’ fee award, not as a justification for additional attorneys’ fees.  Such a mechanism would give plaintiffs’ attorneys the proper incentive to align their interests with those of the class when devising a settlement:  if the class members do not get paid, the attorneys do not get paid.

We think the AEI’s solution confuses the process of negotiating a maximum settlement amount with class counsel’s fee application.  Those are separate things.  Indeed, if class counsel ask for a fee guarantee before the parties arrive at the settlement amount, the defendants’ counsel should so advise the court.  Absent such collusion, the "common fund" that class counsel created is the total settlement amount.

The AEI proposal also conflates class counsel with "the plaintiffs’ bar".  Perhaps repeat defendants view private lawyers who serve as class counsel and public interest groups such as Public Citizen as a monolith, but class counsel don’t view the world in that way.  A dollar to Public Citizen buys no groceries for class counsel.  It’s a fantasy to think otherwise.

Solutions, please.  We applaud debate about cy pres as a way to redress wrongdoing.  The remedy is explicitly imperfect.  Let’s try to make it better, shall we?

Feedicon The perfect is the enemy of the good.