This is a guest post prepared by Rachel Weil of Reed Smith, who has graced us with guest posts before and, we hope, will do so again.  This post concerns the latest of several recent appellate decisions that have imposed limits on the questionable practice of cy pres distributions in class action settlements.  As always, Rachel deserves all the credit, and whatever blame accrues from her post.

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Readers of this blog are familiar with our antipathy toward the remedy – or non-remedy – known as cy pres.  If not, recollections can be refreshed here.  “Cy pres” is a French term that roughly translates to “next best” or “as near as possible.” When class counsel can’t or won’t identify all class members to whom damages are owed, cy pres purports to allow the court to award remaining settlement funds to third parties – usually charities.  These funds are commonly included in the “lodestar” used in the calculation of class counsel’s fee.  “Next best” means, in theory, that non-class member recipients of settlement funds have some logical nexus to the litigation.  In practice, nothing in Rule 23 governs cy pres distributions and there is no institutional mechanism for vetting proposed recipients or ferreting out conflicts of interest.  As a result, class counsel and judges have been known to steer cy pres funds to charities they support or that provide benefits to them (or bestow honors on them), notwithstanding the charities’ lack of any relationship to the settled litigation.    

In recent years, real pundits – actual judges − have chimed in to question cy pres awards and related practices.  See Marek v. Lane , 134 S. Ct. 8 (2013) (Justice Roberts, in a concurrence in a denial of certiorari, commenting that a differently-postured petition might have afforded the Court the opportunity to address “fundamental concerns” about the use of cy pres remedies in class action litigation); Holtzman v. Turza, 728 F.3d 682 (7th Cir. 2013) (Judge Easterbrook rejecting trial judge’s unilateral decision to seize residue of a settlement and award it to Legal Aid as “cy pres”); Cf Redman v. Radio Shack, 768 F.3d 622 (7th Cir. 2014) (non-“cy pres” decision condemning inflation of denominator used in calculation of attorneys’ fees by including funds not actually received by class members) (Judge Posner, this time). 

Which brings us to the case for today.  In In re BankAmerica Corporation Securities Litigation (Oetting v. Jacobson, et al.), -- F.3d --, 2015 WL 110334 (8th Cir. Jan. 8, 2015), the Eighth Circuit reviewed the cy pres distribution of unclaimed settlement funds in a securities fraud action.   After settlement proceeds were distributed to identified class members, the district court judge, over the objection of a class representative, ordered cy presdistribution of money remaining in two classes’ funds to Legal Services of Eastern Missouri (“LSEM”).  Oetting, 2015 WL 110334 at *1.

The class representative appealed the cy pres award, arguing that the district court abused its discretion because: 1) further distribution to the classes was feasible; and 2) LSEM was unrelated to the classes or the litigation and was therefore an inappropriate “next best” cy pres recipient.  Id.  The Court agreed, and so do we (although we would have gone farther).

The Court explained, “Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible only when it is not feasible to make further distributions to class members, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution.”  Id. at *2 (internal quotation marks and citation omitted).   The Court disagreed with the district court’s finding that further distributions (including the search for class members whose checks had been unreturned) would be too “costly and difficult”, emphasizing that “that inquiry must be based primarily on whether the amounts involved are too small to make individual distributions economically viable.”  Id. at *3 (internal punctuation and citation omitted).

The Court also “flatly rejected” class counsel’s argument that further distribution would be inappropriate because “it would primarily benefit large institutional investors, who are less worthy than charities such as LSEM,” id., because the argument “endorse[d] judicially impermissible misappropriation of monies gathered to settle complex disputes among private parties, one of the opportunities for abuse that make it inherently dubious to apply the cy pres doctrine from trust law to the entirely unrelated context of a class action settlement.”  Id. (internal quotation marks and citation omitted).  In other words, class counsel can’t use legal French to take a class’ money.  The Court also rejected class counsel’s contention that the parties and the district court were bound by language in the settlement agreement directing payment of undistributed settlement funds to non-profit organizations chosen by the district court.  The Court noted that this provision was contrary to controlling Eighth Circuit law and this was void ab initio, but, “[m]ore importantly, a proposed cy pres distribution must meet our standards governing cy presawards regardless of whether the award was fashioned by the settling parties or the trial court.” Id. at *4 (internal punctuation and citations omitted).

Finally, the Court emphasized that, “when a district court concludes that a cy pres distribution is appropriate after applying the foregoing rigorous standards, such distribution must be “for the next best use . . . for indirect class benefit,” and for uses consistent with the nature of the underlying action and with the judicial function.”  Id.  at *5 (emphasis in original, internal punctuation and citations omitted).  In other words, “the unclaimed funds should be distributed for a purpose as near as possible to the legitimate objectives underlying the lawsuit, the interests of class members, and the interests of those similarly situated.”  Id. (internal punctuation and citations omitted).  Applying this standard, the Court held that “LSEM, though unquestionably a worthy charity, is not the ‘next best’ recipient of unclaimed settlement funds in this nationwide class action seeking violations of federal and state securities laws.”  Id. Moreover, “it is not sufficient to find that no ‘next best’ recipient is immediately apparent.  Rather, a district court must carefully weigh all considerations, including the geographical scope of the underlying litigation, and make a thorough investigation to determine whether a recipient can be found that most closely approximates the best interests of the class.”  Id. (internal punctuation and citations omitted).  The Court remanded the case to the district court for additional distribution of funds to class members and, if funds remained after such distribution, for choice of a more appropriate cy pres recipient.  Id.

Admittedly, we’d go further.  Cy pres is a legal remedy with no basis in law.  It short-circuits payments to (arguably) deserving class members by awarding damages to entities that were not damaged by the defendants and that have no legal right to recovery, all the while preserving the unabated flow to the coffers of class counsel.  Still, we applaud appellate courts’ recent efforts, even when they fall short of abolition, while remaining hopeful that SCOTUS will soon have an opportunity to address its “fundamental concerns” about this so-called “remedy.”