The  Eighth Circuit last week issued an opinion with a set of new guidelines regarding "cy pres' disbursements in settlements. See In re BankAmerica Corp. Sec. Litig. (Oetting v. Green Jacobsen P.C.),  No. 13-2620 (8th Cir., 1/8/15).

Following the 1998 merger of NationsBank and BankAmerica to form Bank of America Corporation, shareholders filed multiple class actions around the country alleging violations of federal and state securities laws. The cases were transferred by the Judicial Panel on Multidistrict Litigation to the Eastern District of Missouri.  The transferred cases were resolved when the court approved a $490 million global settlement.  See In re BankAmerica Corp. Sec. Litig., 210 F.R.D. 694, 704-05, 714 (E.D. Mo. 2002), and 227 F. Supp. 2d 1103 (E.D. Mo. 2002). After an initial and then a second distribution, motion was made to distribute cy pres the remainder of the “surplus settlement funds” to three St. Louis area charities suggested by class counsel. The district court granted the motion over various objections. Objectors appealed the cy pres distribution, and the court of appeals reversed in the opinion for today's post.

In recent years, some federal district courts have approved disposed of unclaimed class action settlement funds after distributions to the class by making “cy pres distributions.” The term cy  pres is derived from the Norman French expression "cy pres comme possible," which means "as near as possible." The cy pres doctrine originated as a rule of construction to save a testamentary charitable gift that would otherwise fail, allowing ‘the next best use of the funds to satisfy the testator’s intent as near as possible.’” In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 625 (8th Cir.2001).

Such distributions “have been controversial in the courts of appeals.” Powell v. Ga. Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997). Indeed, some courts have criticized or restricted the practice. See, e.g., Ira Holtzman, C.P.A. v. Turza, 728 F.3d 682, 689-90 (7th Cir. 2013); In re Baby Prods. Antitrust Litig., 708 F.3d 163, 172-73 (3d Cir. 2013); In re Lupron, 677 F.3d at 29-33; Nachshin, 663 F.3d at 1038-40; Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468, 473-82 (5th Cir. 2011); In re Katrina Canal Breaches Litig., 628 F.3d 185, 196 (5th Cir. 2010); Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 434-36 (2d Cir. 2007); Wilson v. Sw.Airlines, Inc., 880 F.2d 807, 816 (5th Cir. 1989).  Recently, echoing these views, Chief Justice Roberts noted “fundamental concerns surrounding the use of such remedies in class action litigation” while nonetheless agreeing with the denial of certiorari in Marek v. Lane, 134 S. Ct. 8, 9 (2013).

The American Law Institute addressed the issue of Cy Pres Settlements in § 3.07 of its published Principles of the Law of Aggregate Litigation (2010). The ALI has recommended:

A court may approve a settlement that proposes a cy pres remedy . . . .The court must apply the following criteria in determining whether a cy pres award is appropriate:

  1. If individual class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable, settlement proceeds should be distributed directly to individual class members.
  2. If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.
  3. If the court finds that individual distributions are not viable based upon the criteria set forth in subsections (a) and (b), the settlement may utilize a cy pres approach. The court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class. If, and only if, no recipient whose interest reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class.

Given what it saw as a substantial history of district courts ignoring and resisting circuit court cy pres concerns and rulings in class action cases, the 8th Circuit then concluded it was time to clarify the legal principles for the doctrine, relying in great measure on the ALI principles.

First, said the court, 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. Here, said the court, from the perspective of administrative cost, a further distribution to the class was in fact feasible. The district court thus erred in finding that further distributions would be so “costly and difficult” as to preclude a further distribution; that type of inquiry must be based primarily on whether “the amounts involved are too small to make individual distributions economically viable.” ALI § 3.07(a).

Second, a cy pres distribution is not authorized by declaring, as class counsel did in this case, that all class members submitting claims have been satisfied in full. It is not true that class members with unliquidated damage claims in the underlying litigation are “fully compensated” by payment of the amounts allocated to their claims in the settlement. In this case, the district court approved (not atypically) a global settlement in which plaintiffs would recover only a percentage of the damages that they sought.  The settlement notice to the class stated: “the settling parties disagree as to both liability and damages, and do not agree on the average amount of damages per share that would be recoverable by any of the Classes.” Thus, the notion that class members were fully compensated by the settlement  was speculative, at best, said the court of appeals.

Third, the court rejected any contention that the cy pres distribution must be affirmed because the district court is bound by language in the settlement agreement, such as a clause stating that the balance in the settlement fund “shall be contributed” to non-profit organizations “determined by the court in its sole discretion.” Distribution of funds at the discretion of the court is not a traditional Article III function. More importantly, a proposed cy pres distribution must meet the standards governing cy pres awards regardless of whether the award was fashioned by the settling parties or the trial court.

Fourth, the court held that, unless the amount of funds to be distributed cy pres is de minimis, a district court should make a cy pres proposal publicly available and allow class members to object or suggest alternative recipients before the court selects a cy pres recipient. This gives class members a voice in choosing a “next best” third party and minimizes any appearance of judicial overreaching. See In re Baby Prods., 708 F.3d at 180; ALI § 3.07(c), cmt b (encouraging courts to “solicit input from the parties” regarding cy pres recipients).

Fifth, when a district court concludes that a cy pres distribution is appropriate after applying the foregoing rigorous standards, such a 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. Any 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. Applying this standard here, the court of appeals concluded that while the recipient here was unquestionably a worthy charity, it was not necessarily the “next best” recipient of unclaimed settlement funds in this nationwide class action. A district court must carefully weigh all considerations, including the geographic scope of the underlying litigation, and make a thorough investigation to determine whether a recipient can be found that most closely approximates the interests of the class.

The order was thus vacated. On remand, if any settlement funds remain after an additional distribution to the class, and if the district court concludes after proper inquiry that a cy pres award is still appropriate, the district court was directed to select next best cy pres recipient(s) more closely tailored to the interests of the class and the purposes of the underlying litigation.