Cy pres is an occasionally useful tool. But limiting or eliminating it would clarify the underlying principles of the class action.   

In the last five years, the use of cy pres relief in settlements has become particularly controversial.  Various appellate courts have expressed suspicion about the use of cy pres in questionable settlements.  Even Justice Roberts has signaled that, given the right vehicle, he would like the Supreme Court to review the fairness of cy pres distributions.  Much of the controversy stems from two issues: (1) the potential for abuse of cy pres relief to inflate the value of bad settlements, and (2) the underlying philosophical justifications for allowing cy pres distributions.

Despite the growing controversy, the Rules Advisory Committee is considering formalizing the use of cy pres in Rule 23.  In its October 2014 report, the Rule 23 Subcommittee wrote that

The cy pres phenomenon is a matter of settlement, particularly in cases with small individual harms. There is no specific provision of Rule 23 that bears on this possibility. Some states do have specific provisions as a matter of state law. But the absence of a rule provision has not prevented use of this technique on occasion. And at least sometimes this sort of activity attracts criticism. For an example, see Chief Justice Roberts’ opinion regarding denial of cert. in Marek v. Lane, observing that “in an appropriate case, this Court may need to clarify the limits on the use of such remedies.” Maybe a rule change would be a way to do so as well. The ALI Aggregate Litigation provision on cy pres treatment has received considerable support in the cases and might provide a model.

(Emphasis added, internal citations omitted.)

The ALI’s take on cy pres—that it should be used only when there is unclaimed money in an escrow fund and further distributions to actual class members are not feasible—is largely considered a compromise position, albeit a fairly principled one.  (What is the defense-oriented critique?  Well, if the case had any merit and the settlement was negotiated based on merit rather than the “hydraulic pressure” of litigation costs and massive exposure, then why are there leftover funds?)

Many individual defendants can take or leave cy pres relief.  It can occasionally serve as a useful tool to close the gap between the cash a defendant is willing to spend for peace and the relief required to justify plaintiffs’ counsel’s fees.  (Since cy pres relief goes to third parties, it may tick different accounting boxes for some defendants than a cash payout.)  And there is nothing forcing a defendant to use a cy pres distribution in a class settlement.

If that’s the case, why would defendants bother opposing any attempt to enshrine cy pres relief in Rule 23?  There’s no question that some defendants (or defense counsel) may oppose cy pres because they need a third party to save them from themselves.  Much as someone watching his weight might understand that cutting sugar is good while still succumbing to the candy bar in front of him, it is possible to understand that overuse of cy pres will encourage more questionable settlements while still using it for temporary advantage in a current settlement.  For defense counsel in particular, watching client after client give in to this temptation against advice might motivate some strong advocacy against enshrining cy pres in Rule 23.  (I wouldn’t know; most of my clients don’t employ it.)

But the real stake here is the underlying theory of the class action.  There’s been a long debate over whether a class action is a “deterrent” “Private AG” action or an aggregation device to effect compensation for those who have been wronged.  Cy pres relief is perfectly consistent with conception of the class action as deterrent, and—as even its supporters admit—not at all consistent with any compensation theory.

And that raises some troubling questions.  Because if the class action is actually a deterrent device, then it likely violates the Rules Enabling Act, because it creates a new substantive law regime. (After all, cy pres relief is not available to individual tort or contract claimants.)

One could argue that, since cy pres relief usually comes up at settlement, the parties are free to put in whatever provisions they want.  But enshrining cy pres relief in Rule 23(e) would go beyond simply allowing parties a greater freedom of terms.  It would actively be choosing between the deterrence and compensation models for the class action.

So the debate over cy pres relief really comes down to a debate over the legitimacy of the class action itself.  And it is likely to be a heated one.  After all, cy pres relief has become an integral part of many plaintiffs’ business model.  Despite the likely heat, the Advisory Committee would be on sounder footing were it to explicitly limit (or even disclaim) the use of cy pres relief.  Doing so would be consistent with the traditional rationale for the class action, and would avoid messy constitutional questions.