Sometimes the monetary recovery from a class action is not enough to be feasibly distributed to the class. The amount recovered through a judgment or a settlement may be only pennies for each class member, and the costs of distributing the money exceeds the settlement fund. In those cases, after deducting attorneys’ fees and expenses, courts sometimes approve distributing the remainder of the money to charitable organizations. There are no rules about the types of charities that receive these distributions, but often they are organizations working in areas related in some way to the claims in the lawsuit. These types of settlements are referred to as cy pres settlements, based on a French term meaning “as near as possible.”
The justification for these settlements is that the class benefits from the work done by the charities, even if class members do not receive any money. Cy pres settlements have been criticized, however, as benefiting class counsel without providing any meaningful benefit to the class. The Supreme Court granted certiorari to consider these settlements, and at oral argument last week several justices expressed skepticism of them.
In the case before the court, Frank v. Gaos, Google settled for $8.5 million with class action plaintiffs who alleged that the company had improperly transmitted user search queries to third parties. Of the total settlement, roughly $2 million was paid to Plaintiffs’ counsel. The remainder went to charities because, as the parties argued and the district court agreed, distributing the balance directly to the over 100 million putative class members would not have been feasible. In approving the settlement, the district court found that, “the cost of sending out what would likely be very small payments to millions of class members would exceed the total monetary benefit obtained by the class.” Instead, the court approved a distribution of approximately $5.3 million to six charities to fund projects specifically devoted to Internet privacy issues: Carnegie-Mellon University; World Privacy Forum; Chicago-Kent College of Law Center for Information, Society and Policy; Stanford Law School Center for Internet and Society; Berkman Klein Center for Internet & Society at Harvard University; and AARP Foundation.
An objector appealed the district court’s approval of the settlement to the Ninth Circuit, which affirmed. The Supreme Court granted certiorari.1
The arrangement was questioned this week by several of the justices at oral argument. The issue was whether the settlement was “fair, reasonable, and adequate” under Federal Rule of Civil Procedure 23. Justice Alito asked,
“[A]t 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.”2
Similarly, Justice Breyer wondered whether “what’s happening in reality is the lawyers are getting paid and they’re making sometimes quite a lot of money for really transferring money from the defendant to people who have nothing to do with it.”3 Given this potential dynamic, Justice Breyer suggested that courts should “scrutinize very carefully” cy pres distributions like the one in the instant case.4
On the other hand, Justice Sotomayor seemed to sympathize with the respondents’ arguments that a direct distribution to class members might have been infeasible: “[W]hy would it have been an abuse of discretion for the court to believe that [a direct distribution costing 67 cents per class member] didn't make sense because the cost would outweigh what they would pay?”5
As was noted during the argument, cy pres-only settlements like the one at issue in Frank v. Gaos are relatively rare — Justice Sotomayor cited amicus curiae Harvard professor William Rubenstein, who found only 18 such settlements. She said that it’s “not as if [these types of settlements are] occurring routinely.” Further, the case has some unique facts that may distinguish it from other cases where money is distributed to charitable organizations. Nevertheless, the Court’s decision (if it reaches the merits, which it may not, as several Justices raised standing issues) may give important guidance to parties and litigants when they are negotiating class action settlements in cases where the damages to individual class members are very small.