Those who follow developments in the courts of appeals, as we do here at Duane Morris, will sometimes discern a lesson directly applicable to trial practice. We have an active consumer class action defense practice, so it is particularly noteworthy when appellate decisions point to a change in this area. Because the vast majority of consumer class actions settle, when the courts of appeals address such settlements, we listen closely. Recent decisions strongly suggest a reining in of cy près awards in class action settlements. The lesson for practitioners is: “approach cy près with caution”!

As we all know, cy près is short for cy près comme possible, a Norman-French term meaning “as near as possible.” In re Baby Products Antitrust Litig., 708 F.3d 163, 168 (3d Cir. 2013) (citation omitted). This two-word phrase stands for the doctrine that a benefit may be given to someone other than the intended beneficiary when changed circumstances make it impossible to carry out the benefactor’s original intent. Pearson v. NBTY, Inc., 772 F.3d 778, 784 (7th Cir. 2014). The cy près concept was borrowed from the law of trusts to serve a distinct purpose in class action settlements: finding a use for money remaining in a common settlement fund after the class, or as many of the class as could reasonably be reached, had been paid. The concern that animated the Third Circuit’s rejection of a cy près distribution in In re Baby Products, was that such awards, although permissible, “are inferior to direct distributions to the class because they only imperfectly serve the purpose of the underlying causes of action — to compensate class members.” In re Baby Products, 708 F.3d at 169.

Similarly, in Pearson, the Seventh Circuit recently rejected a cy près award to an orthopedic foundation because the award did not benefit the class in any concrete manner and because the recipient, according to the court, was “entitled to receive money intended to compensate victims of consumer fraud only if it’s infeasible to provide that compensation to the victims—which [was not] demonstrated.” 772 F.3d at 784.

Because class counsel’s fees are often based upon a percentage of a “common fund,” plaintiffs’ counsel traditionally had an incentive to agree to cy près payments rather than see “leftover” money returned to the defendant. Defendants were often inclined to agree that unexpended settlement funds be applied to a charitable cause for various reasons. For example, final approval might be difficult to obtain for a settlement that called for unpaid funds to revert to the defendant, especially if the amount turned out to be substantial. A contribution to a charitable cause might be seen by a defendant to have beneficial publicity value, while payments to class members might have the opposite PR effect. A charitable cause near and dear to the judge might be seen as an astute choice by both plaintiffs and defendants simply to aid in getting the settlement finally approved.

These rationales for cy près awards have been under critical scrutiny for some years by courts of appeals that are increasingly wary of awards that do not recompense the class and artificially inflate the amount on which class counsel’s fees are based. In Pearson, the Seventh Circuit reviewed a settlement in which class counsel sought $4.5 million in fees, which the district court had reduced to $1.93 million. That amount was, according to Judge Richard Posner, actually “an outlandish 69 percent” of the amount that the class in fact received, given that very few claims were made by class members. 772 F.3d at 781. Notably, Judge Posner approved of the district court’s exclusion of the cy près award of $1.13 million in calculating the benefit to the class, “for the obvious reason that the recipient of that award was not a member of the class.” Id.

Judge Posner is not alone in the opinion that cy près awards do not directly benefit the class and therefore should not be included in the court’s valuation of the settlement when awarding fees. One court in the District of New Jersey recently opined “even where funds do not revert to defendant, but are applied to the indirect benefit of the class through a cy pres fund, it may be appropriate to exclude them from consideration in the total settlement value.” Fitzgerald v. Gann Law Books, No. 11-cv-04287, 2014 LEXIS 174567, *37-*38 (D.N.J. Dec. 17, 2014). If the practice of excluding any cy près award from the basis upon which class counsel’s fees are calculated gains currency, that alone will likely reduce the number of cases that employ the cy près device.

In the fullness of time, the Supreme Court may enlighten us. A little more than a year ago, writing in connection with a denial of certiorari, Chief Justice John Roberts suggested that the use of cy près awards lacked well-defined standards. Marek v. Lane, 134 S.Ct. 8, 9 (2013) (suggesting that use of cy près may be becoming too popular, despite the contention in that case that “distributing the $6.5 million [settlement fund] among the large number of class members would result in too small an award per person to bother”). The Supreme Court, the Chief Justice wrote, might grant certiorari in the future in a case that provided the opportunity to address “fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new [recipient] entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.” Id.

In the meantime, we read the tea leaves left to us by the courts of appeals. In one such recent example, the Eighth Circuit Court of Appeals reversed a cy près award using particularly strong language. In re BankAmerica Corp. Securities Litig., 775 F.3d 1060, 1065 (8th Cir. 2015) (suggesting that an improper cy près award amounts to “confiscat[ing] the settlement proceeds”). Citing In re Baby Products and Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), the Eighth Circuit announced its strong preference for additional pro rata distributions to class members, whenever feasible and where an additional distribution would not create a windfall to class members whose claims were already 100 percent satisfied, a situation that the court noted will rarely exist. In re BankAmerica, 775 F.3d at 1063-66. The Eighth Circuit cited with approval the American Law Institute’s Principles of the Law of Aggregate Litigation § 3.07 (2010), which ranks settlement fund distribution preferences as follows: first, directly to individual class members, second, to participating class members of remaining funds, and, third, only if individual distributions are not viable, to a cy près recipient. While the courts of appeals have not unanimously adopted the ALI’s approach, we think litigators considering a cy près award as part of a class action settlement should—until the Supreme Court speaks—adhere to the ALI principles, choose the proposed recipient carefully, and avoid any settlement in which a cy près amount counts toward the calculation of class counsel’s fees.