Consequently, consistent with the intent of determining what is fair, reasonable, and adequate under Rule 23(e), courts have developed principles for determining when a settlement containing a cy pres provision should or should not be approved. The proposed amendments to Rule 23(e) published by the Rule 23 Subcommittee of the Advisory Committee on Civil Rules simply collect and clarify those established and sound principles to provide some consistency in their application.
In general, courts face two key decisions when deciding whether to approve a cy pres distribution of settlement funds: (1) Is this an appropriate case for cy pres distribution? (2) If the funds are not going directly to class members, then who should they go to?
Recently, Chief Justice Roberts raised variances of these questions when he expressed his interest in “clarfy[ing] the limits on the use of [cy pres]” in the U.S. Supreme Court’s denial of certiorari in Marek v. Lane, 134 S. Ct. 9 (2013). As Chief Justice Roberts, other courts, and commentators have suggested, without sufficient clarity and guidance on the questions of cy pres approval—whether a case is appropriate for cy pres distribution and to whom the distribution should go—there is a danger that cy pres may be used improperly. Rule 23(e)’s proposed amendments provide this clarity by listing criteria reflective of the sound principles developed by courts.
Generally, courts have found cy pres distribution appropriate when practical obstacles make distribution of settlement funds directly to class members impracticable. In Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1305 (9th Cir. 1990), the Ninth Circuit recognized that cy pres may be appropriately used “in the settlement of class actions where the proof of individual actions would be burdensome or distribution of damages costly.” Similarly, in the context of residual settlement funds—funds left over after all valid claims have been paid to participating class members—courts have held cy pres may be appropriate but “that the inquiry must be based primarily on whether ‘the amounts involved are too small to make individual distributions economically viable.’” In re BankAmerica Corp. Secs. Litig., 775 F.3d 1060, 1065 (8th Cir. 2015) (emphasis in original). Thus, cy pres distribution “only arises if it is not possible to put those funds to their very best use: benefitting the class members directly.” Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468,475 (5th Cir. 2011).
Consistent with these principles, the first two proposed amendments to Rule 23(e) deal with the question of whether cy pres distribution is appropriate and the default presumption that settlement relief should go to the class members.
The first proposed Rule 23(e) amendment recognizes that if “class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable,” distributions should always be made directly to class members. In other words, distribution directly to class members (the best use of the relief) should always be the default except when distribution of the relief would cost more than the relief itself—an exception widely recognized by courts.
The second proposed amendment appropriately states that if residual funds remain after valid claims have been accepted, the default is that those residual funds should be distributed directly to the class members who participated in the settlement.
These proposed amendments, however, recognize that direct distribution may not be appropriate if “the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distribution impossible or unfair” (an exception already recognized by the courts).
The final proposed amendment to Rule 23(e) deals with the “to whom” question of cy pres distribution. This has been a recent hot-button issue involving cy pres in class settlements because, without proper guidance, courts may approve distribution to organizations that are not the next best option or “as near as” the class as possible.
Nonetheless, courts generally agree that cy pres distributions can be made only to a recipient that is consistent with the interests of the class. See Nachshin v. AOL, LLC, 663 F.3d 1034, 1039 (9th Cir. 2011); In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 682 (8th Cir. 2002). As the Third Circuit recently put it, “a district court does not abuse its discretion by approving a class action settlement agreement that includes a cy pres component directing the distribution of excess settlement funds to a third party to be used for a purpose related to the class injury.” In re Baby Prods. Antitrust Litig., 708 F.3d 163, 172 (3d Cir. 2013).
Again, consistent with accepted principles, the proposed amendments to Rule 23(e) provide that “if the court finds that individual distributions are not viable . . . , a cy pres approach may be employed if it directs payment to a recipient whose interests reasonably approximate those being pursued by the class.”
In addition, the subcommittee is considering an additional provision that “[i]f no such recipient can be identified, the court may approve payment to a recipient whose interests do not reasonably approximate the interests being pursued by the class if such payment would serve the public interest.” This is a more controversial amendment because it leaves open the possibility that the parties or the court can serve its own interests by distributing funds to a preferred charity, but it is consistent with other state and federal statutes discussing cy pres.
For example, California Code of Civil Procedure section 384 provides that residual funds in a class action “are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action, or to promote justice for all Californians.” Even the Class Action Fairness Act, in its attempt to curb coupon settlements, permits that a “[c]ourt, in its discretion, may also require that a proposed settlement agreement provide for the distribution of a portion of the value of unclaimed coupons to 1 or more charitable or governmental organizations, as agreed to by the parties.” 28 U.S.C. § 1712(e).
The amendments simply provide courts with the appropriate clarity to give more consistent answers to the questions of whether a case is an appropriate case for cy pres distribution and, if so, to whom the relief should go.
Although the subcommittee’s proposed Rule 23(e) amendments provide much needed guidance and clarity consistent with courts’ sound principles, some questions remain. For example, the amendments seem focused on cy pres distribution of monetary relief. Presumably, these principles would be applied to non-monetary settlement relief such as product distribution, but maybe not.
In addition, acceptance of the subcommittee’s consideration of a presumption that a distribution “of less than $100” is not viably distributed could lead to cy pres distribution in virtually every consumer class action where small dollar-amount funds are regularly distributed directly to class members. In an effort to avoid the sometime complexities of a claims process, parties may be tempted to simply use a cy pres recipient instead. This would not be consistent with the purpose of the cy pres doctrine and is inconsistent with the ability to often distribute funds to class members in a cost-effective manner, a trend likely to continue as parties and the courts embrace the use of technology and technology advances.
Although some fear may exist with the introduction of cy pres into the text of Rule 23, the widespread use of the doctrine in class settlements, combined with the requirement that courts approve such settlements, begs for guidance that only Rule 23 can provide.
Nonetheless, the proposed amendments will provide courts with general guiding principles to determine when cy pres provisions in class settlements are appropriate and will assist plaintiffs and defendants in drafting settlements and courts in approving those settlements.
The proposed amendments do not offer much for those in the defense bar who seek to greatly restrict or eliminate the use of cy pres, but proposals for restriction or elimination go well beyond the purpose of the Rules Committee because they would dramatically alter decades of law and custom and undercut the public policies behind many of the substantive laws brought as class actions, such as consumer protection, civil rights, antitrust, and securities laws.
Keywords: litigation, class actions, cy pres, class settlement, Rule 23(e), amendment proposals