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February 14, 2017 Practice Points

Ninth Circuit: Cy Pres Awards Must Be Tailored to Plaintiffs’ Claims to Justify a Class Action Release

The case is Koby, et al. v. ARS National Services, Inc.

By Adam Polk

On January 25, 2016, in Koby, et al. v. ARS National Services, Inc., No. 13-56964 (9th Cir. Jan. 25, 2017), the U.S. Court of Appeals for the Ninth Circuit issued an opinion finding that a class action settlement where the only value received by the class is a cy pres award unrelated to plaintiffs’ claims is not fair, reasonable, and adequate under Federal Rule of Civil Procedure 23(e)(2).

In Koby, plaintiffs, on behalf of a nationwide class of 4 million individual debtors, sued ARS National Services, Inc. (a debt collection agency) under the Fair Debt Collection Practices Act (FDCPA) for allegedly unlawful debt collection practices. While the FDCPA allows for statutory damages of $1,000 for named plaintiffs, damages for the class are capped at the lower of $500,000 or 1 percent of the defendant’s net worth. In Koby, ARS represented that its net worth was $3.5 million, so argued that the maximum recovery for the class of 4 million would be just $35,000. Accordingly, in settlement of plaintiffs’ claims, given the practical problems with distributing “less than a penny” to each member of the class, ARS agreed to (1) stop its unlawful debt collection practices and (2) make a $35,000 cy pres award to a San Diego veterans’ organization. In exchange, plaintiffs agreed to a release forfeiting the 4 million class members’ right to seek damages from ARS as part of a class action.  A magistrate judge for the Southern District of California approved the settlement as fair, reasonable, and adequate.

In reversing, the Ninth Circuit first found that the injunctive relief included in the settlement conferred no value upon the class as it only benefitted future debtors contacted by ARS, who were not included in the class definition. The Court then squarely addressed the question of whether the cy pres award—in and of itself—justified the release. Because the $35,000 award to a San Diego veterans’ organization was not “tethered to the objectives” of the nationwide class, the court found that (1) the award conferred no value on the class and (2) the magistrate judge abused her discretion in approving the settlement. The court rejected the argument that the settlement should be approved in view of the low value of the class members’ claims, holding: “The fact that class members were required to give up anything at all in exchange for worthless injunctive relief precluded approval of the settlement . . . .”  The Court remanded for further proceedings.

Adam E. Polk is a partner with Girard Gibbs LLP in San Francisco, California.

Adam Polk – February 14, 2017