UPDATE: Is Cy Pres A-OK? Supreme Court to Consider When Class Action Settlements Can Pay a Charity Instead of Class Members
Legal Sidebari
UPDATE: Is Cy Pres A-OK? Supreme Court to
Consider When Class Action Settlements Can
Pay a Charity Instead of Class Members
Updated March 20, 2019
UPDATE: The Supreme Court issued its opinion in Frank v. Gaos on March 20, 2019. Significantly, the
Court’s majority opinion did not address any of the substantive issues discussed in this Sidebar. Instead,
the Court remanded the case and directed the lower courts to decide an unrelated issue: namely, whether
the federal courts may validly exercise jurisdiction over the case. Thus, guidance from the Supreme Court
regarding whether (and under what circumstances) cy pres settlements are legally permissible in class
action cases will have to await a future case. The original post from May 10, 2018, is below.
The Supreme Court will soon consider a question that has captured the attention of some Members of
Congress as well as other commentators: when, if ever, do the Federal Rules of Civil Procedure permit a
defendant to settle a class action lawsuit by paying money to a charity, rather than to the injured class
members? The Court’s answer to that question could potentially affect whether significant sums of money
that are often at issue in class actions can be distributed to third-party charitable organizations, especially
when the class members are not directly compensated.
This Sidebar begins by discussing class action litigation generally, with a particular focus on the
limitations that federal law imposes upon the parties’ ability to settle a class action lawsuit. The Sidebar
then discusses cy pres settlements—i.e., settlements pursuant to which the defendant agrees to pay some
or all of the settlement funds to a third-party organization. The Sidebar then discusses Frank v. Gaos—a
case that the Supreme Court recently agreed to hear that presents an opportunity to clarify whether, and
under what circumstances, cy pres settlements are legally permissible. The Sidebar concludes with
takeaways for Congress.
Class Actions and the Settlement Thereof
As discussed in greater detail in other CRS publications, a class action is a type of lawsuit that allows a
group (i.e., a “class”) of persons harmed by a defendant’s allegedly unlawful action to challenge that
action in a single lawsuit. The class action device thereby provides an alternative to adjudicating
numerous separate suits prosecuted by each individual plaintiff. In a class action, the plaintiff (known as
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the “class representative” or the “named plaintiff”) sues the defendant not only on his own behalf, but also
on behalf of other similarly situated persons (the “class members”). Class members are usually not formal
parties to the lawsuit and therefore typically do not actively participate in the case.
As is true of civil litigation generally, very few class actions ultimately proceed to trial; most instead
culminate in a settlement. However, because class members typically have few opportunities to
participate in the daily activities of the case or to monitor the activities of class counsel and the class
representatives, the class members must rely upon class counsel to negotiate a settlement that will serve
their best interests. To ensure that the named parties negotiate a settlement that is fair to the absent class
members, Federal Rule of Civil Procedure 23(e) limits the parties’ ability to settle a class action in federal
court. The parties may settle a case on the class members’ behalf only if the court determines that the
proposed settlement “is fair, reasonable, and adequate” to the class members.
Cy Pres Settlements
Litigants occasionally negotiate class action settlements that propose to distribute some or all of the
settlement proceeds to third-party organizations that engage in charitable activities related to the class
members’ injuries, rather than to the class members themselves. For example, if a group of consumers
initiates and ultimately settles a class action alleging that a pharmaceutical company unlawfully published
artificially inflated drug prices for a cancer medication, then one possible settlement option could be to
distribute some or all of the settlement funds to charitable organizations that fund cancer research or
patient care, rather than directly to the injured consumers. This practice of paying settlement proceeds to
charities or other third-party organizations is known as “cy pres,” “which takes its name from the Norman
French expression cy pres comme possible (or ‘as near as possible’).”
“Courts have approved cy pres funds in settlements” pursuant to Federal Rule of Civil Procedure 23(e)
“in at least two circumstances.” First, if some class members never claim their share of the settlement
proceeds, with the result that a portion of the settlement fund remains unclaimed, it may be appropriate to
pay the remaining funds to charity. Secondly—and of particular relevance here—it may be appropriate to
distribute some (or even all) of the settlement proceeds to charities when it would be economically
infeasible to disburse settlement funds directly to class members. To illustrate, suppose that a defendant
harms 10 million individuals. Suppose also that the parties agree to settle the case for $1 million, such
that each class member would thus be entitled to recover 10 cents. It might not be economically rational
to expend the resources that would be necessary to pay all 10 million class members 10 cents each, as
“the cost of verifying and ‘sending out very small payments to millions of class members [c]ould exceed
the total monetary benefit obtained by the class.’” Courts have therefore generally held that, if it would be
“economically infeasible to distribute money to class members” directly, then the court may instead
“distribute unclaimed or non-distributable portions of a class action settlement fund to the ‘next best’
class of beneficiaries for the indirect benefit of the class.”
Supporters argue that cy pres settlements serve several socially desirable purposes. Some maintain that it
is more sensible and efficient to devote “settlement funds . . . for projects that advance the interests of the
class as a whole” than to “distribute negligible amounts to class members” directly. Supporters claim that,
in the absence of cy pres, the “notice and distribution costs” associated with directly paying large numbers
of class members “would inevitably swallow up the settlement fund, leaving little to nothing for class
members.” Proponents also argue that distributing unpaid funds to a charity deters unlawful behavior
more effectively than returning some or all of the unused settlement funds to the culpable defendant.
According to critics, however, cy pres settlements often “provide little or no benefit to class members”
because they result in little to no money being paid to the class members themselves. Opponents have
been particularly troubled by “cy pres-only” settlements, in which all of the settlement proceeds go to
third parties while the class members receive nothing. Some critics therefore maintain that it “deprives
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class members of due process” to “dispose of the legal claims of absent class members” without providing
those class members any significant financial benefit. Critics further contend that cy pres settlements
unfairly allow plaintiffs’ attorneys to “reap exorbitant fees” while class members receive little or no
money. According to opponents, cy pres settlements incentivize class counsel to unfairly collude with
defendants to structure settlements that benefit the named parties and their attorneys to the detriment of
the absent class members. Additionally, some opponents argue that, “by directing . . . settlement funds
away from . . . members of the injured plaintiff class to advocacy groups,” cy pres settlements “effectively
force[] those plaintiffs to provide financial support to organizations with which they may not agree, in
violation of the First Amendment’s prohibition on compelled speech.” Several critics have therefore
recommended that Congress either modify the legal standards governing cy pres settlements or prohibit cy
pres settlements entirely.
Frank v. Gaos
The Supreme Court has decided to weigh in on this ongoing debate by granting certiorari in Frank v.
Gaos. The plaintiffs in Frank initiated a class action alleging that Google unlawfully “violated [its] users’
privacy by disclosing their Internet search terms to owners of third-party websites.” The parties ultimately
negotiated a settlement whereby Google agreed to pay $5.3 million to six organizations that “promote
public awareness and education and/or . . . support research, development, and initiatives[] related to
protecting privacy on the Internet.” Pursuant to that settlement, class counsel would receive $2.125
million in fees, while the named plaintiffs would each receive $15,000. The absent class members,
however, would receive nothing—save for any indirect benefits that might accrue to society at large as a
result of the six organizations’ efforts to promote privacy.
The district court approved the settlement over the objections of several class members. The U.S. Court of
Appeals for the Ninth Circuit affirmed, concluding that the district court did not abuse its discretion by
approving a cy pres settlement that resulted in no direct monetary benefit to the class members. The Ninth
Circuit emphasized that, because the “settlement fund was approximately $5.3 million, but there were an
estimated 129 million class members,” each class member would be “entitled to a paltry 4 cents in
recovery” if the fund were distributed directly to class members. The Ninth Circuit therefore agreed with
the district court “that the cost of verifying and ‘sending out very small payments to millions of class
members would exceed the total monetary benefit obtained by the class,’” thereby justifying the use of cy
pres.
The objectors maintain that both the Ninth Circuit and the district court reversibly erred by concluding
that this cy pres-only settlement was “fair, reasonable, and adequate” within the meaning of Rule 23(e).
The objectors further argue that the Ninth Circuit’s decision conflicts with decisions of other federal
courts of appeals regarding the permissibility of cy pres settlements, though the class representatives and
the defendant dispute the objectors’ contention that any such circuit split exists.
The Supreme Court has now granted certiorari to decide whether, or in what circumstances, a cy pres
settlement that provides no direct relief to class members comports with Rule 23(e)’s requirement that a
class action settlement be “fair, reasonable, and adequate.” The court will not hear the case until the
October 2018 term. Significantly, at least one member of the Court has previously suggested limiting the
availability of cy pres. Specifically, Chief Justice Roberts has previously signaled his discomfort with cy
pres settlements in an opinion respecting the denial of certiorari in the 2013 case of Marek v. Lane. In that
case, the Chief Justice expressed “fundamental concerns surrounding the use of [cy pres] remedies in
class action litigation,” implying that “limits on the use of such remedies” might be appropriate.
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Takeaways for Congress
Some (albeit not all) commentators believe that cy pres settlements are becoming increasingly prevalent.
The Supreme Court’s decision in Frank could therefore potentially affect the way that millions—or even
billions—of dollars ultimately get distributed in class action cases. Thus, the Court’s decision to hear
Frank could be of significant interest to Congress. No matter how the Court ultimately rules in Frank,
Congress also possesses some power to limit or expand the use of cy pres settlements if it so chooses—
subject, of course, to any constitutional limitations on cy pres settlements that the Supreme Court may
ultimately articulate in its opinion in Frank. For instance, Congress could modify Federal Rule of Civil
Procedure 23(e)’s standards for determining whether a proposed settlement is “fair, reasonable, and
adequate” to the absent class members. To that end, some Members of the 115th Congress have
introduced a bill—namely, the Fairness in Class Action Litigation and Furthering Asbestos Claim
Transparency Act of 2017 (H.R. 985) (FICALA)—which would affect “the allocation of class action
settlement funds, including cy pres awards.” Among other things, FICALA would prohibit “any attorneys’
fee award to class counsel” in a class action case that exceeds “a reasonable percentage of any payments
directly distributed to and received by class members.” “In no event shall the attorneys’ fee award” in
such a case “exceed the total amount of money directly distributed to and received by all class members.”
Thus, by tying class counsel’s recovery to a reasonable percentage of the amount of money actually
received by the class members themselves, FICALA would thereby discourage attorneys from negotiating
cy pres settlements that pay zero or minimal damages to class members, like the settlement at issue in
Frank. As of the date of this publication, FICALA has passed the House and is pending before the Senate
Committee on the Judiciary.
Author Information
Kevin M. Lewis
Legislative Attorney
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