Class members and defense attorneys are increasingly criticizing the use of “cy pres” awards, or charitable contributions that come from unclaimed funds in class action settlements, arguing that some of the recipients have little connection to the issues in dispute.

Critics also argue that the contributions allow plaintiffs’ attorneys to obtain higher fees.

Plaintiffs’ attorneys dismiss the concerns as “sour grapes,” noting that defendants want to claim such residual funds for themselves.

Cy pres awards, they say, are viable alternatives in cases in which class members cannot be identified or are unable or unwilling to claim their share of a settlement. They say that such charitable contributions, which better represent the goals of a lawsuit, have been in use for years in class action settlements.

In the past two years, the states of Illinois and Washington, lured by the potential revenue from cy pres awards, have passed laws requiring that a percentage of the contributions go to legal services for the poor.

But defense attorneys argue that many of the beneficiaries, including legal services for the poor, have no connection to the cases from which the funds are given. They also say that plaintiffs’ attorneys have stepped up their use of cy pres awards since the Class Action Fairness Act (CAFA) of 2005 limited attorney fees in coupon settlements.

“It’s just another way to get around the limitation on attorney fees,” said Ted Frank, a resident fellow specializing in liability reform at the AEI Legal Center for the Public Interest, a conservative public policy nonprofit group in Washington. “Where you used to see big-dollar coupon settlements, you now see a smaller-dollar cy pres award settlement.”

A violation?

Cy pres is a French term that means “as near as possible.” The doctrine from which cy pres is derived originally was designed to allow a lawyer to distribute funds in a trust to organizations or causes that come as close to the trustee’s original request as possible.

More recently, cy pres awards have evolved as tools in class action settlements, particularly in consumer cases, where unclaimed funds are common. Many of the awards are thousands of dollars, while a few have reached millions.

But some defense lawyers say that not all the beneficiaries of the funds are the closest possible link to the legal issues in the case at hand — a clear violation of the cy pres doctrine.

“There’s no nexus between parties who are injured and the beneficiaries,” said George J. Krueger, a partner at Philadelphia’s Blank Rome.

Further, leaving the choice of recipient to the lawyers and judge in a case limits the range of organizations that could receive the funds to only those they know about. And some of those groups might not be the best fit, he said.

The new laws in Illinois and Washington are good examples, he said.

“Only lawyers would think a way to solve social problems is to give more money to lawyers,” he said.

The solution: Unclaimed funds should go back to the defendants, most of whom do not admit liability as part of a settlement, he said.

‘Sour grapes’

Michael Hausfeld, head of the antitrust and international practice groups at Washington’s Cohen, Milstein, Hausfeld & Toll, called the complaints “sour grapes.”

Hausfeld negotiated one of the most criticized and substantial cy pres awards in recent years: A $5.1 million gift to George Washington University Law School, his alma mater. Diamond Chemical Co. Inc. v. Akzo Nobel Chemicals B.V., 517 F. Supp. 2d 212 (D.D.C. 2007).

Lead defense counsel David Clanton, a partner in the Washington office of Baker & McKenzie, did not return a call for comment.

But in court papers, the defendants — four companies and their subsidiaries — objected to the cy pres award, insisting that the funds be returned to them and that the recipient had no relation to the case, which involved an alleged international cartel that conspired to fix the prices for the sale of specialty chemicals.

The judge disagreed, finding the award to be appropriate, in part because it would set up an endowment to fund a new Center for Competition Law at George Washington University Law School that would focus on the impact of globalization on U.S. competition laws.

“No cy pres award is going to be an exact substitute for returning overcharges to victims,” Hausfeld said. “And the court felt that the concept that George Washington University was going to address in its new center was precisely one that focused on that issue.”

He said his being an alumnus of the school had nothing to do with the recipient choice.

In some cases, the chances of reaching people who are as close as possible to actual class members increases if a cy pres award is spread throughout various charitable causes, rather than a single, possibly more related, organization, said Patrick Perotti, a partner in the Painesville, Ohio, office of Cleveland-based Dworken & Bernstein.

His firm announced last month 34 charities that would collectively receive a $14 million cy pres award from a $30 million settlement in a case brought on behalf of a class of insurance policyholders who claimed to have been billed extra premiums for motorist coverage. Martin v. Grange Mutual Ins. Co., No. 98-X-343 (Geauga Co., Ohio, C.P.).

The lead defense counsel, Donald A. Powell, a partner at Hanna Campbell & Powell in Akron, Ohio, did not return a call for comment.

Critics also say that cy pres awards encourage plaintiffs’ attorneys to obtain more fees.

Samuel Issacharoff, a constitutional law professor at New York University School of Law, who serves as the reporter for the Project on Aggregate Litigation of the American Law Institute, said cy pres awards are getting more attention since a CAFA requirement stating that attorney fees in settlements involving coupons to class members should be calculated based on how much the class actually redeemed, not the total dollar value of the agreement.

Cy pres awards aren’t coupons. But defense attorneys say that many plaintiffs’ lawyers, anticipating that a large portion of class members might not make claims, encourage charitable contributions as part of a settlement agreement in order to boost the overall value of the case on which attorney fees are based.

“If you want to have cy pres, have cy pres,” said Frank of the AEI Legal Center for the Public Interest. “But attorney fees shouldn’t be based on it. Those should be based on what you won for the putative class.”

Otherwise, he said, attorney fees could be disproportionately high.

In June, Frank, a class member in a recent case, objected to a proposed settlement involving the manufacturers of the Grand Theft Auto: San Andreas video game because less than $27,000 was paid to class members while the agreement included a cy pres award of about $860,000, with the recipients to be determined later, and more than $1 million in attorney fees. In re Grand Theft Auto Video Game Consumer Litigation, No. 1:06-md-1739 (S.D.N.Y.).

The lead plaintiffs’ attorney in the case, Seth Lesser, a partner in the New York office of Philadelphia’s Locks Law Firm, did not return a call for comment.

Jeffrey Jacobson, a partner at New York’s Debevoise & Plimpton who represents the defendants in the case, said his clients agreed to the settlement because it involved a total maximum and minimum payment, which, if claims from class members failed to reach, would be accomplished through a cy pres award. He agreed that cy pres awards are becoming much more common.

“Only in the past two years have plaintiffs been talking to me about charitable contributions,” said Jacobson. “In my cases, for the first decade of my practice, nobody said bull about charitable contributions.”

Stephen Tillery, a partner at Korein Tillery in St. Louis, disagreed about the novelty of cy pres awards. He said his firm has handled dozens of cy pres awards over the years, including a $60 million settlement with Pfizer Inc. in 2004 that involved a $20 million cy pres award to several Illinois charities and hospitals.

He said there is no connection between the use of cy pres awards and CAFA.

Instead, he said, the recent criticism comes as defense attorneys have raised more questions about class actions. He said “the tides have turned to a large extent in class actions in the past several years. There’s been a substantial change in attitude of the courts in class actions.”

As a result, defense attorneys have been more aggressive in attacking cy pres awards, he said.

A good fit

Two states are snatching up the benefits of cy pres awards.

In Illinois, a law became effective on July 1 requiring that half the funds in a cy pres award go to a dedicated legal aid or a related access-to-justice nonprofit group aimed at low-income individuals.

Bob Glaves, executive director of the Chicago Bar Foundation, which pushed for the law, said courts backed the concept once his organization began receiving a handful of cy pres awards each year while funding for legal services remained chronically short.

“And since class actions themselves are about access to justice for people who otherwise on their own couldn’t bring a claim, it’s a good fit,” he said.

He said the group was influenced by a similar rule of civil procedure that became effective in Washington state in 2006. That rule, which applies to settlements in state courts, requires that at least 25% of the funds in a cy pres award be disbursed to the Legal Foundation of Washington to support access-to-justice programs for low-income individuals.

David Leen, a partner at Seattle-based Leen & O’Sullivan who was president of the foundation at the time, said that cy pres awards were “part of that effort to look around to see if there were any other nickels or dimes lying on the street we might pick up.”