Cy pres awards are funds left over in major class actions that courts distribute to charitable organizations. The purpose of these awards is to channel unclaimed money to an organization performing functions likely to benefit uncompensated class members by alleviating the type of harm at issue in the lawsuit. But controversy about cy pres awards persists. In fact, in early November, when the U.S. Supreme Court declined to hear a challenge to a cy pres award arising out of a settlement with Facebook Inc., Chief Justice John Roberts expressed serious reservations about the fairness of cy pres awards generally, which, he wrote, are becoming more frequent.
State and federal courts have diverged in their treatment of cy pres awards. States are trending toward statutory or rule-based systems that designate legal services organizations as appropriate cy pres recipients. In contrast, federal courts, operating without the guidance of any rule for designating cy pres recipients, have struggled to protect class members and have, therefore, established an increasing number of conditions on cy pres awards.
Many of the challenges that federal courts face in this area could be ­avoided with a rule-based system similar to those implemented in a number of leading states. Following this model would also channel critical support to legal services organizations, which have experienced large declines in funding since the Great Recession.
To date, at least 11 states have amended their class action rules or enacted statutes mandating or encouraging cy pres awards for legal aid. California, Hawaii, Illinois, Indiana, Massachusetts, North Carolina, New Mexico, Pennsylvania, South Dakota, Tennessee and Washington have implemented rules or laws directing cy pres awards at least in part to legal aid. Illinois, for example, requires that at least half of undistributed settlement funds go to legal services organizations, while undistributed funds arising from a judgment must go entirely to legal aid. Indiana, Massachusetts, Pennsylvania, South Dakota and Washington are similar. California, Hawaii and North Carolina are more permissive — distribution to legal aid is encouraged and always permitted, but not mandated. Finally, Tennessee explicitly permits cy pres awards and identifies legal aid organizations as appropriate recipients, without restricting the court’s discretion.
In these states, cy pres awards have become an important source of funding for legal aid, sending millions of dollars toward legal assistance for seniors, people with disabilities, domestic violence survivors, tenants facing eviction and other needy clients. Thus, while the use of the cy pres mechanism has been sharply criticized by some, it has proven an effective tool to enhance access to justice for deserving but disadvantaged litigants. Moreover, reducing the number of unrepresented litigants is a benefit to the court system as a whole, and, by extension, to all parties with business before the courts.
The federal courts have been much stricter in approving cy pres awards. Two recent cases are telling. In Dennis v. Kellogg Co., a class action alleging false advertising of breakfast cereal, the U.S. Court of Appeals for the Ninth Circuit in 2012 overturned the district court’s award to organizations that feed the indigent. The court reasoned that while the organizations were “noble,” they had no connection to the issues in the suit. According to the court, “appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.”
The Third Circuit in In re Baby Products Antitrust Litigation announced another notable restriction on cy pres awards, rejecting a settlement projected to result in a cy pres award of more than half the total settlement funds and more than six times the class members’ distribution. The court held that district courts must consider “the degree of direct benefit provided to the class” and instructed that cy pres awards “should generally represent a small percentage of total settlement funds.”
Some jurists have gone further. In the dissent in In re Pet Food Products Liability Litigation, for example, Senior Judge Joseph Weis Jr. in the Third Circuit argued that the doctrine should rarely or never be used and that residual funds should go to the government as a “user fee” to “defray some of the costs of the court system.”
Federal courts would do well to follow the lead of states at the forefront of reform and amend the federal class action rule to designate legal services organizations as cy pres recipients, either in all cases or at least in those in which there is no obvious nonprofit recipient with a nexus to the lawsuit. Such a rule would assist the courts by relieving the burdens associated with unrepresented litigants and help to restore the legal services sector, which serves as a bulwark against injustice for the neediest clients.
Catherine Weiss and Michael Hahn are partners and Andrew S. Zimmerman is counsel at Lowenstein Sandler.