SAN FRANCISCO — If the outlook has been cloudy for cy pres awards in federal class actions lately, on Monday thunder rumbled, with a downpour surely on the way.
After weighing the case for a month, the U.S. Supreme Court finally signed off Monday on a $9.5 million settlement of a Facebook class action that leans heavily on cy pres relief—in this case, $6.5 million awarded to a charitable foundation, controlled partly by Facebook, to educate the public about online privacy.
But Chief Justice John Roberts also served notice that the high court is on the lookout for a case to determine “when, if ever, such relief should be considered.” Leaving little doubt as to which way he’s leaning, Roberts cited a law review article that’s critical of cy pres relief as furthering “the pathologies of the modern class action.”
“Obviously, we prefer to win than to lose,” said Ted Frank of the Center for Class Action Fairness, which had asked the high court to take up the Facebook settlement. “But we basically got a road map going forward.”
The order is ominous news for legal nonprofit groups that have been relying on cy pres awards in a challenging financial environment. California law allows parties and judges broad discretion to fashion cy pres relief to charitable organizations when distributing funds to the class isn’t practical. A typical scenario involves a case with small economic injury per class member but millions of potential claimants. Under the 2005 Class Action Fairness Act, more of those cases are moving to federal court, where the cy pres law is still developing.
Marek v. Lane, 13-136, stems from Facebook’s short-lived Beacon feature that broadcast details of users’ online purchases from third-party retailers like Zappos.com and Overstock.com. Lead plaintiff Sean Lane alleged that he bought a ring as a Christmas gift for his wife, but Facebook ruined the surprise by broadcasting news of the purchase to his 700 Facebook friends.
Because the potential class of 3.6 million members was so large, plaintiffs lawyers led by Scott Kamber of KamberLaw in New York and Facebook proposed a cy pres settlement where Facebook would spend $6.5 million to create a foundation that educates users about online privacy. The foundation’s three-person board of directors includes a Facebook executive.
U.S. District Judge Richard Seeborg of the Northern District of California approved the settlement, which also included about $2.3 million in attorneys fees.
The settlement was controversial in the U.S. Court of Appeals for the Ninth Circuit. A 2-1 panel upheld it, with Judge Procter Hug Jr. writing that it bore “a substantial nexus to the interests of the class members.” Judge Andrew Kleinfeld dissented, and five other judges signed Judge Milan Smith Jr.’s dissent from denial of en banc review.
Before the Supreme Court, Frank and other attorneys for objectors argued that class members weren’t getting a nickel even though some may have been entitled to $2,500 in statutory damages. The Supreme Court put the case on its weekly conference three times before denying cert Monday.
Frank suggested one reason the court might have passed on this case: At the district court level, before he became involved, the parties had stipulated that providing monetary relief to the class was not feasible—even though a subsequent Facebook settlement has proven that untrue.
But Frank was cheered by the “statement” Roberts issued with cert denial.
“I agree with this court’s decision to deny the petition for certiorari,” the chief justice wrote. “Granting review of this case might not have afforded the court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation, including when, if ever, such relief should be considered; how to assess its fairness as a general matter; whether new entities may be established as part of such relief; if not, how existing entities should be selected; what the respective roles of the judge and parties are in shaping a cy pres remedy; how closely the goals of any enlisted organization must correspond to the interests of the class; and so on.”
Citing an article by Northwestern University law professor Martin Redish and others, “Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis,” Roberts said that “in a suitable case, this court may need to clarify the limits on the use of such remedies.”
“I think he’s looking at a broader scope—what judicial authority is there for this?” Frank said Monday. “That’s why he cited the Martin Redish article.”
Though it could be some time before the high court finds the right vehicle, Frank said, “I think this will get the attention of more district judges” when considering cy pres relief.
Joan Graff, director of California’s Legal Aid Society-Employment Law Center, said federal judges are already aware of appellate rulings that limited cy pres awards to beneficiaries with a close nexus to the plaintiff class. “There’s clearly been a tightening of the noose around cy pres awards,” Graff said. “You almost feel like if you’re not in the class you don’t meet the nexus.”
Graff called cy pres funds a great resource for legal services programs at a time when other forms of support are precarious. However, the scrutiny being applied by objectors, who can tie up a settlement in appellate courts for years, is discouraging some parties from considering cy pres awards in the first place, she said.
“If there is an abuse, it can be changed in a particular instance,” Graff said. “But that’s not a reason to throw out cy pres altogether.”
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