The Seventh Circuit Suggests that Cy Pres Still Has a Place in Class Actions When Potential Individual Awards Seem Too Small to Justify Class Treatment

By Ira Neil Richards and Gary M. Goldstein

A ruling last week out of the Seventh Circuit, Hughes v. Kore of Indiana Enterprise, Inc., suggests that cy pres can be used as a remedy for a class to support class certification even when the size of potential damages awards to individual class members would otherwise seem too small to justify class treatment.

When class action settlements involve high costs of distributing money to eligible class members, or where there is money left over after a settlement fund has been distributed, the settling parties often turn to “cy pres.”  Cy pres is a term borrowed from trust law.  In the class action context, settling parties use it to refer to a distribution of settlement funds to charity or other third parties instead of to class members themselves.  Objectors to class action settlements though increasingly focus on any cy pres component.  The result has been an increase in appellate authority that can help guide parties in determining when and how to use cy pres as part of a class action settlement.

Objections raised in response to cy pres distributions of class action settlement funds include challenges that the awards improperly distribute funds to charity instead of fully compensating class members.  Challenges have also focused on a perceived lack of nexus between the cy pres recipient and the lawsuit’s compensatory objectives. Other objections have questioned whether a judge’s discretion in approving a cy pres recipient, or a party’s (or their counsel’s) ability to direct funds to a chosen charity, creates a conflict of interest. Under the guiding principle that cy pres awards “are inferior to direct distribution to the class” (In re Baby Prods. Antitrust Litig.), courts have rejected cy pres awards because they are susceptible “to the whims and self interests of the parties, their counsel, or the court” and “create an appearance of impropriety.”  Nachsin v. AOL. Objectors have also complained when courts have not discounted any cy pres amount when awarding attorneys’ fees to class counsel.

Despite the recent skepticism towards cy pres class action settlement payments, courts continue to recognize that there are times when cy pres makes sense.  The Seventh Circuit’s decision in Hughes is the most recent example.  In that case, the Seventh Circuit reviewed a district court’s decision decertifying the class because the district court believed the potential recoveries of individual class members were too small to justify class treatment and because it would be hard to give class members individual notice.  The plaintiff claimed that he and other potential class members were entitled to statutory damages under the Electronic Funds Transfer Act because the defendant had not provided required notices of ATM fees.  The district court concluded that the statutory limit on damages made class members better off if they filed their own claims.

On the notice question, Judge Posner, writing for the Seventh Circuit, explained that notice can be given by publication when individual class members’ addresses cannot be obtained from available records.  With respect to the district court’s conclusion that a class action recovery would not provide meaningful recovery, Judge Posner suggested that cy pres might provide the best option.  Since the cost of distribution of any recovery to individual class members would outweigh the recoveries, a “[p]ayment … to a charity whose mission coincided with, or at least overlapped, the interest of the class … would amplify the effect of the modest damages in protecting consumers.”

The Seventh Circuit’s opinion that cy pres can be appropriate where the distribution costs are high relative to any individual class member’s share is consistent with the Ninth Circuit’s decision in Lane v. Facebook.  In that case, the Ninth Circuit rejected challenges to a settlement that included a cy pres distribution because paying small amounts to individual class members would not be feasible and because the recipient of the cy pres distribution had a relationship to the subject of the litigation (online privacy).  Notably, the Court rejected a challenge to the settlement based on the fact that a Facebook employee sat on the board of directors of the recipient of the cy pres distribution.

While cy pres can attract the attention of objectors to class settlements, which can lead to delays in settlement finality and increased litigation costs, cy pres can still have a place in a settlement.  Parties need to be mindful that courts will scrutinize any proposed cy pres payments as they relate to the cost to give money directly to class members.  In addition, designating a cy pres recipient that has some connection to the subject matter of the litigation might also help in getting final settlement approval.

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