Mandatory Million-Dollar Donations: Examining Cy Pres Settlements

In 2014, six institutions received approximately $5.3 million total for the purpose of educating the public on Internet privacy. [1] This was not spurred by a kind donation or an altruistic, astute public relations move; rather, the District Court for the Northern District of California ordered Google to do so as part of the settlement of a class action lawsuit in which these institutions had no part. This practice of distributing money from class action settlements to third-party non-profit organizations is known as cy pres (pronounced “sigh pray”), [2] and Rule 23(e) of the Federal Rules of Civil Procedure states that these settlements must be “fair, reasonable, and adequate.” [3] Cy pres as a legal term (meaning “as near as possible” from Norman French) [4] originated during the Middle Ages, though the practice itself goes as far back to Roman law. [5] Recently, cy pressettlements have been criticized as unfair on the grounds that it is not clear whether class members are actually benefiting from the distribution of settlement funds to third-party organizations. In Frank v. Gaos in 2018, the case mentioned above, plaintiffs sued to challenge the legality of cy pres settlements. This case is the U.S. Supreme Court’s first formal inspection of cy pres, throwing this practice —which is not well known, even in some legal spheres—under scrutiny. The current lack of formal legal language regarding what constitutes a “fair” cy pres settlement allows for settlements that do not ultimately benefit class members. Thus, the Supreme Court of the United States must set clear language and stricter standards that amend the practice. A potential solution would be to require that outside parties select cy pres recipients, requiring that settlement funds go towards organizations whose work best provides indirect relief to class members.

One of the main flaws of the cy pres process is the easy potential for impropriety and bias in the selection of recipients, which are suggested by parties’ counsel and quickly approved by the court. This is because the plaintiffs’ counsel, the defense counsel, and the judge may have conflicts of interest that, as a result of their positions, cannot be checked or limited in any way. This can be seen in Gaos, where Google was ordered to pay $8.5 million, of which $3.2 million was awarded to class counsel and the remaining $5.3 million was given to six recipients chosen by class counsel and Google including university institutions studying Internet legal policy, the World Privacy Forum, and the AARP. [6] Two class members, Theodore Frank and Melissa Holyoak, submitted an appeal regarding the settlement to the Court of Appeals for the Ninth Circuit [7] and then to the U.S. Supreme Court. [8] The concern stems from the fact that out of the six institutions named, Google had previously donated to four. Furthermore, three of the research institutions are based at alma maters of class counsel (Harvard, Stanford, and Chicago-Kent), suggesting a conflict of interest issue common in cy pres settlements. [9] Since Google’s attorneys can propose cy presrecipients, their decision likely served to further Google’s agenda rather than aiming solely to maximize the benefit of affected parties.

Similarly, in Marek v. Lane in 2013, the U. S. District Court for the Northern District of California ordered Facebook to allocate $6.7 million to establish a new non-profit organization with the mission of educating the public on Internet privacy with a Facebook representative on the organization’s board of directors. Essentially, Facebook was merely required to create a new charity, the Digital Trust Foundation, and embrace the resulting public goodwill. While the overall mission of the Digital Trust Foundation is laudable, most of the $6.7 million was allocated as grants to programs with missions that do not pertain to the original goal of educating the public on Internet privacy, such as researching the privacy needs of people of low socioeconomic status. [10] Even judges are not immune to potential conflicts of interest. In 2010, part of the settlement of the case In Re: Google Buzz User Privacy Litigation included a $500,000 donation to a research institution at Santa Clara University, where the judge was a lecturer. [11] These examples demonstrate that maximizing relief for class members has not been the main priority when selecting cy pres recipients. Due to the lack of a system to check any bias, a third-party decision maker with no conflicts of interest must be appointed to lead the selection process to ensure that cy pres settlements fulfill the legal requirement of being “fair, reasonable, and adequate.” It is impossible to guarantee recipients are chosen with class members’ best interests in mind when only parties’ counsel and judges have a say in the decision.

Additionally, while cy pres settlements are intended to benefit class action members, current use of cy pres may not fulfill this obligation. In particular, the selected recipients may not be particularly relevant to the class action issue at hand. For instance, during the oral argument for Frank v. Gaos (2018), Chief Justice John Roberts questioned Google’s donation to AARP given its exclusive focus on the elderly and its many political activities unrelated to Internet privacy. [12] Furthermore, it is difficult to quantify the benefit, if there is any, that class action members receive from large donations to research institutions. If there are no restrictions or guidelines on how settlement funds are to be used, there is no guarantee that the institutions’ actions will provide any relief to class members. Also, if the defendant had repeatedly donated to the same organization, it is possible that the settlement simply replaces a donation that would have otherwise been made — ultimately benefiting the defendant, not the plaintiffs. Finally, selecting appropriate cy pres recipients is a difficult task, and attorneys and judges do not and should not be expected to have the expertise relevant to each case to make the best decision. A third-party experienced in the subject of the class action lawsuit will be much more knowledgeable on the relevant nonprofits and research institutions and thus will be far better suited to select cy pres recipients that will actually benefit class members.

To resolve this issue, solutions which involve third-parties in the recipient selection process must be considered. At the moment, cy pres recipients can be selected and approved by only the judge in the case, and frequently the plaintiff or defense counsel will make suggestions that will be accepted. External voices in the selection process would reduce bias and lead to a more thoroughly considered decision. This can be introduced in a variety of ways. As mentioned, courts could make use of a third-party organization or sole arbitrator to select potential recipients. This figure should be well-versed in the subject of the class action lawsuit; it has even been recommended that an objector figure should oppose all cy pres distributions and suggest alternatives. [13] Alternatively, the cy pres selection process could be opened to the public to allow charities to apply for cy pres grants, with the final selection made by a third-party individual. This procedure would force organizations to better demonstrate the benefit they could provide, increasing the settlement’s effectiveness in benefiting class members. These new restrictions would minimize ineffective allocation and increase the benefit class action members receive. While it is possible that restrictions could be set on cy pres recipients to prevent donations to institutions with prior connections to counsel, judge, or either party, using a third-party arbitrator also avoids overly detailed restrictions and allows for a more unbiased selection of the best recipients. The U.S. Supreme Court’s timely consideration of Frank v. Gaos (2018) provides an important opportunity to ensure that settlements of class action suits truly provide relief to the affected class members.

Sources:

[1] In re Google Referrer Header Privacy Litigation, 869 F.3d 737 (9th Cir. 2017).

[2] Cy Pres, Merriam-Webster, online at {https://www.merriam-webster.com/dictionary/cy%20pres} (9 Nov. 2018).

[3] Rule 23. Class Actions, Legal Information Institute.

[4] Ibid., 4.

[5] Edith L. Fisch, “The Cy Pres Doctrine and Changing Philosophies,” 51 Michigan Law Review375, 375.

[6] Paloma Gaos et al. v. Google, Inc., (9th Cir. Apr. 2, 2015).

[7] Ibid., 1.

[8] Frank v. Gaos, 138 S. Ct. 169 (April 30, 2018).

[9] Ibid., 8.

[10] Program Areas, Digital Trust Foundation, 2 Dec. 2018, http://digitaltrustfoundation.org/what-we-fund/.

[11] Daniel J. Popeo, Online Privacy Organizations Get "Buzzed" on Millions from Google Lawsuit Settlement, Forbes, 20 Jun 2018, www.forbes.com/sites/docket/2011/06/02/online-privacy-organizations-get-buzzed-on-millions-from-google-lawsuit-settlement/#7c35ea0b366b (Nov. 16, 2018).

[12] Ronald Mann, “Argument analysis: Justices skeptical of “cy pres” class-action settlements,” SCOTUSblog, 1 Nov 2018, http://www.scotusblog.com/2018/11/argument-analysis-justices-skeptical-of-cy-pres-class-action-settlements/}(9 Nov. 2018)

[13] Rhonda Wasserman, “Cy Pres in Class Action Settlements,” 88 S. Cal. Law Review97, 153 (2014).