One of the most controversial issues in class action litigation is the use of the cy pres doctrine to create an agreed-upon remedy when settlement proceeds cannot, for some reason, be distributed to the plaintiffs class. In such cases, when recovered funds are not fully dispersed to the members of a class - and some or all the money goes unclaimed - it can be paid to a third-party beneficiary, in an attempt to provide the class with a benefit cy pres comme possible ("as close as possible") to what a classwide distribution would have achieved. Providing such a result - while simultaneously avoiding complications and potentially prohibitive administrative costs - makes cy pres an attractive tool for courts and parties seeking to resolve class disputes.
But as recent cases illustrate, cy pres has become a doctrine with a split personality. It is both a trust doctrine and a class action tool, a creature of both common law and statute, a feature of both federal and state law. As a legal and practical reality, there is rarely a clear "next best thing" - and as recent cases from the Ninth Circuit teach, the crucial issue in applying cy pres in the class action context is: How close is close enough?
Origins of Cy Pres
Although it has become important in civil class actions, the roots of this time-honored doctrine are in trust law. Cy pres came into being to solve a perennial problem: what to do when some outside force frustrates the purpose of a trust. When this occurs, the courts historically have allowed the trust administrator to seek a use for the funds that fits the trustor's intent as closely as possible. Rather than let the trust fail, cy pres allows a shift to the next best solution. (See Pennsylvania v. Coxe, 4 U.S. 170, 203 (1800) ("Although a charity cannot take place according to the letter, yet it ought to be performed cy-pres, and the substance preserved.") (citing 17th-century English precedent).)
In class actions, a similar situation arises when complete compensation of all class members is either impossible, or prohibitively costly and complicated. The theoretically presumed outcome following resolution of a class action is full payment to each class member according to the terms of the applicable settlement or judgment. As a practical matter, however, full distribution of funds to the class may not be feasible - for example, claims may not be submitted properly, or even at all, by every class member.
After as much of a classwide fund as possible has been distributed to the class, there can be a sizable "residue" that must be disposed of. Before the courts adopted the cy pres doctrine to fill the gap, the choices for solving this residue dilemma were generally two-fold: Either the unpaid residue would revert to the defendant, or escheat to the state.
But cy pres, in the hands of creative lawyers and judges, provided a third option. One of the earliest examples of this approach involved allegations of overcharging for streetcar services in San Francisco. In 1946 the court determined that the railway had overcharged patrons by roughly $700,000, and it created a mechanism through which individuals could claim their share of the recovery. Some compensation was paid - approximately $12,000 - but the vast majority of the funds went unclaimed. Rather than allow the residue to revert to the railway or to escheat to the state, the court decided to put it to a use that would provide as much benefit as possible to streetcar riders, since so few had been directly compensated. The court's solution was to put the remaining $688,000 toward system repairs and to order a fare reduction for a period of time. Although most received no money directly, the railway's patrons would be able to pay less for an improved service and thus reap the benefit of the litigation brought on their behalf. (See Market Street Ry. Co. v. R.R. Comm'n, 28 Cal. 2d 363 (1946).)
After that initial ruling, more courts began to apply cy pres in the civil litigation context and eventually the doctrine began to take shape as a class action-specific remedial tool. (In re Agent Orange Prod. Liab. Litig., 597 F. Supp. 740, 841 (E.D.N.Y. 1984) (discussing disagreement among federal courts about doctrine); Simer v. Rios, 661 F.2d 655, 675-677 (7th Cir. 1981) (discussing, but not applying, cy pres as an alternative); and California v. Levi Strauss & Co., 41 Cal. 3d 460 (1986).)
Federal Cy Pres
Over the years, the federal courts - and the Ninth Circuit in particular - have become increasingly wary about the use of cy pres in class action cases. The Ninth Circuit, while recognizing the doctrine's utility as an alternative to direct class compensation, has expressed concern about the potential for abuse, or at least for divergence from the best interests of class members. With the goal of having a clear nexus between the proposed remedy and the alleged harm to the class, it and other federal courts have set out distinctive guidelines on what a cy pres remedy ought to look like.
Recognizing that trial courts have broad discretion to shape remedies, the Ninth Circuit declared that the choice ought to be guided by "the objectives of the underlying statute and the interests of the silent class members." (Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1307 (9th Cir. 1990).) Although the court endorsed the use of cy pres generally, it found that the proposed remedy in Six Mexican Workers - funding an international organization that did beneficial work in areas in Mexico where class members had come from - was too remote from the underlying violation of farm labor laws in the United States to be the proverbial next best thing. The court directed the parties and the lower court to craft a better remedy or escheat the funds on the second try.
Two decades later, the Ninth Circuit cited Six Mexican Workers in coming down harshly on a cy pres remedy proposal that it found to miss the mark. In Nachshin v. AOL, LLC (663 F.3d 1034 (9th Cir. 2011)), the trial court resolved a class action regarding the practice of inserting advertisements into email footers by ordering donations from the defendant to six charities - three chosen by the lead plaintiffs and their counsel, and three chosen by the judge. On appeal, the Ninth Circuit rejected the selected cy pres beneficiaries because they were local charities that would not serve the interests of the geographically broad class of email account holders, on the one hand, and because of various connections between the attorneys and judges and the charities they chose, on the other. The court expressed concern that the allocation of funds "[u]nbridled by a driving nexus between the plaintiff class and the cy pres beneficiaries" creates an appearance of self-interest and impropriety. (Nachshin, 663 F.3d at 1038.) If the proposed distribution does not serve the interests of the class, the court held, then cy pres does not serve its historic purpose and is an inappropriate use of class funds. On remand, the court directed the parties and trial judge to either find an appropriate cy pres beneficiary - one that was connected to the cause of action and would serve the interests of the class - or else escheat the funds. (663 F.3d at 1041.)
The following year, the Ninth Circuit reiterated its position that "[n]ot just any worthy recipient can qualify as an appropriate cy pres beneficiary." (Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2012).) The plaintiffs claimed that Kellogg engaged in false or misleading advertising when the cereal company claimed its breakfast products would improve children's alertness and academic performance. One part of the proposed settlement was a donation of $10 million worth of Kellogg's products to charities combating hunger. The Ninth Circuit rejected the plan, finding that the "noble goal" of feeding the poor "has little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved." (Dennis, 697 F.3d at 866 (quoting Nachshin).) The court sent the parties back to the drawing board to craft an appropriate settlement.
Meanwhile, another cy pres case from the Ninth Circuit (Lane v. Facebook, Inc., 696 F.3d 811 (9th Cir. 2012), petition for cert. filed July 26, 2013, sub nom. Marek v. Lane, No. 13-136)) has sparked a cert petition at the U.S. Supreme Court.
In California, state law roughly tracks federal courts' gloss on the purpose of cy pres - with an important exception. Here, the doctrine is governed by section 384 of the Code of Civil Procedure, which declares, "It is the intent of the Legislature in enacting this section to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying cause of action or" - and this is California's unique twist on the doctrine - "to promote justice for all Californians." (Cal. Civ. Proc. § 384(a).) This latter permissible means of resolution is far more expansive than federal courts generally allow. Section 384(b) lists acceptable types of cy pres recipients, including "nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent." The first two categories mirror the Six Mexican Workers standard, but the last two would likely be rejected if proposed in the Ninth Circuit.
A 2006 case illustrates the point. In a class action against a computer manufacturer, an intermediate appellate court approved a settlement quite similar to the solution rejected in Nachshin. (See In re Microsoft I-V Cases, 135 Cal. App. 4th 706 (2006).) The case, alleging software overcharges, involved violations of the Cartwright Act and the Unfair Competition Law; the proposed settlement provided for consumer vouchers to class members and cy pres vouchers for public schools with low-income students. Under the Ninth Circuit's standards in Nachshin and Dennis, the contributions to education and computer literacy, while admirable, would be far too removed from the commercial claims undergirding the case to pass muster. However, the California court ruled in Microsoft that the class members would benefit from "a new generation of computer literate children [entering] the work force fully trained to make the best use of computer technology," and also "indirectly through a reduced tax burden to fund technology investment in eligible schools." (Microsoft, 135 Cal. App. 4th at 726.) The opinion noted that the settlement served its cy pres purpose by "ensuring that Microsoft incurred a minimum liability," without depending on individual class members to make claims. (135 Cal. App. 4th at 728.) The court was satisfied that the proposed settlement came close enough to be permissible cy pres under section 384.
The other distinguishing feature of the California cy pres remedy is its willingness to embrace a general charitable option as an alternative to - not necessarily a next step after - distribution of funds to the class. For example, the court in one case found that the statute's reference to the "residue" in a class action does not preclude a settlement between the parties that allocates even the full amount of damages to charitable recipients, with no distribution at all to the class. In settling allegations of price-fixing and unfair competition in the vitamin market, the defendant companies agreed to pay $38 million to several health- and nutrition-related entities. The court approved the settlement. (See In re Vitamin Cases, 107 Cal. App. 4th 820 (2003).)
An animating policy behind the use of cy pres in class actions is avoiding unjust enrichment. If funds cannot end up in the hands of the class members, the focus shifts to where the money should go instead - or, more accurately, where it should not go.
It is worth noting that in Nachshin, the Ninth Circuit, in addition to objecting that the members of the class would reap minimal benefit, expressed great concern about the various personal connections among the attorneys, the trial court judge, and the proposed charity recipients of the cy pres funds: "When selection of cy pres beneficiaries is not tethered to the nature of the lawsuit and the interests of the silent class members, the selection process may answer to the whims and self interests of the parties, their counsel, or the court. Moreover, the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety." (Nachshin, 666 F.3d at 1039.)
In the federal framework, the compensatory goal of cy pres appears to be the primary consideration. In order to secure court approval, a proposed cy pres remedy must demonstrate a logical and defensible connection to the class and its alleged harm. Thus in Dennis, where the harm was false advertising of food, the court rejected a donation to feed the hungry as too far removed to qualify as a remedy. (Dennis, 697 F.3d at 866.) In short, from the federal equitable perspective, a cy pres remedy without a nexus to the harm suffered by the class would unjustly enrich the recipient who reaps a benefit without suffering any harm.
California, however, allows more flexibility in identifying the recipient of a cy pres distribution. Its statute focuses on the general beneficial impact of a cy pres remedy, and a worthy recipient need not be tethered tightly to the class.
So, the answer to the ultimate cy pres question - how close is close enough? - depends mainly on judicial attitudes and statutory mandates, in addition to the facts of the case. The clearest lesson from the case law is that lawyers fashioning a cy pres remedy in a class action should know the standards that the court will use - to either approve the remedy, or send the parties back to the negotiating table.
Rocky Tsai is a litigation partner and Rebecca Harlow is a litigation associate in the San Francisco office of Ropes & Gray.