CLE Center Home  |  FAQs  |  
Continue to take Test  |  Print test for mailing
Overview of cy pres in class actions
By Daryn Pakcyk

Please visit the MCLE section of the Daily Journal's website to take this test.

In class actions, the cy pres doctrine, also known as "fluid recovery," is an equitable doctrine that is utilized "to ensure that the policies of disgorgement or deterrence are realized." State of California v. Levi Strauss & Co., 41 Cal. 3d 460 (1986).

The objective of this article and self-study test is to familiarize readers with the cy pres doctrine. Readers will learn about the origin and purpose of this doctrine, the California statute, state and federal law, and how the doctrine has been applied.

Overview

"The cy pres doctrine takes its name from the Norman French expression, cy pres comme possible, which means 'as near as possible.'" In re Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679 (8th Cir. 2002). "The implementation of fluid recovery involves three steps. First, the defendant's total damage liability is paid over to a class fund. Second, individual class members are afforded an opportunity to collect their individual shares by proving their particular damages, usually according to a lowered standard of proof. Third, any residue remaining after individual claims have been paid is distributed by one of several practical procedures that have been developed by the courts." State of California v. Levi Strauss & Co., 41 Cal. 3d at 472-73 (internal citations omitted). These options can include reversion, further distribution to the existing claimants, escheatment, and the selection of a cy pres recipient.

In class actions, "the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement (or the judgment, in the rare case in which a class action goes to trial) to the class members." Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781 (7th Cir. 2004). Indeed, CCP Section 384 reflects the intent of the Legislature "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 causes of action, or to promote justice for all Californians."

The cy pres doctrine originated in the field of charitable trusts where "compliance with the literal terms of a charitable trust became impossible, the funds would be put to 'the next best use,' in accord with the dominant charitable purposes of the donor." State of California v. Levi Strauss & Co., 41 Cal. 3d at 472. Generally, in the class action context, the "next best use" theory has been adopted in California. Cundiff v. Verizon California Inc., 167 Cal. App. 4th 718 (2008). However, CCP Section 384(b) also indicates that the residual could go "to 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."

Selection of a Recipient

There has been some concern of how the residual has been distributed to cy pres recipients. Nachshin v. AOL LLC, 663 F.3d 1034 (9th Cir. 2011), noted that "[s]ome courts appear to have abandoned the 'next best use' principle implicit in the cy pres doctrine [and that] [w]hen 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." This concern also arises even where the charitable distribution serves a "noble" purpose. Dennis v. Kellogg Co., 697 F.3d 858 (9th Cir. 2012) ("Although there is no way to identify either the product or the cash cy pres beneficiaries from this record, we do know that according to the settlement, any charity to receive a portion of the cy pres distributions will be one that feeds the indigent. This noble goal, however, has 'little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved.'").

Where the settlement does not list any cy pres recipient, a trial court may ask for supplemental briefing (Zeisel v. Diamond Foods Inc., 2012 U.S. Dist. LEXIS 148893 (N.D. Cal. 2012)) or deny preliminary approval (Better v. YRC Worldwide Inc., 2013 U.S. Dist. LEXIS 116984 (D. Kan. 2013) ("By not identifying the proposed cy pres recipient, the parties have restricted the Court's ability to conduct the searching inquiry required to approve such a distribution.")). While CCP Section 384(b) does allow a court to select a cy pres recipient when the settlement agreement is silent on the issue (In re Microsoft IV Cases, 135 Cal. App. 4th 706 (2006)), In re Lupron Marketing and Sales Practices Litigation, 677 F.3d 21 (1st Cir. 2012), warns about a court getting too involved in the selection process because "having judges decide how to distribute cy pres awards both taxes judicial resources and risks creating the appearance of judicial impropriety...."

A Court's Evaluation

Courts "do not require as part of that doctrine that settling parties select a cy pres recipient that the court or class members would find ideal. On the contrary, such an intrusion into the private parties' negotiations would be improper and disruptive to the settlement process." Lane v. Facebook, 696 F.3d 811 (9th Cir. 2012).

In evaluating the cy pres selection, courts look to whether there may be the "appearance of impropriety" because of a preexisting relationship between the recipient and the parties, including counsel (In re EasySaver Rewards Litigation, 921 F.Supp.2d 1040 (S.D. Cal. 2013)), but will allow some leeway when the recipient is selected as part of the "give-and-take negotiations" between the parties (Lane v. Facebook, 696 F.3d at 821-22 ("That Facebook retained and will use its say in how cy pres funds will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is the unremarkable result of the parties' give-and-take negotiations, and the district court properly declined to undermine those negotiations by second-guessing the parties' decision as part of its fairness review over the settlement agreement.")).

The physical location of the cy pres recipient can also be less important if the "next best use" is satisfied. In re EasySaver Rewards Litigation, 921 F.Supp.2d at 1052 ("As counsel argues, the internet is not limited by geographic boundaries, and the educational impact of the funded academic programs will have a nation-wide impact. By giving the money to academic institutions, counsel contends that the funds will directly contribute to the national academic dialogue involving internet privacy and security.... On the whole, the location of the recipient is less important than 'whether the projects funded will provide "next best" relief to the class.'"). But see Nachshin v. AOL LLC, 663 F.3d 1034 (9th Cir. 2011) ("The cy pres distribution also fails to target the plaintiff class, because it does not account for the broad geographic distribution of the class.... Although the class includes more than 66 million AOL subscribers throughout the United States, two-thirds of the donations will be made to local charities in Los Angeles, California.").

Additionally, courts consider the "degree of direct benefit to the class" to make sure that the cy pres award "generally represent a small percentage of total settlement funds." As noted in In re Baby Prods. Antitrust Litig., 708 F.3d 163 (3rd Cir. 2013): "We add today that one of the additional inquiries for a thorough analysis of settlement terms is the degree of direct benefit provided to the class.... Barring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds." See also Klier v. Elf Atochem North America Inc., 658 F.3d 468 (5th Cir. 2011) ("A cy pres distribution puts settlement funds to their next-best use by providing an indirect benefit to the class. That option arises only if it is not possible to put those funds to their very best use: benefitting the class members directly.") Courts are, however, wary of awarding a windfall to the class. In re Universal Serv. Fund Tel. Billing Practices Litig., 2013 U.S. Dist. LEXIS 80204 (D. Kan. 2013); Klier v. Elf Atochem North America Inc., 658 F.3d at 475.

Nevertheless, where "the proof of individual claims would be burdensome or distribution of damages costly," the parties may settle an action with money only being paid to a cy pres recipient. Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301 (9th Cir. 1990). See also Cundiff v. Verizon California Inc., 167 Cal. App. 4th at 730; In re Vitamin Cases, 107 Cal. App. 4th 820 (2003); In re Motor Fuel Temperature Sales Practices Litig., 2012 U.S. Dist. LEXIS 166461 (D. Kan. 2012). In these instances, courts often require the parties to explain the value of the payment being made to the cy pres to "show that the cy pres payment represents a reasonable settlement of past damage claims, and that it was not merely plucked from thin air, or wholly inconsequential to them." Foley v. Facebook, 2012 U.S.Dist.LEXIS 116526 (N.D. Cal. 2012).

Some courts, in "unusual circumstances," discount the cy pres payment from the settlement for purposes of awarding attorney fees. Weeks v. Kellogg Co., 2011 U.S. Dist. LEXIS 155472 (C.D. Cal. 2011) ("Although the value of the settlement may be $5.4 million from defendants' perspective, this does not mean that it is appropriate to utilize that number in determining reasonable attorneys' fees. Therefore, the court concludes that it is appropriate to discount the Cy Pres Fund when determining the settlement value on which reasonable attorneys' fees should be calculated."). But see In re Baby Prods. Antitrust Litig., 708 F.3d at 178 ("We think it unwise to impose, as Young requests, a rule requiring district courts to discount attorneys' fees when a portion of an award will be distributed cy pres....").

Notice to the Class

Courts are also split on whether the cy pres recipient should be identified in the class notice. In re Motor Fuel Temperature Sales Practices Litigation, 286 F.R.D. 488, 504 (D.C. Kan. 2012) ("the failure to designate a proposed cy pres recipient deprives class members of notice and the ability to object thereto. Accordingly, the Court will not preliminarily approve the proposed cy pres clause."). See also Better v. YRC Worldwide Inc., 2013 U.S. Dist. LEXIS at 30 ("In addition, the failure to designate a proposed cy pres recipient deprives class members of notice and the ability to object."). But see Rodgriguez v. West Publishing Corp., 563 F.3d 948 (9th Cir. 2009) (finding cy pres distribution "becomes ripe only if the entire settlement fund is not distributed to class members" and declining to determine propriety of cy pres at that time) and In re Baby Prods. Antitrust Litig., 708 F.3d at 180 ("While a valid concern, failure to identify the cy pres recipients is not a due process violation. Class members know there is a possibility of a cy pres award and that the Court will select among recipients proposed by the parties at a later date. This knowledge is adequate to allow any interested class member to keep apprised of the cy pres recipient selection process."). Also, in some circumstances, there is some debate as to how much information about the cy pres recipient should be provided. Lane v. Facebook, 696 F.3d at pp. 826, 834-35 (Kleinfeld, J., dissenting).

Certiorari Denied

On Nov. 4, the U.S. Supreme Court denied certiorari in Lane v. Facebook (sub nom. Marek v. Lane, 13-136). According to the statement of Chief Justice John Roberts, certiorari was denied because the challenge was too "focused on the particular features of the specific cy pres settlement at issue." However, signaling that the U.S. Supreme Court will likely someday have the final say in this field, the chief justice noted that "[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies."

Daryn Pakcyk is a research attorney in Los Angeles County Superior Court.

Continue to take Test   |  Print test for mailing