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Competing for Leftovers

By Kari Santos | Sep. 2, 2011


Roundtable-Class Action

Sep. 2, 2011

Competing for Leftovers

Cy pres settlements generate competing claims by nonprofit groups for charity awards.

Close may be good enough for horseshoes and hand grenades, but it doesn't always count when judges and class counsel face the so-called cy pres distribution of unclaimed cash.

Cy pres is old French for "as near as possible," and it evolved as a doctrine in charitable trust law. In cases where the donor's original intent cannot be carried out, the court selects the next best alternative. Today cy pres distribution - also called fluid recovery - is used increasingly in class action settlements. It comes into play after class members are paid and cash remains, whether because of unfound class members, unclaimed awards, or uncashed checks.

Sometimes a plaintiff class is so large and awards so limited that distributing payments would be too costly. Then the parties may designate an entire cy pres class award for charity. But such cases open possibilities for abuse. Courts tend to examine them closely as potential slush funds for the favored friends of lawyers and class representatives, or as a device used by defendants to exclude critics from the payout.

Just two years ago in the Southern District of New York, U.S. District Judge William H. Pauley III declared that a "feeding frenzy of competing interests" had ensued over more than $79 million designated for a cy pres distribution in the massive prosecution of a stock research analyst. Rather than pick and choose among the applicants, he ordered the entire amount turned over to the U.S. Treasury (SEC v. Bear, Stearns & Co. Inc., 626 F. Supp. 2d 402 (S.D.N.Y. 2009)).

But in a recent California case, the outcome was very different. In May, Chief U.S. District Judge James Ware approved an $8.5 million class settlement by Google over alleged Internet privacy violations that gave the entire $6 million class pool to a dozen charities that were selected by opposing counsel from among 77 applicants. Then without explanation, Ware - a visiting instructor at Santa Clara Law - earmarked $500,000 of the money for an additional charity: the university's Markkula Center for Applied Ethics (In re Google Buzz Privacy Litigation, 10-cv-00672 (N.D. Cal. amended order filed Jun. 2, 2011)).

Six of the groups awarded cy pres funds had received contributions from the defendant in the preceding year, including Stanford University's Center for Internet and Society, Harvard University's Berkman Center for Internet and Society, the Brookings Institution, and the Electronic Frontier Foundation in San Francisco. Google attorney Albert Gidari Jr. of Perkins Coie in Seattle referred questions to the company. Plaintiffs attorney Gary E. Mason of Washington, D.C., says he had no problem with Ware's final list, saying Markkula is a worthy organization that had applied for funds.

The selection process was aided by the Rose Foundation, which helps class lawyers solicit suitable charities, makes recommendations, and manages cy pres grants. The Oakland-based foundation has a reputation for transparency and a no-nonsense approach to the competition for funds. Two years ago, for instance, Rose publicly stood up to Google after one of its executives suggested the foundation could find a better recipient than Consumer Watchdog, a Google critic. Rose stood behind its grant, and Google later apologized.

In July, however, objectors to the Google privacy cy pres deal filed an appeal (In re Google Buzz Privacy Litigation, 11-16639 (9th Cir. notice of appeal filed July 7, 2011)). "I am not questioning the integrity of the court," says Joshua R. Furman, a Beverly Hills attorney who represents some of the objectors. He adds that the earlier Consumer Watchdog dispute "is one thing we are looking at on appeal."

Google Buzz shows the potential difficulties in making large cy pres distributions. "A trend I've seen is for some defendants to exert more and more control over who gets funding," says Tim Little, Rose's executive director. The defendant's view, he says, is " 'This is not penalty money; this is our donation money and we want to control it.' That is a dangerous trend." In some instances, Little adds, companies insert settlement language barring use of the money for litigation against them.

Although Rose provided administrative support to the class counsel, according to Little the foundation had no role in selecting the Google Buzz charities. "I think [the choice of recipients] should be taken out of the process and given to a third party, and the selection made independently," he says.

In January the Impact Fund in Berkeley issued a summary analysis of cy pres decisions reported nationwide. "There needs to be a high level of transparency," warned Jocelyn D. Larkin, the fund's executive director. Larkin says judges have rejected settlements that would provide money to a cy pres fund but give nothing to the class. She adds that parties "can't be seen as feathering their own nests" - although she admits there's not a lot of case law for guidance.

The California Supreme Court approved use of the cy pres doctrine 25 years ago to distribute unclaimed class settlements (California v. Levi Strauss & Co., 41 Cal. 3d 460 (1986)). The Legislature then joined in with a law declaring that unpaid class funds should be subject to cy pres distribution.

In 2001 that law was amended to specify that funds are to be distributed to nonprofits or foundations whose work would benefit the class, to child advocacy groups, or to nonprofit groups that provide civil legal services to the indigent. (Cal. Code Civ. Proc. § 384(b).) In recent years, Larkin notes, California's budget crisis has made cy pres money an increasingly important source of funds for financially strapped legal aid groups.

Even as "we are seeing some of the biggest cy pres funds ever," Little says, the growing competition among applicants means more of those settlements are being challenged in court. The Google Buzz appeal is one of three cy pres disputes the Ninth Circuit has had on its docket already this year.

In February objectors in a product liability suit over Bluetooth headsets opposed an $800,000 award of attorneys fees when just $100,000 went to a cy pres fund and the plaintiffs got nothing. Class members were millions of Bluetooth headset owners who had allegedly received inadequate warnings about the risk of hearing loss from using the device (In re Bluetooth Headset Products Liability Litigation, No. 09-56683 (9th Cir. oral argument Feb. 7, 2011)).

The objectors' lawyer, Theodore H. Frank of the Center for Class Action Fairness in Washington, D.C., called the attorneys fees excessive and asked that the case be returned to the district judge. But defense attorney Terrence J. Dee, a partner in the Chicago office of Kirkland & Ellis representing Motorola, the headsets' manufacturer, told the appeals panel that the $100,000 limit on the class payment was "a line in the sand" for the company, and only after agreement had been reached on that amount were attorneys fees negotiated. Daniel L. Warshaw, the class lawyer with Pearson, Simon, Warshaw & Penny in Sherman Oaks, acknowledged that the settlement may not be the greatest in the world, but he said the district court made no error in approving it.

In June, the Ninth Circuit heard another challenge to a cy pres distribution, this time to settle allegations that AOL had placed ads on customers' outgoing email in violation of the Electronic Communications Privacy Act (18 U.S.C. §§ 2510-2522) and California's Unfair Competition Law (Cal. Bus. & Prof. Code §§ 1720017210). The deal provided no money at all to millions of class members. Dawn Fairchild, one of the named plaintiffs, designated her employer - the New Roads School of Santa Monica - to receive $8,750 in cy pres funds rather than accept any money herself. In addition, one of three $25,000 cy pres grants went to the Legal Aid Foundation of Los Angeles, where U.S. District Judge Christina A. Snyder's husband volunteered on the board. Snyder rejected a recusal request and approved the deal, pointing out that she had no role in choosing the charity (Fairchild v. AOL Inc., No. 09-03568 (settlement approval Dec. 28, 2009)).

An objector to the settlement has asked the Ninth Circuit to reverse the settlement order. The objector's lawyer - again Frank of the Center for Class Action Fairness - suggested in his brief that the court either require the cy pres award to be "strictly tethered" to the class (citing Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990)), or else give the money to the U.S. Treasury. (See 28 U.S.C. § 2042.) (Fairchild v. AOL Inc., No. 10-55129 (9th Cir. oral argument June 7, 2011).)

AOL attorney Mark D. Litvack, a partner at Pillsbury Winthrop Shaw Pittman in Los Angeles, disparaged Frank's challenge, noting that the charities were picked independently with retired Judge Dickran M. Tevrizian, a JAMS mediator in Los Angeles, and then approved by Judge Snyder.

Ultimately, Frank has written, he hopes the Ninth Circuit will adopt the cy pres distribution standards of the Philadelphia-based American Law Institute. Those standards bar conflicts of interest in cy pres selections, allow such settlements only where money cannot go to the class, and require that benefits from the funds be reasonably related - "as near as possible" - to the class.

Pamela A. MacLean, a freelance writer based in the Bay Area, has reported on state and federal courts for 25 years.

#264819

Kari Santos

Daily Journal Staff Writer

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