Cy pres is alive and well in class action settlements

Despite prognostications to the contrary, cy pres is alive and well in the 9th Circuit. In In re Google Referrer Header Privacy Litigation, 2017 DJDAR 8031 (Aug. 22, 2017), the 9th U.S. Circuit Court of Appeals affirmed approval of an $8.5 million cy pres-only class action settlement. The case involved small monetary harm to millions of class members. This provided the perfect opportunity for the court to set forth the factors under which cy pres will be approved in class action settlements.

The plaintiffs alleged that Google violated the privacy rights of approximately 129 million internet users by disclosing their search terms to third-party websites. Prior to class certification, the parties agreed to an $8.5 million settlement that allocated $5.3 million to six cy pres recipients. Objectors challenged the selection of the cy pres recipients, including claims that some of the cy pres recipients were alma maters of counsel and others were nonprofits to which Google had previously donated. Objectors also claimed that class counsel should not receive a percentage of the cy pres portion of the settlement as attorney fees. Finally, objectors claimed that it would be better to provide a distribution to a smaller proportion of randomly selected class members instead of cy pres.

In the class settlement context, the cy pres doctrine “permits a court to distribute unclaimed or non-distributable portions of a class action settlement fund to the ‘next best’ class of beneficiaries for the indirect benefit of the class.” “Quickly dispos[ing]” of appellants’ challenge to cy pres-only settlements, the court reaffirmed that cy pres settlements are appropriate when funds are “non-distributable” because “proof of individual claims would be burdensome or distribution of damages costly.” Here, each class member would receive “a paltry 4 cents in recovery” ($5.3 million/129 million class members). Similarly, the court rejected the objectors’ proposed alternatives to compensate class members using a random lottery distribution, or by offering $5 to $10 per claimant on the assumption that few class members would make claims. The existence of “possible” alternatives to a cy pres distribution is simply not relevant to whether a settlement is “fair, adequate, and free from collusion.”

The “crux” of the appeal was “whether approval of the settlement was an abuse of discretion due to claimed relationships between counsel or the parties and some of the cy pres recipients.” Specifically, objectors took issue with the cy pres recipients because three previously received Google settlement funds, and three were class counsel’s alma maters. While the court recognized that the cy pres doctrine “poses many nascent dangers to the fairness of the distribution process” because the selection of beneficiaries may be subject to the “whims and self-interests of the parties their counsel, or the court,” these dangers are checked by the “nexus” requirement, which tethers cy pres awards to the objectives of the underlying statute and the interests of class. Thus, the court held that “a prior relationship or connection … without more, is not an absolute disqualifier.”

The court set forth “a number of factors” that practitioners should take note of, including the nature of the relationship; the timing and recency of the relationship; the significance of dealings between the recipient and the party or counsel; the circumstances of the selection process; and the merits of the recipient.

The panel found that the district court had explicitly or implicitly examined each of these factors. It was no surprise that Google had previously supported programs that were recognized academic institutions and nonprofits in the arena of internet privacy. Similarly, the fact that some recipients had previously received settlement funds established a substantial record of service that inspired confidence that the funds would be used for the class. Connections between counsel and their alma maters also did not raise questions of whether recipients were selected on the merits. All counsel swore no affiliations with the recognized research centers of their alma maters, and no ongoing relationships. Notably, the panel emphasized the importance of transparency in the selection process, observing that detailed proposals submitted by each of the cy pres recipients disclosed how settlement funds would be specifically used to further internet privacy and the interests of the class, and how these funds were distinct from prior contributions by the parties.

Yet, while the court did not find an abuse of discretion under these circumstances, it specifically noted that prior connections could present “a stumbling block to approval of a settlement.” Thus, practitioners should pay special attention to this opinion, and in particular to the dissent, which suggested that more could have been done by the district court and the parties/attorneys. Note that the Court of Appeal’s review was based upon an “abuse of discretion” standard. It is possible that district courts will look at Justice John Wallace’s dissent suggesting that an evidentiary hearing was appropriate to further examine the attorneys on their connections to their alma maters and the process in which the recipients were selected.

In the end, the 9th Circuit has affirmatively approved the use of cy pres in settlements where there are millions of class members who would receive pennies if there was a pro rata distribution of a common fund. In fact, without the cy pres alternative, Google and other corporations would have even less incentive to comport with consumer rights. Google represents a significant opinion that will have a long lasting effect in consumer class actions.