State budget bills would change cy pres funding rules again

Language added this week to budget bills for state courts will make significant changes to cy pres funding in California, reversing policies implemented last year. The about-face illuminates an ongoing battle between progressive groups over how to distribute excess funds from class actions.

The bill also includes rules requiring attorneys in a case to disclose if they have ties to groups that might receive cy pres funds. This provision goes to the heart of a case recently accepted by the U.S. Supreme Court.

The changes are contained within SB 847 and AB 1813, this year's versions of the annual courts omnibus bills. These bills are mainly concerned with traditional budget topics such as funding several long-delayed courthouse construction projects and adding two new judges to the overburdened Riverside County Superior Court.

But changes pushed during last year's budget process gave one quarter of cy pres funds directly to the Judicial Branch's Equal Access Fund, which supports legal aid.

The policy was pushed by the ACLU and allies, which saw it as a way to help shore up flagging legal aid funding. But this use of the budget process rubbed other progressive groups who rely on cy pres funds the wrong way.

"Last year, we were opposing a change that we believe is a very significant public policy matter regarding our civil justice system," said Richard Holober, the executive director of Consumer Federation of California. "A budget trailer bill is not a way to address an important public policy matter. It should be addressed in a bill that would go to the judiciary committees in the Assembly and Senate."

In part because of lobbying efforts by Holober's group and others, cy pres funding will revert to the old model in which attorneys and judges negotiated cy pres distributions on a case-by-case basis. Legal aid groups are still eligible, but don't get a set-aside.

Cy pres money is notoriously unpredictable. The total amount of funds goes up and down each year, depending on what class action litigation occurs and how much remains that cannot be distributed from large verdicts.

The 2017-18 fiscal year -- when the soon-to-be-former policy was in place -- turned out to be a down year. Judicial Council Finance Director Zlatko Theodorovic testified to a Senate budget subcommittee on May 17 that $93,000 went into the legal aid fund, an amount he characterized as "not substantial."

That committee and its Assembly counterpart did recommend a temporary, two-year, $10 million augmentation to the Equal Access Fund be made permanent. That change is now contained in two separate budget bills expected to be approved in coming days.

Even with that money, however, legal aid in California only gets about half the per capita national average, said Kevin Baker, legislative director of the ACLU of Northern California.

"Let's keep in mind the national average is no gold standard," Baker said. "We're looking at a bunch of states that don't traditionally have a strong interest in supporting legal aid."

Using cy pres to fund legal aid "hasn't been controversial" in many other states, but in California it ran into opposition from "nonprofits who liked the way it was done in the past," Baker said. He added that cy pres itself may be "a vanishing dream."

"You have a case going to the Supreme Court right now that might rewrite the rules," Baker said.

That case is Frank v. Gaos, 17-961, which the U.S. Supreme Court accepted for review on April 30. The matter grew out of an $8.5 million settlement by Alphabet Inc.-owned Google approved by the 9th U.S. Circuit Court of Appeals last year.

The court found that the millions of potential class members whose online search data the company improperly shared would each receive just 4 cents. Instead, the $5.3 million left after attorney fees was approved for cy pres distribution.

Theodore H. Frank, senior attorney at the Competitive Enterprise Institute, petitioned for review. He argued the majority of the money went to law schools of attorneys involved in the case and to groups Alphabet already supported.

The lead attorney representing the class said he approved of the Legislature's pending cy pres disclosure requirement.

"Anything that increases transparency in class action, I think it is a good thing," said Kassra P. Nassiri, a partner at Nassiri & Jung LLP in San Francisco. "This looks to me like it's consistent with best practices."