Is Cy Pres Defensible?

[Music]

 

Sam Fendler:  Hello and welcome to this Federalist Society virtual event. My name is Sam Fendler, and I’m an assistant director of practice groups with The Federalist Society. Today, we’re excited to host “Is Cy Pres Defensible?”

 

Helping us tackle this question are Theodore “Ted” Frank and Professor Brian Fitzpatrick. Ted Frank is the director of litigation and senior attorney at Hamilton Lincoln Law Institute. His class action practice has placed him at the forefront of several landmark cases, and The New York Times has described Ted as the leading critic of abusive class action settlements.

 

Brian Fitzpatrick is the Milton R. Underwood Chair in Free Enterprise at Vanderbilt Law School. His research focuses on class action litigation, federal courts, judicial selection, and constitutional law. He is the author of The Conservative Case for Class Actions, published in 2019. If you’d like to learn more about today’s experts, you can see their full bios at our website, fedsoc.org.

 

After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window. And we’ll do our best to answer as many as we can. Finally, I’ll note that as always all expressions of opinion today are those of our guest speakers, not The Federalist Society. And with that, Ted, the floor is yours.

 

Theodore “Ted” Frank:  Thank you, Sam, and thank you to The Federalist Society for setting this up and to Brian for jousting with me today. Cy pres comes from the old French phrase “cy pres comme possible,” as near as possible. It was originally a doctrine in the context of trusts. What do you do when the purpose of a trust is frustrated? You can go to a court and have it reformed to be the next best thing, as close as possible to the creators’, the granters’ intent.

 

So for example, the March of Dimes was established to fight polio. Once polio was cured, they pivoted to birth defects. And there’s some controversy over cy pres in the trust context. Are organizations too quick to run to court and defeat the granters’ purpose? But that’s outside the scope of this particular Teleforum.

 

The idea came about decades ago. Hey, we could use this in class actions. Maybe it’s too hard to get money to the class, or maybe there’s some money left over that would be impossible to distribute or unfeasible to distribute. Let’s give it to a cause that serves the class’s interests.

 

And this was loosey-goosey for a number of years. But a number of attorneys starting around 2009, 2010 started challenging the practice because of the potential abuses. The theory of cy pres as doing the work for the class did not comport with the practice where lawyers were essentially using it as a slush fund. And the problem here in the theory versus practice is the problem of incentives in class action settlements.

 

The defendant wants to get out of a class action as cheaply as possible whereas the attorneys are trying to maximize the benefit to themselves. And that gives both parties the incentive to structure a settlement to freeze out the class members who aren’t at the table though they’re supposed to be being represented by the class counsel. But the cy pres gives class counsel a way to divert money away from the class and then into something that they might prefer, for example, their alma mater or a cause that they’re interested in.

 

Similarly, defendants can put more money on the table if the money is going to a nonprofit that they like, perhaps a nonprofit that they’re already funding. In one class action, Lane v. Facebook, it was a nonprofit that Facebook actually sat on the board of and had a lot of control over where the money went once the court ordered the settlement to happen. Plus, a defendant might prefer cy pres to distributing money to the class because distributing money to the class is effectively notifying the class that somebody accused them of doing something wrong and admitting that they had to pay money to get out of the case.

 

And they avoid the reputational effects when they instead give money to a nonprofit. The nonprofit might well even thank them on the website. Thanks to Google for giving us this money as part of a class action settlement. Similarly, class counsel would prefer having a big ceremony where they hand over a $3 million check to mailing out a million $3 checks to a bunch of ungrateful class members who probably won’t even send a Christmas card.

 

So in addition, class counsel has sort of the incentive to steer money to causes that they like. And that creates some ideological problems because, well, that usually tends to be left wing causes. The Federalist Society almost to my knowledge has never been suggested as a beneficiary of cy pres. Class members of course are usually across the political spectrum, but the money is going to one side of the debate.

 

In addition there are potential conflicts of interest when the judiciary is involved in selecting or approving the cy pres recipients. Judges aren’t really set up to be grant makers, but they have power over the cy pres purse. They get lobbied. And there’s actually one Google settlement where the judge sua sponte from the bench said, yeah, these charities are all good. But I also want to take a million dollars from it and give it to the local university where I happen to be teaching a class. We wanted to bring that up on an ethics complaint, but the federal judge retired before we had the opportunity to do that.

 

So you have all these potential problems with cy pres. And starting around 2010-2011, courts started to notice and started to ask questions about it. And the Third, Fifth, and Seventh Circuits in particular have been very skeptical of cy pres. The Third Circuit in a case called Baby Products which I argued held that class counsel has a duty to prioritize class relief, recovery to the class. The class is not indifferent to whether money goes to the class or to a third party charity, and class counsel shouldn’t be either.

 

The Fifth Circuit said that cy pres should only be a last resort. Always find a way to get money to the class when you can. The Seventh Circuit out and out said that cy pres isn’t a class benefit and shouldn’t be counted as one. Get the money to the class.

 

And interestingly enough in all three of those cases after the cy pres distributions were rejected, new settlements were negotiated that got the money to the class, even though the parties had argued vociferously how difficult that would be. But the reality is when you give lawyers the incentive—you tell them you don’t get paid unless you get money to the class—the lawyers find a way to do it. And you just have to incentivize them to prefer giving money to the class rather than their favorite nonprofits.

 

In contrast to those circuits, the Ninth has had a much more loosey-goosey approach where they’ve essentially let almost anything go on the grounds that it’s compromised. Their only standard is that it has to be a nexus to what the underlying settlement is or the underlying cause of action is. So for example giving money to the local Boys and Girls Club for a lawsuit against AOL privacy practices was not appropriate. The nonprofit had to be something relating to the privacy practices. In a case called Dennis v. Kellogg, a case over consumer fraud, Kellogg couldn’t get out of it by giving money to a food bank or giving product to a food bank is what it was going to be -- something they do anyway. And it’s just a change in accounting entries when that happens with defendants.

 

But on the other hand, once there’s a nexus the Ninth Circuit has been okay not scrutinizing these things very carefully. They say that there’s no obligation to try to get money to the class. They say there’s no obligation to look at the conflicts of interest, so it’s okay for class counsel to divert money to their alma mater. It’s okay for a defendant to run the nonprofit who’s going to be the recipient. It’s okay for a defendant to give money to basically a series of nonprofit organizations that they’ve already supported or promote their interests in other ways other than the litigation.

 

We took one of those cases involving Google to the Supreme Court in 2018 in a case called Frank v. Gaos where I was the Frank. The settlement was an $8 million settlement where the lawyers got $2 million and the class got zero. Instead $6 million went to the attorneys’ alma maters and a variety of nonprofits that Google was already supporting.

 

Unfortunately, the Ninth Circuit was a little sloppy in assuming that there was Article III jurisdiction in standing. And the Supreme Court, though they seemed at oral argument to be skeptical of cy pres, were much more skeptical of the way the Ninth Circuit handled the standing question. And they remanded for -- they vacated the settlement approval but remanded for consideration of the Article III issues without reaching the merits of the case.

 

Though Justice Thomas dissented, he said he would’ve found standing and that this was just completely beyond the pale. It shouldn’t be a class benefit. The attorneys shouldn’t be paid for it, and you shouldn’t even certify a class if you’re going to say that it’s impossible to pay the class members because then a class is not superior to other forms of relief.

 

The Eighth Circuit used to be skeptical. Oh, and interestingly on remand they’ve just announced a new settlement for tens of millions of dollars that will go to the class, so once again, another example of attorneys saying it’s impossible to get money to the class and that’s why we need cy pres but actually doing it when they’re worried that they’ll get called out for it or when they are called out for it.

 

The Eighth Circuit had been skeptical of cy pres and struck down a $2 million cy pres awarded Bank of America Securities, a 2015 case. There they’d already distributed hundreds of millions of dollars. They had $2 million left over. The judge wanted to distribute it to -- the class counsel and the court wanted to distribute it to local St. Louis and Missouri-based nonprofits. And by a 2-1 vote the Eighth Circuit reversed and said no, you have to get money to the class. The money belongs to the class.

 

So that brings us to Jones v. Monsanto, an Eighth Circuit case that I argued earlier last year. It was a fairly large settlement against Monsanto over their labeling practices. But it ended up being divided as follows: $10 million to the attorneys, $16 million to uninjured nonprofits, and the class only got $12 million or so with about 98 percent of the class, about 10 million members, receiving no cash. We complained about this to the Eighth Circuit after the district court approved.

 

The district court said oh, it would be too difficult to get money to the class and we shouldn’t give direct notice to the class. We shouldn’t try to do direct distribution to the class. They could’ve seen the internet notice, and they didn’t make a claim. And that’s plenty.

 

We pointed out to the Eighth Circuit that this was even more objectionable than the Bank of America case that they reversed where the amount the class was much, much larger and the amount to cy pres was much, much smaller. Nevertheless, the Eighth Circuit affirmed the settlement approval. We also made a First Amendment challenge, the objector objecting to political valance of one of the cy pres beneficiaries, Berkley Law School, of course the environmental clinic at Berkley Law School. Though they say they’re environmental justice, they go for a long range of leftwing causes on top of it.

 

Of course people who buy Monsanto weed killer are exactly the demographic that wants to see money to go to Berkley Law School. We complained about that mismatch. The court said no First Amendment problem because the class has no right to the money once they didn’t make the claim on it. This contradicted what the Eighth Circuit said earlier. It contradicts what the Fifth Circuit and Seventh Circuit say. So we’ve taken that up on cert sub nom St. John v. Jones, and that’s case number 22-554.

 

Parallel to that, we lost a case in the Second Circuit, Hyland v. Navient. This was an out and out zero dollar settlement where instead $2 million would go to a brand new nonprofit affiliated with the teachers’ union that funded the litigation. And we suggested there was a conflict of interest there. The Second Circuit didn’t care. Second Circuit didn’t care that class members were waving their B2 claims and part of their B3 rights for damages and getting zero in return.

 

We’ve taken that up to the Supreme Court as Yeatman v. Hyland. And that’s number 22-566. And we’re pleased to have amicus support from a number of institutions, the Manhattan Institute, Center for American Liberty, I think Buckeye Institute, and 16 state AGs. So the Supreme Court has previously expressed interest in the cy pres issue. And we are cautiously optimistic that they’ll have some interest in these two cert petitions.

 

As I note, when we win, class members benefit. It’s almost always crocodile tears when the argument is that you can’t get money to the class. The reality is in a class action settlement even when you have millions of class members and it would seem like there could only be a few pennies per class member -- the reality is is that claims rate in class action settlements are just so low that if you set it up for a claims process and distribute the money pro rata to the claimants, you get substantive amounts. And Google in another settlement after three or four consecutive cy pres settlements went ahead and set it up for cash relief and just electronically distributed $4 or $5 a class member to claimants.

 

So as I note there are basically two competing views of class actions. One is that a class action is sort of a substantive device, that it gives class attorneys the ability to act as a private attorney general and right wrongs. The other is that the class action is a procedural device. It’s just a species of joinder. Class counsel still has fiduciary duties to their class members, to their clients. And you can’t sell your clients short in the interest of doing a greater good.

 

Sam Bankman-Fried took money from his customers at FTX and was very altruistic with it, giving millions of dollars to charity. But he’s probably going to go to jail for that. It seems inappropriate that we instead celebrate lawyers who do this to their clients in the class action context. But of course if you view class actions as a substantive device, subject to the private attorney general, then you’re less skeptical of a cy pres because after all the point is taking money away from the defendant, righting the wrong. And it’s probably better to give a bunch of money to a nonprofit who would do something with it because if you just gave 3 or $4 to class members, they might spend it or otherwise like it.

 

The Supreme Court to date has rejected the idea that the class action is a substantive device versus a procedural device. And we think we have the better of this debate. But I look forward to hearing how Brian feels about these things.

 

Brian T. Fitzpatrick:  Thank you, Ted. Thank you, Sam. Thank you all for joining us today to talk about cy pres. One thing I hope we hear from Ted when we turn the microphone back over to him is whether he thinks we should ever use cy pres and if so, under what circumstance he thinks we should do it. I’m not sure if he’s totally opposed to it or just opposed to it most of the time, etc., etc.

 

My own view is cy pres is not perfect, but nothing is perfect. And it’s better than a lot of the other options a lot of the time. I do want to acknowledge that I have a bit of a conflict of interest on this subject because Vanderbilt Law School has received money from a cy pres award. It was many years ago now, and they don’t let me touch any of the money I assure you. But we have gotten some money from a cy pres. So I am compromised to some extent for that reason. Nonetheless --

 

Theodore “Ted” Frank:  Money is fungible, Brian. Money is fungible.

 

Brian T. Fitzpatrick:  That’s true. Nonetheless, I think that there’s something to be said for cy pres. And I want to pick up where Ted left off, which is about this notion that the class action device might be just a procedural device and it shouldn’t be doing substantive work and cy pres is substantive stuff that the class action shouldn’t be doing. I want to address that first because I think it’s important to be clear about something.

 

And that is the source of the law of cy pres is not Rule 23. The source of the law is federal and state common law or state statutes. Cy pres is a common law doctrine. And it has been extended to situations that are like the trust situation in the same way the common law is extended to new challenges all the time. So the substantive law is common law, or in 21 states, at least 21 states last time I checked, they’ve codified the common law with states statutes saying under these circumstances you can give money from class action settlements and class action judgements to third parties. So we don’t have to worry about whether the class action can do substantive work or just procedural work because the substantive work is being done by the common law or by state statutes when it comes to cy pres.

 

So let me turn to the balance of Ted’s arguments, which are largely arguments about policy. Is it good to give this money to charity when we could be giving it to the class? If that’s the question, I think we’re all in agreement here. If we could give the money to the class, I think most of us would say give it to the class. Cy pres is supposed to be used when it is impractical to give the money to the class, and therefore we have to ask what is the next best thing.

 

So there’s two circumstances in which we use cy pres. And one circumstance is the Monsanto case that Ted described. And one circumstance is the Navient case which he described. So the first circumstance is we try to distribute the money to the class, and class members didn’t file enough claims. And so there’s money left over. And what are we going to do with this leftover money?

 

One option is to give it back to the defendant. And that has a lot of downsides to it because it ends up meaning the defendant gets something of a windfall. And the defendant is the wrongdoer. And so do we want to give the defendant money back when the defendant is the wrongdoer, or do we want to make the defendant internalize the costs of the wrongdoing and therefore be better deterred against wrongdoing? So the policy argument against giving it to the defendant is it’s bad for deterrence. It’s bad to give the wrongdoer their money back.

 

So what are we going to do with this leftover money when we don’t file enough claims to consume it all? Well, one option is just to give more money to the class members who did file claims. And you could do that in a lot of ways. You could just do it the way Ted mentioned in his opening remarks, and that is just do what’s called a pro rata distribution, just see who files claims and then divide the amount of money in a settlement into those claims and just send everyone a check for that amount.

 

You could do it with another round of checks, see who filed a claim the first time and if there’s money left over send everybody who filed a claim the first time another check. You could do that. All those things are fine, frankly, except for one potential problem. And I say potential because I really don’t think this is much of a problem, but some people usually align with Ted on this issue, like Marty Redish who’s a professor at Northwestern.

 

I debated him in 2020 in the Vanderbilt Law Review on cy pres. So you can pick that up if you’d like to see our remarks there. But some folks like Marty Redish and maybe Ted—we can hear from him again in a moment—they think there’s a potential problem if you end up giving class members more money than they were injured to begin with. If they get more than they were injured to begin with, this Marty Redish said is illegitimate for some of the same reasons Ted mentioned.

 

It’s turning the class action into a substantive device. You’re changing a substantive law. And substantive law said you can only get full compensation for your injuries, and now you’re giving someone twice, three times, four times, five times as much in the settlement. And so you’re changing the substantive law. That’s the argument Marty Redish makes. I don’t know if Ted would make the argument as well.

 

I do think I remember one time Ted proposed in one of his cases that we just hold a lottery, give the entire settlement to one lucky class member or a couple lucky class members. And so if he endorses the lottery idea, then he wouldn’t associate himself with Marty Redish’s concerns about overcompensating class members. But this is one objection that people make to the pro rata approach or this multiple rounds of checks approach is that we’re going to overcompensate class members.

 

Now, to be honest with you, I don’t think this is a really big problem. If the choice is between giving the money to some third party that is completely unrelated to what’s going on or to give more money to the people actually injured, I’m okay with giving more money to the people who were actually injured frankly. So I’m not too worried about this option, but some people do worry about it. And some people worry about it not just because it’s changing the substantive law.

 

But some people worry that if we actually do a good job of picking the charity, then all the people who didn’t file claims could get indirect benefit from the charity. We could indirectly benefit the class members who didn’t file claims, and wouldn’t that be better than giving them nothing, no direct or indirect benefit and instead sending the money to other class members? Now, these arguments have some traction, but I’m not going to lose a lot of sleep over it to be honest with you. Giving a little extra money to a class member who filed claim forms I think is an okay option here. I think it’s an okay option. It’s much better than giving the money back to the defendant.

 

So the other situation where -- so there are some other options if we have leftover money besides more to the class members who file claims or to third parties in cy pres. The other option is we could give the money to the government. We do that with abandoned property. And so some arguments are made we should just give all this leftover money to the government. Won’t they do great things with it?

 

Well, I’m not a big fan of the government, so I don’t think they do a lot of great things with our money. So I think I’d probably favor giving it to a lot of charities before I’d favor giving it to the government. And so I don’t think that’s a very good option either.

 

I did argue in one of my papers we should give the leftover money to the class action lawyers because they’re the ones filing these cases. They’re the ones we need to incentivize to file these cases so we can get good deterrence against wrongdoing. But I doubt Ted’s going to endorse that idea. So I’m not going to push it too hard here today.

 

But among the options—more to class members, the government, charity—they’re all better than giving back to the defendant. And so I don’t have super strong feelings about which one of those we pick as long as it doesn’t go back to the defendant. And I’m happy to send out multiple checks and overcompensate people if that’ll make Ted happy. I really am.

 

The other situation in which we use cy pres is more the Navient situation, although I’m not sure it maps on there perfectly. And that is we don’t even try to give the money to class members. And this was Ted’s Google case as well that he mentioned. We don’t try to give the money to class members. We think the money is small and the number of class members is so big that it would be a waste of time to try to give the money to class members.

 

I thought about this scenario in Ted’s Google case a couple weeks ago because I got a class action settlement check in the mail for 49 cents. And I thought to myself, you know, they obviously could distribute this money to me, but why? What am I going to do with 49 cents? The envelope and the stamp cost more than that.

 

And so we have to ask ourselves a question. If we have a situation where we have so many class members and so little money that all we can do is give everybody 49 cents or 39 cents or 29 cents or 19 cents or 9 cents, is it worth doing? And sometimes the courts say, you know, I don’t think it’s worth doing it. I think we don’t want to give the money to the defendant because then they’re not being deterred from wrongdoing. So we want to give it to someone, let’s find a third party charity that will indirectly benefit the class instead. So that’s the other scenario where we do this.

 

Now, I think Ted is right that before we go down that path we really need to make sure that we can’t actually get money to the class members. And I think he’s also right that a lot of times if we’re not doing direct distribution, we’re relying on claim forms to be sent in or clicked in online, a lot of times the claim rate’s going to be so low that people will get more than 49 cents. He’s right about those things.

 

But on the occasions where people are going to just get 49 cents if we try to distribute this thing, is it really worth the trouble of sending all these 49 cent checks out. Or would the class be better off finding a charity that would indirectly benefit them? Again, I’m not going to lose a ton of sleep over this. I’m not going to lose a ton of sleep over 49 cent checks versus charity. But I don’t think it’s crazy to say we’re going to send the money to charity instead.

 

Now, a lot of Ted’s complaints in his opening remarks are about the charities that are selected when we do the cy pres stuff. And again, cy pres is not perfect, and the courts and the lawyers that are picking these charities, they’re not perfect. And some of them make egregious mistakes. Some of them make small mistakes. I cataloged some of these mistakes in my book, The Conservative Case for Class Actions, that Sam so kindly mentioned in our introductions. So I’m not going to defend every charity that’s been picked by every judge and every class counsel and every defense counsel because they’ve done a lot of self-serving things with cy pres.

 

The question is do we think that it’s so futile to try to police the charities that we give up on the entire endeavor and say give the money back to the defendant or overcompensate class members or hold a lottery where one class member gets the entire $10 million settlement? Is it so futile to actually find something that would indirectly benefit class members we should just throw the entire thing away? Or do we think we could just do a better job of policing this stuff?

 

And I think there are a lot of courts that do take this seriously. I remember a case out of the southern district of Florida, Miami. It was one of these bank overdraft cases. And there was a lot of money left over in the settlement. I don’t remember how much but tens of millions of dollars. And the lawyers got together and proposed this long list of charities to the judge to send tens of millions of dollars to. And I’m sure their alma maters were on the list and what have you.

 

And the judge looked at it and he said, you know what? This does not feel right to me. It does not feel right to me to give tens of millions of dollars out to a bunch of charities that you guys picked, some of your alma maters. I don’t like the feeling of this. This is like I’m playing Santa Clause or the Ford Foundation or something, and that’s really not my job.

 

So the judge said, you know what we’re going to do? We’re just going to send more checks. And I think they sent three, four rounds of checks before they got rid of all the money. And so I think that it’s not too much to expect our judges to take a close look at these charities and make sure that these are charities that will indirectly benefit the class members. And people like Ted frankly are helping courts do that.

 

Ted serves a very, very valuable function of pushing back on these class action settlements when there’s no adversarial-ness in the process. The defense counsel, the class counsel, they’re all in favor of what they’ve agreed to. And we need people like Ted to tell the courts, hey, listen, you need to take a closer look at this thing. And so I think people like him are really helping our judges do a better job. And I have faith that they can police this thing.

 

I don’t think we need to give up on it and give money back to defendants certainly. And I’m not even sure the atmospherics would be better if we held a lottery and gave all the money to one lucky class member. I think most people would think that that is kind of a strange use of our class action system, and maybe they would prefer a good charity that indirectly benefited the class to be the lucky lottery winner.

 

But all these options are plausible. The one option that’s not plausible is giving the money back to the defendant because we’re not serving the goals of our substantive laws, including deterrence, if we do that. And I don’t think there’s anything wrong with a common law doctrine that helps us serve the substantive ends of our laws. Thank you. Ted, back to you.

 

Theodore “Ted” Frank:  Thanks, Brian. And I would disagree that this is a common law doctrine. I mean, it’s a judge invented doctrine. And maybe that’s what the common law is, but this didn’t exist 80 years ago, in part because this sort of class action didn’t exist 80 years ago. So we’re saying that the appropriate common law approach is to say that this is unreasonable under Rule 23(e).

 

It sounds very nice to say, hey, we tried to give money to the class. There’s leftover money. Let’s give it to cy pres. But the problem there is again theory versus practice. Attorneys will prefer to give the money to cy pres. And if you say, oh, as long as you say you tried, you can give the money to charity, that’s what’s going to happen. So in Baby Products, oh, we tried to give money to the class, and gosh, we needed a five page claim form to make sure that they weren’t trying to defraud us out of $5. And as a result only $3 million got distributed to the class, and they were going to give $14 million to charity.

 

And we had this problem in Monsanto too where, again, 12 million to the class, 16 million to the nonprofits instead of trying to get the claims rate from 2 percent to 4 percent. And they did no direct notice, and in fact they argued against doing additional notice. They argued against doing direct distributions. And that’s because the class counsel was happier to see the money go to the nonprofit, as was the defendant.

 

And so in cases like Pearson v. NBTY and Baby Products and Bayer and Pecover v. Electronic Arts where we’ve come in and complained about the cy pres and either the parties turned around and said, oh, it’s too hard to do it and then when the courts made them do it, they found a way to do it. And that’s all I’m saying is structure the incentives so that the attorneys have the incentive from the beginning to give the money to the class. And you need rules that do that. And if the rules are as long as the attorneys say but we tried, they have every incentive to be self-serving.

 

The court might prefer the money going to a nonprofit if it’s a nonprofit that the court likes. And it’s the Holmesian bad man view of the law. You structure the law so that the bad man does the right thing, even if there are good judges like the southern district of Florida judge that says send the money to the class. And the fact that there are judges like that who exist and do this sua sponte without me having to come in doesn’t mean that we don’t need a legal rule to handle the judges that don’t do that.

 

And that incentive problem is why -- it’s already a bad enough incentive that to create leftover money to go to the nonprofit, if the leftover money is going to the attorneys as a default, wow, now you’re really talking about an incentive to collude and make the claims process so difficult that nobody -- and notice process so shoddy that nobody actually claims the money. And this isn’t hypothetical. This isn’t 49 cents. In the Volkswagen clean diesel case there was a settlement. They knew the identity of every single Volkswagen car owner, but they still required a claims process. And as a result there was $76 million left over to what was tens of thousands in this particular subclass who were entitled to hundreds or thousands of dollars each.

 

And this money was instead going to cy pres with no penalty to the previously awarded fee. And because this was in the Ninth Circuit, the permissive approach meant that there was no effort to provide direct distribution to this vast majority of class members who received direct notice but failed to jump through the hoops of making a claim, no new notice because you get these things in the mail. They’re postcards or they’re thick envelopes. You don’t go to the website, or you don’t read the 20 page notice. Or you think it’s junk mail, or it seems like a scam because right now in my spam folder I get a dozen emails a day about class action settlement notices that aren’t class action settlement notices but are phishing attempts.

 

There is no new notice to the class of the 55 newly identified cy pres recipients, no disclosure of potential conflicts of interest, no press coverage, and thus no objections before the court rubber stamped a short proposed order giving away $76 million of the class’s money. So we can complain about the hypothetical of the windfall, but where do you decide what the windfall is? Do you have a mini trial and say, well, the class wouldn’t have won anything anyways, so the settlement’s too big and they shouldn’t get everything that they ask for in the complaint?

 

Then you give the parties once again the incentive to argue against the value of the claim. Oh, damages would’ve been really low, and therefore nobody’s entitled to more than a dollar. It’s a windfall if they get more than a dollar. Let’s give the money to my favorite alma mater instead.

 

Again, if you define windfall by the idea that the settlement is paying class members too much relative to what the value of the claim is or that they weren’t really injured and we should have a mini trial to determine whether they were really injured, the settlement is a compromise. And if the compromise is that 4 or 5 percent of the class is going to get the full measure of damages asked for in the complaint, so be it. Maybe the case was completely worthless.

 

And Monsanto or Google or whoever it was could’ve settled the case for a peppercorn and it would’ve overcompensated the class. They chose to settle it for a few million dollars because whatever the risk of the litigation was to them. And that settlement value belongs to the class. The case was brought in their names. Their causes of action created the settlement value. Pay the attorneys a percentage of that. Fine. But the settlement value belongs to the class.

 

We talk about indirect benefit. A settlement is consideration for the release of the class members’ claims. And when you give money to even the most noble of charities, say the American Cancer Society, nobody could complain about it. Maybe there’s some Christian Scientists out there who would complain about the American Cancer Society. But assume that nobody would complain about the American Cancer Society and it’s an indirect benefit to all the class members.

 

But the thing is it’s also an indirect benefit to all the opt-outs. It’s an indirect benefit to all the non-class members. There’s no marginal benefit to being a class member and getting this indirect benefit. And that’s why Judge Posner in Pearson v. NBTY said this isn’t a benefit to the class. There’s no consideration for the release. The class member would’ve been better off just in the Google case where the class members got nothing. A lawyer following his fiduciary duty would’ve recommended to every single class member that they opt out, take the indirect benefit, and keep their claims.

 

So I don’t buy the indirect benefit argument unless there happens to be a nonprofit particularly targeted to the class and not to any non-class members. So there is a very exceptional case of retired NFL players who brought a lawsuit, and the cy pres was essentially a fund to help retired NFL players. There was a one to one correspondence. And if anything, the appeals court dodged it by saying actually this was injunctive release to benefit the class. And that’s correct. So that’s my response to what Brian had to say.

 

Brian T. Fitzpatrick:  Ted, we have a number of questions.

 

Theodore “Ted” Frank:  We have so many questions now.

 

Brian T. Fitzpatrick:  And so I’d like to get to some of them, and I’d like to start with my own question though, Ted, because you talked a lot about how we need rules. We need rules about cy pres. And I’m just still a little unclear what rules you want. Your last comments about indirect benefits suggested to me you want a rule against cy pres entirely because you don’t think that it’s possible to get indirect benefits. Is that right or not right?

 

Theodore “Ted” Frank:  I think in the absence of statutory authorization you shouldn’t have cy pres. And there’s already 28 U.S.C.  § 2412 calling for escheat to the Treasury. That’s where you can send the leftover money if you have to send the leftover money somewhere. But I think the other rule you need is to sort of create an incentive to the attorneys that says you don’t get paid if the class doesn’t get paid. You have to find a way to get money to the class. And you will get a percentage of what the class actually receives, and if there’s money left over that goes to the government, you don’t get a percentage of that.

 

Brian T. Fitzpatrick:  Okay. So I think that actually answers two of our questions because Jeff Wood wanted to know our views about what if the legislature passes a law directing escheat of funds to the state. And Jeff noted that Delaware funds a third of its state budget, my god, from unclaimed corporate dividends. And so it sounds like, Ted, you would rather give it to the government than to trust the courts to come up with charities that are good charities.

 

Theodore “Ted” Frank:  I mean, maybe you set up a rule that it’s offset by income taxes so that the government doesn’t get extra money. But escheat is escheat. I hate to see the government get more money, and it’s a good reason to point to the attorneys when that happens, I guess. But I think it’s superior to the incentives created and the distortions that are created when you create exceptions for cy pres because the exceptions end up swallowing the rule if there’s any discretion.

 

Brian T. Fitzpatrick:  Okay. So on this issue I think Ted and I are going to disagree a little bit. I hate the government so much that I would put even some of these American law schools as preferable to giving more money to the government.

 

So what about this one, Ted? So this is a question from Michael Rossman. He says should cy pres money be considered in determining fees for class counsel? And what I think he means by that is should class counsel get any credit for the money that goes to cy pres? So I know your view, Ted, is the percentage class counsel should get should be less for the cy pres money compared to the money that goes to class members. But I’m wondering is your view that the percentage of the cy pres should be zero to class counsel, or do you think class counsel should get some fee credit for cy pres rather than just returning the money to the defendant?

 

Theodore “Ted” Frank:  My first preference is zero because it correctly establishes the correct incentives. The class counsel’s duty is to the class, and it really undercuts the incentive for class counsel to create the opportunity for cy pres, which just realistically nine out of ten class counsel are going to prefer giving money to cy pres if they’re permitted to do that than to giving money to the class. There are very noble class counsel out there who are true believers on this and really fight hard for it. Jay Edelson made a video bragging about how they get money to the class. And they do get money to the class. They get 20 percent claims rates where other law firms get 1 or 2 percent or less than 1 percent. I think we found that in cases where there isn’t direct notice the median claims rate is 0.26 percent.

 

Brian T. Fitzpatrick:  Let me ask you this, Ted. If you give zero percent of cy pres to the lawyers, why wouldn’t they just negotiate settlements where the money goes back to the defendant? That’s going to be even easier to get an agreement on with the defendant than the leftover money goes to cy pres.

 

Theodore “Ted” Frank:  Well, no. The argument is that they get a percentage of the money that the class actually receives.

 

Brian T. Fitzpatrick:  Right. So --

 

Theodore “Ted” Frank:  So if the money goes back to the defendant, they don’t get credit for that either.

 

Brian T. Fitzpatrick:  Granted. But wouldn’t it be easier to negotiate a deal with the defendant where they get the money back as opposed to sending the leftover money to charity? So are we going to end up with a situation where all of our settlements now are the defendant gets it back? And is that really a good thing?

 

Theodore “Ted” Frank:  Well, we already have lots of settlements where, quote/unquote, the defendant gets it back. We have claims made settlements all the time where the defendant puts a fictional number on the table and then agrees with class counsel to throttle the claims process so that the defendant doesn’t actually have to pay anywhere near what they’ve allegedly committed. The reversion goes to them. The attorneys go to the court and said we made $30 million available. Give us $7.5 million.

 

Brian T. Fitzpatrick: But if you go to zero percent -- if we go to zero percent on cy pres, we’re going to have more of those situations; right?

 

[CROSSTALK]

 

Theodore “Ted” Frank: Not if the rule is class counsel gets paid when the class gets paid. Then class counsel will have the incentive to structure a settlement so that the money goes to the class.

 

Brian T. Fitzpatrick:  Correct. But there’s a limit to what we can do to get money to the class. There’s some limit. I know you think we could do a lot better job than we do, and you’re probably right. But there’s some limit to what we can do. And once we hit the limit, no one is going to negotiate a settlement that says give it to cy pres anymore with your zero percent rule. Everyone’s going to negotiate one that says give it back to the defendant because that’s easier to get agreement on.

 

Theodore “Ted” Frank:  I have yet to see the settlement where they negotiate -- with the exception of this Volkswagen settlement where there really was full compensation to the class, and then they just didn’t give the money to the class, settlements are generally for pennies on the dollar, and all you need to do is to get a few percent. And you exhaust the settlement fund.

 

Brian T. Fitzpatrick:  So you think it’s unlikely we ever get to a situation where there’s going to be any leftover money for the defendant if we really tried?

 

Theodore “Ted” Frank:  I mean, if you create a claims made settlement, then there’s always money given to the defendant.

 

Brian T. Fitzpatrick:  No, I know. But in a situation where you think that we can -- if we try hard enough, we can distribute all of the money to people without overcompensating them 99.9999 percent of the time?

 

Theodore “Ted” Frank:  I wouldn’t give it to the four nines, but you know, a large percentage of the time. Jeffrey Wood asks why can’t we just sue class counsel? There’s a very famous case before my time, Bank of Boston v. -- it’s a long Polish name and apologies to the Polish that I forget it. But it’s a 2-1 Seventh Circuit decision with Judge Easterbrook in dissent where they held that you couldn’t bring a malpractice suit against the attorneys because you’re collaterally estopped by the judgment in the class action. Your remedy was to object and appeal to the extent -- you know, a lot of state courts don’t let you appeal.

 

And that was a problem with many of these state court class actions. The Bank of Boston one was particularly egregious. It was the way escrow fees were calculated. They negotiated something with Bank of Boston where class members got a little bit of additional interest for the escrow, so the typical class member got $9 back. Then the attorneys went to the court and said, we should be paid a percentage of the benefit. And the benefit is that they have this money extra for the full two days. And we should get a percentage of the entire amount of money that they have extra for the full two days. And the court said yes.

 

And so class members got this $9 benefit and then had a $76 deduction from their escrow accounts to pay the attorneys, which is not just malpractice but out and out theft. And that was the lawsuit in Bank of Boston. Kamilewicz was the other party. And 2-1 Seventh Circuit said no federal jurisdiction over that because it was already resolved in the state court under the Rooker-Feldman doctrine.

 

Brian T. Fitzpatrick:  There’s some questions here about what criteria you think a court should use in picking a cy pres beneficiary. So let’s assume we don’t get your preferred rule where there’s no cy pres. What should a court do when looking at a potential beneficiary to decide whether it’s a good one or not?

 

Theodore “Ted” Frank:  I think you still have First Amendment problems. The Supreme Court has said you can’t compel speech in terms of forced donations to an entity that you disagree with. And you can’t assume consent by silence. You have to opt in before you can take the money and give it to them. So you’re always going to have those First Amendment problems. But one more thing to minimize is to make sure that the nonprofits have a completely nonpolitical valance, they don’t take political positions on anything, they’re not litigating, they’re not pushing a cause. You’re pretty much restricted --

 

[CROSSTALK]

 

Brian T. Fitzpatrick:  So Sesame Street. I don’t know. Even that’s political. I don’t know what’s left.

 

Theodore “Ted” Frank:  So that’s grounds for escheat, I guess. But medical causes for curing disease. Then you’re not going to have a nexus a lot of the time. Feeding the hungry.

 

Brian T. Fitzpatrick:  One questioner asked, Ted, about legal aid, in particular -- this was Joel Ard -- the Legal Foundation of Washington. It’s like a state legal aid. But I don’t think that’s going to satisfy your criteria, legal aid.

 

Theodore “Ted” Frank:  It was interesting. We had a case involving Citi Bank shareholders. And the class counsel wanted to give it to a legal aid society that sues banks over mortgage disputes or defends people facing mortgage foreclosure or brings suits over mortgage foreclosure. And that’s counterproductive to the interest of Citi Bank shareholders. Why are you taking money from Citi Bank shareholders and giving it to an organization that made Citi Bank shareholder poorer?

 

So it depends on the legal aid society. Certainly cy pres has been used to fund legal aid societies, and that’s what a lot of these state statutes, to the extent they’ve been passed, generally call for that sort of funding. When interest rates plummeted, legal aid lost a lot of its funding that normally came through IOLTA, Interest on Lawyer Trust Accounts.

 

Brian T. Fitzpatrick:  We have one question here, Ted. Sam, I see you came back on because you want to probably cut us off. But we have one question that I do think it’s worth addressing from William Trachman. He wants to know more about the compelled speech argument against cy pres. It’s not something I addressed because it’s kind of a new argument that I haven’t seen for very long. And I haven’t given it great thought to be honest with you.

 

But a couple of arguments against the First Amendment problem with cy pres are, number one, in the Monsanto case, for example, the money went to cy pres because class members did not file a claim form. So your money went to the charity because you did not file the claim form. You could make the argument that you chose not to file the claim form and therefore is it really compelled. That argument is weak because you may not have known about the settlement, so it really wasn’t much of a choice. But that’s at least one other thing.

 

Theodore “Ted Frank:  And moreover Janus speaks to that. It says you cannot presume affirmative consent. You actually have to get affirmative consent to get the money, to say I want to support the left wing causes of the Berkley Law environmental justice project. So Harris v. Quinn, the government may not prohibit the dissemination of ideas that it disfavors nor compel the endorsement of ideas that it approves.

 

And this is basically compelled endorsement because you’re taking the class’s money and giving it to these nonprofits. The Eight Circuit side stepped this by saying this is not the class’s money. The Fifth and other circuits including once upon the Eighth Circuit disagrees and says this is the class’s money. So that’s an interesting circuit split, and we’d like to see the court address that.

 

Brian T. Fitzpatrick:  All right, Ted. I think we have to turn it back over to Sam now because we’re over our time. But it was a lot of fun, Ted. Great to see you again. Sam, take it away.

 

Sam Fendler:  Well, Ted and Brian on behalf of The Federalist Society, I do want to thank you both so much for sharing your time and your expertise with us today. And thank you also to the audience for joining us. We greatly appreciate your participation. Please, check out our website, fedsoc.org, or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. Thank you all once more for joining us and we are adjourned.