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On April 30, the Supreme Court granted cert in Frank v. Gaos, an appeal of a Ninth Circuit decision affirming a District Court cy pres class action settlement. The petitioner claims that because the class action members received no direct relief, the award does not support class certification and violates Rule 23 of the Federal Rules of Civil Procedure requiring a settlement binding class members to be “fair, reasonable, and adequate.” Ted Frank, petitioner in the case and member of the Federalist Society Litigation Practice Group, will join us to discuss this important case.
Theodore H. Frank, Director of Litigation, Competitive Enterprise Institute
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Speaker 1: Welcome to The Federalist Society's practice group podcast. The following podcast, hosted by The Federalist Society's Labor and Employment Law Practice Group was recorded on Tuesday, May 22nd, 2018 during a live courthouse steps Teleforum conference call, held exclusively for Federalist Society members.
Laura Flint: Welcome to The Federalist Society's tele-forum conference call. In this Teleforum we'll discuss Frank v. Gaos, a case that was recently granted cert. in the Supreme Court. My name is Laura Flint and I'm the Deputy Director of Practice Groups here at The Federalist Society. As always, please note that all expressions of opinion are those of the expert on today's call.
Laura Flint: Today we are happy to have with us Theodore H. Frank, Director of Litigation at the Competitive Enterprise Institute. After hearing from our speaker, we'll go to audience question and answer. Thank you for speaking with us, Ted. The floor is yours.
Ted Frank: Hi. Thanks for having me and thanks for the opportunity to talk about cy-pres which I've done on many Federalist Society Teleforums. The underlying case where the Supreme Court has granted cert involved a class action against Google and the settlement thereof, where the class gets zero dollars, the attorneys get over $2,000,000, and the remainder of an $8,000,000 settlement fund, $8,500,000 settlement fund goes to a variety of charities that are affiliated with both Google and the plaintiff's attorneys.
Ted Frank: The underlying allegations were a privacy class action claiming that 119,000,000 or so Google users had their privacy violated by the way that Google transmitted information about search inquiries to people who clicked links or to website where links were clicked and that variety of state/federal privacy laws were violated regarding those practices because it was hypothetically possible to track back who was doing the searches and information about those people.
Ted Frank: The case settles, though billions of dollars of damages were claimed. The case settled for an $8.5 million fund, but zero of that was going to go to the class, because it's a class action settlement class members may object to attorneys using the class action settlement process to benefit themselves at the expense of class members or using the class action system to create settlements where the only benefit goes to the attorneys and Melissa Holyoak and I both of CEI both objected to this settlement.
Ted Frank: We protested that there was no benefit to the class and therefore it was inappropriate to treat it as a class action. There was no superiority, but the ct-pres was also inappropriate because it would have been possible to distribute money to the class rather than to these charities and the charities indicated conflicts of interests because several of them were charities that Google was regularly giving money to and therefore all that was really happening was a change in accounting entries and it was a losery relief and two of the charities were the alma maters of class council and seemed to have been picked in order for class council to, sort of, double dip in the settlement by being able to have a ceremony at their alma mater where they deliver a large check and then get attorneys fees on top of that.
Ted Frank: The district court at the fairness hearing said that this doesn't pass the smell test but, nevertheless, approved the settlement and approved the fee request with respect to the alma mater issue. The court said, "Well, one of the attorneys is giving money to Harvard but not all of the attorneys went to Harvard, therefore it's okay." That seems to me to be an incorrect analysis of a conflict of interest issue after all, if one of the attorneys gave money to a charity his wife ran nobody would say, "That's okay because not all of the attorneys are married to the same woman and therefore there is a check" there could be mutual backscratching as appeared to have happened here.
Ted Frank: With respect to the argument that money should go to the class rather than to ct-pres, the court said that it was not feasible to give money to the class because there were 119 million class members and distributing 6 million dollars to 119 million class members would mean that each class member would only get a few pennies each. We think that's also the wrong way to analyze that sort of question because in no class action does money go to every single class member. Nearly every single class action is settled with a claims process and under that claims process usually only a fraction of the class ever makes money.
Ted Frank: So, for example there is a large class in a Facebook settlement, Fraley v. Facebook, where the court insisted that there be a claims process and money go to the class rather than there be a $0 settlement and, sure enough, so few members of the Facebook class made claims that they were able to distribute a $15 million fund even though, again, that would only be pennies per class member and, in fact, they still had money left over for ct-pres, because they capped the claims at $15 each in that case.
Ted Frank: There are just a variety of other cases where these sorts of things happen. Where, in fact, in the median class action less than a quarter of the percent of the class makes a claim. If you're to say that a class action has to distribute money to every single class member or doesn't have to distribute money to any class members once you make that judgment then nearly every class action will move to all ct-pres with zero for the class.
Ted Frank: We appeal to the ninth circuit and the ninth circuit affirms on basically the same grounds that the basic court did in a 2 to 1 decision. It held that the conflict of interest regarding the attorneys alma maters was not sufficient, that Google was entitled to give money to organizations it was affiliated with as part of a compromised settlement and, again, to determine that it was appropriate to have ct-pres when it was not feasible to give money to every single class member. We argued that cash to the class should not be treated as equivalent to ct-pres, the indirect benefit, and that attorneys had a fiduciary duty to put the class members first. The court disagreed and said that attorneys had no obligation to favor a cash distribution over a ct-pres distribution.
Ted Frank: This contradicts what the 3rd circuit, 7th circuit, and 8th circuit said so we took this to the Supreme Court, pointing out the circuit split and pointing out that an earlier petition that had been denied by the Supreme Court in Marek v. Lane resulted in a statement respecting denial certiorari by Chief Justice Roberts, indicating that ct-pres was a potential problem that the court would be interested in taking up. Sure enough, on April 30th the court has granted certiorari it'll be scheduled for arguments sometime in the October term and we don't have the date of the actual oral argument yet, but opening briefs are due July 9th with amicus briefs due July 16th. We had some very interesting amicus support pointing out the first amendment problems of ct-pres where class members are being forced to support causes that they may not agree with and that opting out would not protect their rights. The article 3 problems of ct-pres, the property rights problems with ct-pres. 16 state attorneys general, in a bi partisan coalition also protested the idea of money going to ct-pres rather than class members and arguing that other circuits had gotten it right.
Ted Frank: This is an important case because, as I mentioned, if the ninth circuit standard of distributability prevails, whereby if it's not possible to give money to every single class member, attorneys may choose to give money to ct-pres instead of to the class with no penalty to their fee requests or settlement approval, we will see potentially billions of dollars going from class members to attorneys' favorite charities, as sort of a flush fund.
Ted Frank: To take a recent example, the Anthem data breach class action, with over 60 million class members, settled for $115 million but once you take away the cost of administering the settlements and the requested attorneys fees it works out to less than a dollar per class member. You could have said that that was completely non-distributable and there was no obligation to give any compensation to the class and instead all of the money will go to the attorneys favorite charities. Indeed the conflict of interest provisions are now so light, in terms of ninth circuit scrutiny, that you can have all sorts of conflicts of interest in terms of the attorneys giving money to their favorite charities or charities relatively related to them so long as they don't have a current financial interest in the charity. Certainly defendants can create the illusion of relief by giving money to charities where they are already giving money and therefore make a settlement seem much larger than it is so that the attorneys actually get the lion's share of the settlement value because there's actually no change in the defendants practice when they're giving money to a charity they were already giving to that the attorneys can take credit for it and then get a large attorney fee.
Ted Frank: Another potential problem with ct-pres, though it didn't occur in this case, parties may try to curry favor of the judge by using ct-pres to move money to the judge's favorite charities. In another Google settlement, that we did not challenge, a few years back, the judge who had a teaching appointment at Santa Clara School of Law moved $500,000 of the ct-pres money from other charities to Santa Clara University as a condition of the approval of the settlement. You can see the potential problems of situations like that.
Ted Frank: I think it's also very important that class council fiduciary duty to their class, that they put the class members first, that they prioritize class members' relief as the 3rd circuit said in Baby Products Antitrust litigation class members are not indifferent between cash and money given to a third party and class council should not be either. The fact is class council isn't indifferent, class council would prefer to give money to their favorite charity than to give money to class members. Faced between the choice of having a ceremony where they're handing over a million dollar oversized check to their favorite charity and getting honored and getting their picture in the newspaper and issuing 200,000 $5 checks to a bunch of anonymous class members who probably won't even send a thank you card it's going to be very hard for an attorney to not want to prefer to give the money to ct-pres rather than to their clients and indeed you can go on Google and do an image search for ct-pres and over-sized check and see lots of ceremonies where this has actually happened.
Ted Frank: This is a fascinating case, we were very excited that the Supreme Court has taken it to resolve the conflicts among the circuits. I got into this issue when I wrote an essay for the Federalist Society back in 2007, and here we are 11 years later and looking at a possible dramatic reform of the law. I'm very excited to see that happen. I look forward to your questions.
Laura Flint: Let's go to audience questions. In a moment you'll hear a prompt indicating that the floor mode has been turned on. After that, to request the floor, enter star then the pound key.
Laura Flint: When we get to your request you'll hear a prompt and then you may ask your question. We will answer questions in the order in which they are received. Again, to ask a question please enter star and then the pound key on your telephone keypad. While we wait for our first audience question I'll ask one of my own. How do you think this case will be decided in the Supreme Court?
Ted Frank: Well, I'm right so I expect it'll be nine - nothing. At least that's what we hope. I don't see this as a partisan issue. I see this as a good government, just a civil justice this is the way the system is supposed to work. Attorneys are supposed to put their clients first and the class action system shouldn't be abused like this.
Ted Frank: Cy-pres is a bit of a misnomer here. The doctrine originated in the trust context, you would have a trust that had a charitable purpose. The charitable purpose would be frustrated or resolved or realized in some way and the trust could no longer use its money for that charitable purpose. What do you do with it? There's the doctrine called ct-pres which comes from the old French for ct-pres comme possible: as near as possible. You reformulate the trust for a new cause to recognize that you can no longer do it. So, in the nineteenth century somebody has a trust that was for the abolition of slavery. Slavery is abolished, what do you use the money for? The trust reformulated for the education of former slaves.
Ted Frank: Similarly, the March of Dimes used to be for curing polio. Polio is cured, it now deals with birth defects. It's been a distortion of that doctrine to transport it into the class action system and turn it into something where instead of giving money to class members, you're giving it to the lawyers' favorite charities.
Laura Flint: Again, to ask a question please enter star then the pound key on your telephone key pad. While we wait for a question I'll make a brief announcement: our next Teleforum conference call is scheduled for next Thursday, May 24th. That call will be on the book "Speak Freely: Why Universities Must Defend Free Speech" and it'll feature professor Frederick Schauer of UVA, professor Keith E. Whittington at Princeton, and our moderator Anthony Deardurff of the faculty division of The Federalist Society. Again, to ask a question please enter star then the pound key on your telephone key pad.
Laura Flint: Not seeing any, has there been any recent Supreme Court cases on this issue?
Ted Frank: There have not. This is the first Supreme Court case in over a decade on class action settlements at all and this is the first one to address the ct-pres issue at all. I will say, as long as we have people on the phone who are interested in the topic, that we're still looking for pro bono help. There are a number of organizations that have expressed interest in writing amicus briefs that are looking for pro bono support and we'd be happy to help match you with organizations if you're interested in this topic and would like to write upon it, or if you just have questions in general or you're a class member in another case where there's a ct-pres issue we're happy to take on those sorts of pro bono representations.
Laura Flint: I'll make a final call for questions, again to ask a question please enter star then the pound key on your telephone key pad. Not seeing any questions, do you have any final remarks?
Ted Frank: Thank you for your time and happy to talk to people about this issue.
Laura Flint: On behalf of The Federalist Society I wanna thank Ted for the benefit of his valuable time and expertise today. We welcome listener feedback by email at email@example.com. Thank you all for joining us, we are adjourned.