Limits on class-action suits good for courts

Imagine that you get a congratulatory note in the mail because you won a multimillion-dollar settlement in a class-action lawsuit.

Only problem is, you didn’t even know you were involved in the case, so what does your victory mean for you? You get nothing, but the lawyers who brought the lawsuit will be paid handsomely, and some obscure charities also get big financial windfalls.

This is precisely what happened not long ago to 66 million plaintiffs covered by a 2009 class-action lawsuit against America Online. The good news, however, is that the 9th U.S. Circuit Court of Appeals threw out this settlement and in the process placed some much-needed curbs on the use of class-action settlements as vehicles to create charitable slush funds.

This practice of giving undistributed settlement money to third parties (often charities) is known as cy-pres (pronounced “see-pray”), which alludes to a French expression for “next best” or “as close as possible.” The idea is that in some cases, it is simply impossible or impractical to compensate members of a wronged class, usually because they either cannot be located or don’t respond when informed of their status.

In this case, AOL had earned only $2 million on the actions that sparked the lawsuit, which was unilaterally placing ads in the email footers of its 66 million customers. Even a settlement worth 10 times that amount, at 30 cents per plaintiff, would cost more to distribute than it would be worth. In such cases, courts will often allow a cy-pres settlement in which proceeds go to a charity suggested by the plaintiffs or selected by the judge that will at least theoretically benefit the class.

Unfortunately, judges in our system sometimes take liberties with cy-pres awards.

In the AOL case, the district court judge approved sending money to a number of local Los Angeles charities whose purposes were completely unrelated to any issues involved in the case, such as cyberprivacy. The district court judge’s husband just happened to sit on the board of one of the charities receiving the cy-pres funds.

But then Ted Frank, who heads the justly lauded Center for Class Action Fairness, challenged the settlement and the 9th U.S. Circuit Court of Appeals agreed with him, over the objections of both AOL’s and the plaintiffs’ attorneys. The court noted that the “proposed awards fail to (1) address the objectives of the underlying statutes, (2) target the plaintiff class or (3) provide reasonable certainty that any member will be benefitted.”

This ruling is important for two main reasons: First, it establishes that the doctrine of cy-pres does not create a slush fund for lawyers and judges to help the charities of their choice. Second, if the ruling discourages this abuse in the future, it will prevent lawyers from taking cases they know won’t ever benefit their clients, in the mere hope of generating large cy-pres awards that inflate their own fees. And curbing this sort of lawsuit abuse helps everybody who cares about preserving the credibility of our courts.

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