Honoring a time-tested philanthropic tradition
In modern litigation, the term “cy près” refers to the act of designating unclaimed class funds to public interest organizations whose work furthers the interests of the class and is tied to the purpose of the litigation. But the concept of cy près originated long ago in the law of charitable trusts in courts of equity. The cy près doctrine gets its name from the Norman French expression cy près comme possible, which means “as near as possible.” If the original purpose of a charitable trust became impossible, courts could amend the terms of the trust to re-designate the funds to a new purpose “cy près comme possible,” rather than allow the trust to fail.
Today, cy près is generally used only after class funds have been distributed to class members, but it has become impossible or impracticable to distribute some remaining portion of the class funds, such as in the following situations:
1. Some class members cannot be identified;
2. Class members have been identified, but some of them cannot be located after multiple attempts;
3. Some class members have not cashed their settlement checks within an allotted time period; and/or
4. The amount remaining is less than the administrative cost of distributing it (i.e., the cost of stamps, postage, and administrative work is greater than the funds that remain).
Under these circumstances, a court may permit the remaining funds to be given to a public interest organization whose purpose is aligned with the interests of the class. The organization is generally agreed upon by all parties and reviewed by the court early on, before any class funds have been distributed. Cy près designees must undergo rigorous judicial review and meet standards set by federal and state courts.
The American Law Institute’s (“ALI’s”) Principles of Aggregate Litigation—widely considered an authoritative view on the subject—requires a link between the goals of the litigation and the work of the cy près designee. “The court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class.” A.L.I. Aggregate Litig. § 3.07(c) (2010). The Advisory Committee on Rules of Civil Procedure has declined to include any explicit provision on cy près principles in Rule 23 or elsewhere, concluding that the ALI’s Principles provide sufficient guidance.
Federal courts require “a driving nexus between the plaintiff class and the cy près beneficiaries.” Dennis v. Kellogg Co., 697 F.3d 858, 865 (9th Cir. 2012) (quoting Nachshin v. AOL, LLC, 663 F.3d 1034, 1038 (9th Cir. 2011)). “A cy près award must be guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members, and must not benefit a group too remote from the plaintiff class.” Id. (internal quotation marks and citation omitted).
The Ninth Circuit and other federal courts routinely review cy près designees to ensure they will use any remaining funds to further the interests of the class. Recently, the Ninth Circuit did just this in Fraley v. Batman, 638 F. App’x 594 (9th Cir. 2016). The Court reviewed an objection to the district court’s approval of a $20 million class settlement of a case involving Facebook’s “sponsored stories” advertising program. The Ninth Circuit affirmed the settlement, including the cy près provision, concluding that an appropriate nexus existed between the issues underlying the case and the cy près recipients—consumer protection organizations that focused on “the very issues raised in plaintiffs’ complaint.” Id. at 597.
A growing number of states have enacted statutes or rules to ensure cy près grants are appropriate uses of residual funds in class actions. California, for example, enacted Code of Civil Procedure § 384, which requires in class actions a determination of the total amount payable to class members and a subsequent accounting of unpaid class funds, and specifies that such funds be subject to cy près distribution. Cal. Civ. Proc. Code § 384. The express legislative intent is “to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action, or to promote justice for all Californians.” Id. § 384(a). Section 384 permits undistributed funds to go to “nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.” Id. § 384(b).
Alternatives to cy près are reversion to the defendant and escheat to the state, both of which are problematic. To allow left-over funds to revert to a defendant in such situations would not only be a windfall but might also create an incentive for a defendant to insist on an onerous claims process or otherwise actively deter class members from filing claims. Escheat to the state may not be an effective means of furthering the interests of the class, particularly when the policy or practice at issue was in a realm with little or no government involvement (e.g., failure to pay wages).
Today, cy près awards maintain a time-honored philanthropic tradition, allowing class settlements and awards to further the interests of the class, even when their original purpose can no longer be fulfilled.
Update 04.30.18: SCOTUS adds Frank v Gaos to fall, 2018 docket
The case challenges the $8.5-million settlement of a class action brought against Google, which alleged that the search engine had violated its users’ privacy by disclosing their search terms to other websites. Approximately $2 million of the settlement went to the lawyers for the plaintiffs, and the named plaintiffs themselves received a few thousand dollars each. But the remainder of the settlement – approximately $5 million – went to groups that work on privacy-related issues, including the World Privacy Forum and the alma maters of the plaintiffs’ lawyers.
Ted Frank, a well-known attorney who frequently challenges class-action settlements, objected to the Google settlement, but the district court approved it over his objections. The U.S. Court of Appeals for the 9th Circuit affirmed, explaining that district courts can approve cy pres settlements of class actions as long as they are “fair, adequate, and free from collusion.” The justices will now review that ruling.