Largesse or license - cy pres a weapon of class warfare?

The SE Texas Record Jun. 21, 2011, 6:00am




When a court orders cy pres awards to be distributed to charities or other unrelated nonprofit organizations, is the court being charitable or licentious with these unclaimed funds from class action suits?

Kelly Swanson, an attorney with the St. Paul, Minn., law firm of Larson King, along with Shawn Raiter, a firm partner, wrote an article citing two problematic cases.

One example Swanson and Raiter noted was the case of In re Airline Ticket Commission Antitrust Litigation, arising out of Minnesota federal court. The Eighth Circuit Court of Appeals found "that the trial court had twice abused its discretion in regard to a cy pres distribution in a nationwide class action."

The first instance of abuse occurred when the court "merely adopted liaison class counsel's proposed list of mostly local recipients, which had no relationship to the class action suit."

The second act that the Appeals Court felt was abusive by the lower court was the failure to distribute the unclaimed funds on remand consistent with the Eighth Circuit's opinion in the case's first appeal.

"The trial court's failure to tailor its cy pres distribution to the nature of the underlying lawsuit served as the underpinning for the Eighth Circuit's rulings on both appeals," Swanson and Raiter wrote.

The second case Swanson and Raiter cited was Fears v. Wilhelmina Model Agency, Inc., arising out of U.S.District Court for the Southern District of New York. Here the court had the problem of more than $6 million in unclaimed funds and no patently obvious beneficiary.

It then invoked cy pres and instructed that the residual money be doled out to seven different charities and non-profit organizations that were somewhat related to the class made up primarily of females.

Among those receiving funds were eating disorder programs. The judge, Harold Baer, said he consulted with several physicians and hospital administrators to determine the most appropriate use of the funds before issuing this ruling.

Swanson and Raiter wrote that the Second Circuit Court of Appeals disapproved of the trial court's actions. It did not go as far as to say that there was an "abuse of discretion." But it did order the trial court to consider giving the residual funds to actual plaintiffs.

The trial court, for its part, took great lengths to identify appropriate beneficiaries of the excess funds. It determined that the cy pres distribution of the funds would avoid making the few models who filed claims very wealthy. It was the "next best" compensation use for the indirect benefit of the class.

Swanson believes the courts act conscientiously for the most part despite the problems.

"What struck me was that the courts really wanted to be asked how the funds are distributed," she said. "The courts do not want any collusion. For a period of time the courts were not being overly vigilant. They are more involved now. "

The mother of all cy pres cases is the 1999 Toshiba settlement. It is arguably the largest recovery of economic damages in a class action lawsuit. The lawsuit, filed in federal court in Beaumont, Texas, resulted with Toshiba and NEC settling with the plaintiffs to pay $2.1 billion after it was alleged that they sold millions of defective laptop computers.

The attorneys in the case received $147.5 million for their fees. While many could not understand Toshiba settling, executives felt that the company was at risk if they had lost in a trial.

U.S. District Judge Thad Heartfield of the Eastern District of Texas, a Clinton appointee who presided in the Toshiba case, defended the staggering legal fees, by stating that the fees represented a smaller percentage than usual.

It is these types of problems - and others more subtle - that have prompted criticism of cy pres. But there are those who not only defend cy pres, but also extol its virtues.

University of Pennsylvania law professor, Stephen Burbank, is one such person.

"What you are talking about is taking undistributed funds and using it for some worthy purpose," Burbank said. "Its propriety depends whether the substantive law policy is that of deterrence."

Burbank said that there is nothing inappropriate about a distributive plan if the substantive law is to deter wrongdoing. He said this is what makes the argument that cy pres is unconstitutional weak.

"The importance is that the defendants pay the money," Burbank said, "not that the claimants receive the money."

Representing the other side is Northwestern University law professor Martin Redish. He believes cy pres is wrong on a few different levels.

He believes cy pres awards are unconstitutional. He also says "favoritism" can be a problem.

The cy pres doctrine is "a fig leaf," Redish said.

He reminds people that the doctrine is not something that came about by American lawmakers.

It started in Norman law, developed between the 10th and 13th centuries, and was related to wills and trusts. The origins of its use in litigation he has traced to a 1972 University of Chicago Law Review article by Stuart Shepherd, who raised the possibility of using cy pres for litigation.

According to Redish, it was in a 1974 case that the cy pres doctrine was first brought out of the realm of trusts and wills, and into the realm of litigation. It has been a problem ever since, he said.

When asked why it continues if it is so obviously unconstitutional, Redish noted that he may be ahead of the curve. He believes that it will be declared so in the future.

But why would courts continue to sanction the practice now?

"Everybody in the process who is active has benefited by it," Redish said.

"The judges benefit because they get complicated class actions off their docket," he said. "The plaintiff's lawyers love it because they make a great deal of money out of this. Defendant's love it because they buy the end of the whole litigation."

Redish said the Constitution is the loser. Absent claimants are also potential losers - although he was quick to add that he has no supporting data to make this claim.

He believes the practice subverts the Constitution. The distribution of cy pres funds to those other than the claimants makes it a civil fine, Redish said.

Unlike Burbank, Redish believes that a civil fine goes against the law.

"You cannot do this in a civil process. It is Rule 23 of Civil Procedure," he said.

By including charities as recipients for unclaimed funds the court is essentially adding a third party to the litigation. Then they are declaring an alternative solution.

"There is no second best," Redish said, "Either the defendant committed the wrong or not. The charity has nothing to do with this. There are now three parties involved. "

There are ways to eliminate cy pres, he said.

According to Redish, Congress can overrule it, it could be declared unconstitutional or judges can simply rule against cy pres distributions.

Some who would like to end the practice are pessimistic about its demise.

Judd Serotta is a lawyer at the Philadelphia firm of Blank Rome. He said that in a day and age where charities need money and judges have unchecked power, they can satisfy their charitable leanings and earn goodwill by ordering cy pres funds distributed to various charities.

Serotta raises an interesting point. As good as it looks to distribute cy pres money, it looks just as bad to oppose it. People are reluctant to say that giving money to charities is a bad thing.

"People have charitable instincts - including judges," Serotta said. "The litigants have no incentive to oppose this. The lawyers want to get paid. The defendants are content to end the litigation and judges want to move the case from the docket."

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