Cy Pres Distributions in Class Action Settlements

Thursday, January 1st, 2009 at 12:00 am by Sam Yospe
Sam Yospe, Cy Pres Distributions in Class Action Settlements, 2009 Colum. Bus. L. Rev. 1014

In 1979, the plaintiffs and defendants agreed to a settlement in In re Folding Carton Antitrust Litigation, the largest antitrust settlement of its time. As a result of the settlement between a nationwide class of purchasers of folding cartons, the defendants agreed to contribute approximately $200 million to a settlement fund to be distributed in accordance with an agreed upon “plan of distribution.” Once the plaintiff class recovered, approximately $6 million was left in the fund–“a result of various factors including high investment yield on the settlement fund, exceptionally low per dollar administration expenses and a small and dwindling number of late claims filed.” After determining that neither the defendants nor the plaintiff class had any right to the residual funds under the terms of the settlement agreement, the court was left with what it called a “novel administrative problem”–what to do with these excess funds. While the Folding Carton court faced the “novel” problem of how to appropriately distribute the remaining funds, this is no longer a unique situation. Once settlement payments have been made, there are often residual funds–funds left over after each class member has been compensated. Residual funds can remain, for example, when class members do not submit claims, cannot be located, or fail to cash their settlement checks. For example, in a recent case, a group of defendant modeling agencies settled a lawsuit filed by a class of models for violating antitrust law and overcharging their clients. Despite efforts of class counsel to distribute the settlement amongst models who were overcharged by the defendants, many potential class members did not submit claims, and $6 million remained in the fund. In another case, the defendants were sued for allegedly fixing prices of NASCAR souvenirs. As part of the settlement the defendants paid $5.6 million into a fund. After the claiming deadlines passed, “[c]laims were submitted for substantially less than the cash amount of the settlement” and over $2 million remained in the fund. In some cases, parties contemplate the possibility of residual funds in the settlement agreement. In these cases, judges simply allocate the residual funds in the manner that the parties agreed. However, if the parties do not contemplate how the funds should be allocated, the judge has a great amount of discretion. Most courts recognize four options: the court can (a) order that the funds be returned to the defendant; (b) apply the funds prospectively for the indirect benefit of the class; (c) distribute the funds pro rata to the class members; or (d) declare that the funds escheat to the state or to the United States treasury. This note will be primarily concerned with the most controversial of these options, applying the funds prospectively for the indirect benefit of the class. This is called the cy pres doctrine, an equitable doctrine that has its origins in trust law. While courts have wide latitude to determine how to distribute cy pres money, the most common method is to give the residual funds to a third party, generally a charity.

This note will argue that, while cy pres is a valuable process, the discretion afforded judges often makes distributions arbitrary and unpredictable. Part II provides an overview as to the discretion afforded to judges, with a focus on a recent case, Diamond Chemical Co. v. Akzo Nobel Chemicals B.V. Part III addresses two broad problems with the current approach. Often, the cy pres approach suffers from distribution problems: the lack of “nexus” between the chosen cy pres beneficiaries and the underlying litigation, and the potential for bias that exists when judges have complete discretion. Additionally, this note will argue that the cy pres approach, as currently implemented by the courts, often causes efficiency problems. Part IV discusses the limitations on judicial discretion, focusing on the rare circumstances in which district courts are overturned for abuse of discretion. Finally, Part V proposes some solutions to the current situation. These solutions include using the other distributive mechanisms at the court’s disposal, limiting the role of the judge to that of an arbiter, limiting the role of the lawyers involved in the process, and encouraging parties to contemplate residual funds in their settlement agreements. An additional solution is that Congress could enact a statute to control cy pres procedure, modeling the statute after one of the several state statutes that have recently been enacted.

Author Information

Columbia University Law School, J.D. Candidate 2010.