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Supreme Court Denies Review—This Time—Of Challenge To Cy Pres Class Settlement

Posted in Class Action Settlements

For weeks, class-action practitioners have been waiting to see whether the Supreme Court would grant review in Marek v. Lane, a case involving a challenge to the cy pres component of the class settlement of the Facebook “Beacon” litigation. The Court did not, but Chief Justice Roberts issued a rare statement respecting the denial that sounded a warning to everyone involved in class-action settlements: At least some Justices are on the lookout for a case in which to address the propriety of cy pres settlements.

Here’s the background. The plaintiffs alleged that Facebook’s Beacon program violated a host of federal and state privacy laws. The parties reached a settlement requiring Facebook to pay up to $9.5 million to resolve the case, with $6.5 million to be paid in the form of cy pres relief to a new charitable foundation that would be established to promote online privacy. The settlement did not provide for the distribution of funds to any of the absent class members; the parties agreed that any payments to individual class members would have been so small as not to be worth writing checks. The district court ultimately approved the settlement and awarded plaintiffs’ counsel $2.36 million in fees and expenses and granted incentive payments to the named plaintiffs. The Ninth Circuit affirmed and denied en banc review over the dissent of six judges.

An objector, Megan Marek, petitioned for a writ of certiorari, represented by (among others) Ted Frank of the Center for Class Action Fairness. Marek sought review of whether a settlement featuring “a cy pres remedy that provides no direct relief to class members” is “fair, reasonable, and adequate”—as required by Rule 23.

As noted above, the Supreme Court denied review. But the Chief Justice’s statement respecting the denial of certiorari is well worth a read; it is a warning shot that—at some point—the Court may take up the question whether (and under what circumstances) cy pres is an appropriate way to settle class actions.

Chief Justice Roberts explained that the Facebook case was not the right vehicle for addressing the issue because “Marek’s challenge is focused on the particular features of the specific cy pres settlement at issue.” Another case, the Chief Justice suggested, might “afford[] the Court an opportunity to address more fundamental concerns surrounding the use of [cy pres] remedies in class action litigation.” According to the Chief, this non-exclusive list of concerns includes:

  • “when, if ever, such relief should be considered”;
  • “how to assess its fairness as a general matter”;
  • “whether new entities may be established as part of such relief,” and, “if not, how existing entities should be selected” to receive cy pres funds;
  • “what the respective roles of the judge and parties are in shaping a cy pres remedy”; and
  • “how closely the goals of any enlisted organization must correspond to the interests of the class.”

These questions—which the “Court has not previously addressed”—range from the operational details of how cy pres works to the fundamental question whether cy pres is permissible at all. And thus, while Ted Frank’s petition did not succeed in getting review of the Facebook settlement, there is no question that cy pres is now on the Supreme Court’s radar screen. Because “[c]y pres remedies … are a growing feature of class action settlements,” the Chief Justice opined that “[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies.”

What does this mean for companies facing class actions and the lawyers who defend them? Certainly any defendant who agrees to cy pres relief in a class settlement should be prepared for potential objections—and, if the most tenacious objectors are involved, for the possibility that those objectors will seek appellate and Supreme Court review. If defendants agree to cy pres settlements, those settlements should be negotiated and crafted with Chief Justice Roberts’ questions in mind. Within the world of cy pres settlements, there is a wide spectrum of possibilities, and the less troubling the features of such a settlement might appear to courts, the less likely it is that the Supreme Court will view the case as an appropriate vehicle for review.

There is a second issue lurking in the background of the Chief Justice’s opinion. In response to defendants’ arguments that class certification is improper because a class is unascertainable or a trial would be unmanageable, plaintiffs often argue that it doesn’t matter whether class members can be identified or cross-examined at trial, because so long as aggregate liability can be determined, any funds that can’t be distributed to individual class members can be paid out through a cy pres remedy. Yet that premise is open to debate: Cy pres payments in litigated class actions are exceptionally rare—in part because class actions that go to trial are so infrequent—and a number of courts have either concluded or suggested that defendants cannot be forced to make cy pres payments in the context of a litigated class action. Some of the questions in Chief Justice Roberts’ opinion indicate that he may be receptive to such arguments in an appropriate case.