Past posts have noted that federal courts have become increasingly skeptical of class-action settlements that contain a cy pres component.  Another recent example is In re Groupon, Inc., Marketing & Sales Practices Litigation (S.D. Cal.).  The plaintiffs in this case alleged that Groupon violated various federal and state consumer-protection statutes by marketing vouchers with allegedly improper restrictions on usage.  In settling the case, Groupon agreed to create a settlement fund of $8.5 million, of which $2.125 million would be paid to class counsel as attorneys’ fees.  The remaining funds would be used to provide settlement vouchers (good for 130 days) to class members who bought a Groupon voucher before December 1, 2011, but never used it.  The settlement provides that if more than $75,000 is left after the settlement vouchers are cashed in, a similar process would take place for customers who purchased Groupon vouchers after December 1, 2011.  Once the settlement fund diminishes to $75,000, the remainder would be divided between two designated advocacy groups for internet consumers.

U.S. District Court Judge Dana Sabraw had no problem with the amount of the settlement fund, the distribution of the fund to class members in the form of vouchers (rather than outright cash refunds), and the $2.125 million fee request.  But he bridled at the cy pres award to the advocacy groups, pointing out that neither group was expressly dedicated to addressing the specific wrongs alleged in the complaint.  As Judge Sabraw read Ninth Circuit precedent, there must be “a ‘driving nexus’ between the claims alleged in the case and the cy pres beneficiary.”  Judge Sabraw also questioned why the $75,000 “should be reserved for the cy pres recipients when there may be class members who could make a claim to those funds.”  Noting that he lacks authority to strike down only the cy pres component of the settlement, Judge Sabraw felt compelled to reject the entire settlement.

The obvious lesson to be learned here is that cy pres should be a tool of last resort, not a standard component of every settlement.  This settlement almost surely would have been upheld if the fund were $8.425 million, instead of $8.5 million.  And for that reason, I don’t think that there could be any logically valid objection if the settlement instead provided that if $75,000 or less is left over after all class members submit their claims, that amount would revert to Groupon.  But in hindsight, it’s hard to understand why the parties felt the need to include a cy pres award for such a modest amount when that feature would subject the entire settlement—which could result in millions of dollars of value to the class—to far more searching scrutiny.