Argument analysis: Justices skeptical of “cy pres” class-action settlements

It’s not hard to see where the justices are leaning in Frank v. Gaos, the first important class-action case of the year. This case involves a “cy pres” settlement, a common device in class actions that award trivial sums to a large class of plaintiffs. When the costs of identifying class members and distributing proceeds make it impractical to locate and identify all of the plaintiffs, courts commonly approve a settlement that takes a portion of the settlement proceeds and distributes them to some public-interest or charitable recipient that serves an interest parallel to the interests served by the judgment in the case. Those arrangements are called “cy pres” settlements on the theory that they come as close as possible (“cy près comme possible,” in Norman French) to awarding damages to the plaintiffs.

The great majority of those cases distribute a portion of the settlement that goes unclaimed when it is impractical to locate all members of a large class. This case, though, is a “full” cy pres case, which distributed the entire settlement on a cy pres basis. The problem is that the entire settlement amount was $8.5 million (owed by the defendant Google to a class of more than 100 million members, in a privacy challenge to Google’s practice of sharing information about its customers’ internet searches). After attorney’s fees, the settlement amounted to approximately 6.5¢ to each of the class members. Concluding that it was not feasible to distribute the fund to the class members (because it would cost more than 6.5¢ per plaintiff to make a distribution), the lower court instead, after awarding $2.1 million in attorney’s fees, distributed the remainder of the settlement fund to initiatives studying internet privacy and involuntary information-sharing at a variety of locations including such institutions as Carnegie Mellon University, AARP, and the law schools at Harvard, Stanford and Chicago-Kent.

One thing that is clear is that this case will not produce a ringing endorsement of cy pres settlements, as the attitudes of the justices suggested perspectives ranging from deep skepticism to well-settled hostility. One salient possibility, which consumed a fair share of the argument time, is that the court will conclude that the plaintiffs lacked standing under the Supreme Court’s 2016 decision in Spokeo v. Robins. The Spokeo court held that a plaintiff in federal court cannot establish standing simply by alleging a violation of a federal statute; the plaintiff must identify some cognizable real-world harm. The problem in this case is that the trial court’s reason for concluding that the class-action plaintiffs had standing was precisely the reason later rejected by the Supreme Court in Spokeo. It might be that the plaintiffs could establish standing on some other theory, but the case before the Supreme Court, in its current posture, does not include any explanation of how the plaintiffs have standing.

The U.S. solicitor general pointedly raised this problem in the government’s brief, suggesting that the court might wish to send the case back to the lower courts to let them address the problem in the first instance. It is clear from the argument that the justices take the problem seriously, though it is not at all clear what they will do about it. Justice Samuel Alito (the author of the court’s opinion in Spokeo) seemed to think that the existing allegations of the complaint (written before Spokeo) are so plainly inadequate that the court should simply dismiss the complaint out of hand: “It’s a question of law. … If it wasn’t alleged properly, … then there isn’t any standing. Why … is a remand necessary?” In response to the suggestion that the standing problem had not been fully briefed, he asked whether it made sense for the court to ignore the defects of the existing complaint just “to see whether the plaintiff might be able to come up with some additional allegations.” At points in the argument, Justice Stephen Breyer seemed to have the same perspective, asking, “[W]here is an allegation of some kind of injury that would actually concretely and particularly hurt him?” Other justices, though – Justices Ruth Bader Ginsburg and Neil Gorsuch – seemed to think that it might be appropriate to remand the matter for the lower courts to consider the standing question.

On the merits of the cy pres question, several of the justices expressed great skepticism about the propriety of the “full” type of cy pres settlement at issue here – in which the plaintiffs in the class receive no recovery at all. The most favorable perspective was that of Justice Sonia Sotomayor, who emphasized an amicus brief from Harvard professor William Rubenstein showing that full cy pres settlements are extremely rare: Rubenstein’s research found that only 18 of them have ever been approved. Sotomayor observed that it’s “not as if it’s occurring routinely.” And agreeing that the petitioner, Theodore Frank, who argued the case on his own behalf, could “point to some potentially abusive situations,” she viewed all of Frank’s examples of “abusive” settlements as coming from cases in which “the circuit court rejected a cy pres award.” So, she suggested, “[i]t seems like the system is working.”

Breyer also suggested a similarly guarded approach, asking whether it would work if the court “[di]dn’t say never” to full cy pres settlements, but obligated lower courts to “scrutinize very carefully” those cases, recognizing that “what’s happening in reality is the lawyers are getting paid and they’re making sometimes quite a lot of money for really transferring money from the defendant to people who have nothing to do with it.”

The three other justices who spoke most frequently to the subject – Chief Justice John Roberts, Alito and Justice Brett Kavanaugh – all expressed more serious doubts about the fundamental propriety of the arrangement. Alito, for example, repeatedly asked about the likelihood that the class members would support distributions to the named beneficiaries. For example, he asked early in the argument whether “[i]n a case such as this, is any effort made – and would it even be possible – to determine whether every absent class member or even most of the absent class members regard the beneficiaries of the cy pres award as entities to which they would like to make a contribution?” With mock incredulity, he then went on to comment: “So the parties and the lawyers get together and they choose beneficiaries that they personally would like to subsidize? That’s how it works?”

Roberts focused on two general points. One was the idea that the indirect benefit provided by a cy pres award is simply too remote to count as relief. As he put it at one point: “I mean, I think you either decide the cy pres award provides relief or it doesn’t provide relief. If it doesn’t provide relief, you don’t get a fee for it.” Later, more pointedly, he scoffed at the idea that the problem at issue in this case “is going to be meaningfully redressed by giving money to AARP [one of the cy pres beneficiaries]. … As if … this is only a problem for elderly people? … Including a group that engages in … political activity, having nothing to do with the inability of elderly people to conduct searches?”

Roberts also repeatedly noted the appearance of impropriety that plagues the selection of beneficiaries. At one point, for example, he asked whether counsel for Google, Andrew Pincus, would “agree that the district court should never be the one suggesting possible recipients of the funds of a settlement he has to approve.” Later, in the same vein, he suggested that “it’s just a little bit fishy that the money [paid by Google as defendant] goes to a charity … that Google had contributed to in the past.”

For his part, Kavanaugh repeatedly emphasized how “strange” it is to give the proceeds of class litigation “to people who weren’t injured at all, who have affiliations with the counsel.” He repeatedly asked why it wouldn’t “always [be] better to at least have a lottery system, then, that one of the plaintiffs, one of the injured parties gets it, rather than someone who’s not injured? Why isn’t that always more reasonable?” When counsel for the plaintiffs, Jeffrey Lamken, responded that a lottery system would be tantamount to treating membership in a plaintiff class as a lottery ticket, Kavanaugh responded “[a]t least [the award’s going to] someone who … paid for the lottery ticket as opposed to giving the billion-dollar award to someone who didn’t buy the lottery ticket. … It reduces, to pick up on the Chief Justice’s comments, the appearance of favoritism and collusion, which is rife in these cases.”

Alito’s last comment of the hour captured the tone on which the argument ended:

How can you say that it makes any sense? The purpose of asking for compensation, it’s not injunctive relief that would benefit a broad class, … it’s compensation for the … class members. And at the end of the day, what happens? The attorneys get money, and a lot of it. The class members get no money whatsoever. And money is given to organizations that they may or may not like and that may or may not ever do anything that is of even indirect benefit to them.

An argument like this one could lead in several different directions. The court could reverse the judgment, holding that the plaintiffs have failed to make allegations sufficient to show standing. Perhaps a bit more likely, the court could send the case back for more consideration of the standing question. Or the court could reach the merits and address the cy pres topic directly. If it does reach the merits, I think the most that the parties to the settlement can hope for is a sharply critical opinion suggesting that full cy pres settlements are appropriate only in the rarest of cases – and sending this settlement back for re-evaluation by the courts below.