Supreme Court to Decide Permissibility of Cy Pres Awards in Class Action Settlements
The U.S. Supreme Court has agreed to decide whether parties to a class action may agree to a settlement that confers cy pres awards upon various nonprofit institutions and organizations, but provides no monetary relief for class members.
In Frank v. Gaos, plaintiff Paloma Gaos filed a class action against Google, alleging that the company violated her privacy rights when it allowed third-party websites to see her search queries. She sought monetary damages and certification of a nationwide class of all U.S.-based Google users. The parties entered into a class settlement that extinguished the privacy claims of the estimated 129 million people who used Google's search engine in the United States between 2006 and 2014.
In exchange, Google created an $8.5 million settlement fund that was used to pay plaintiffs' attorneys' fees (25% of the fund), "incentive awards" of $5,000 to each of the named plaintiffs, and cy pres awards to six educational institutions and other organizations to promote research, education, and initiatives relating to protecting privacy on the Internet. None of the settlement fund was disbursed to class members. Although the settlement required Google to disclose on its website how users' search terms are shared, Google was not otherwise required to make any changes to its practices.
The cy pres-only settlement was approved by the district court despite objections by certiorari petitioner Ted Frank, Director of Litigation for the Competitive Enterprise Institute and a frequent objector to class action settlements. The U.S. Court of Appeals for the Ninth Circuit affirmed the order approving the settlement. The Court of Appeals agreed with the district court that dividing the $5.3 million in net settlement proceeds remaining after payment of the attorneys' fees among 129 million class members would be "infeasible" because they would each receive "a paltry 4 cents in recovery," which is "a de minimus amount if ever there was one."
The Google case is significant because it represents the first time the Supreme Court has agreed to decide the parameters of cy pres relief in class action settlements. When certiorari was denied in a different case raising this issue in 2013, Chief Justice John Roberts noted the "fundamental concerns" raised by cy pres relief, including "when, if ever, such relief should be considered" and "how to assess its fairness as a general matter." He suggested that, "in a suitable case, this Court may need to clarify the limits on the use of such remedies." The Court has now decided that the Google case represents its opportunity to provide such clarification.
It is unclear whether the Court will confine its focus to cy pres-only settlements or will more broadly address class settlements that include cy pres distributions of settlement funds unclaimed by class members.
It also is worth noting that last June, the Department of Justice announced a new policy prohibiting DOJ attorneys from entering into settlements on behalf of the federal government that provide for cy pres payments to any non-governmental entity or person that is not a party to the lawsuit.
The Google case will be decided sometime next term. In the meantime, parties in class actions would be well advised to exercise caution in structuring settlements with cy pres relief.
The attorneys in Ballard Spahr's Consumer Financial Services Group and Litigation Department regularly defend against class actions in state and federal courts around the country.
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