Controversy over Cy Pres Settlements

View Adam Doerr's Complete Bio at RBH.comFunds from a class action settlement are generally distributed to class members. But in some cases, not all funds are claimed. In others, it may not even be possible or practical to distribute any funds to individual class members. A “cy pres” distribution is one way of dealing with this issue. The concept comes from trust law and means “as near as possible.” The goal of a cy pres settlement is to distribute funds in a way that indirectly benefits the class members.

Supreme Court SmallLast fall, the issue of “cy pres” settlements got some press when Chief Justice Robert issued a warning note about the growing practice, agreeing with the denial of certiorari in Marek v. Lane, but stating that the Court may need to set limits on the practice in a future case.

Such concerns are not new – a 2007 New York Times article by Adam Liptak describes cy pres awards as “an invitation to wild corruption of the judicial process.” Other commenters have argued that the procedure has “vast ethical implications” and even described it as fostering “pathologies” in class action practice. Jennifer Johnston, Cy Pres Comme Possible to Anything is Possible, 9 J.L. Econ. & Pol’y 277 (2013); Martin Redish et al., Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617 (2010).

In North Carolina, the General Assembly has enacted legislation to “ensure that unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action or to promote justice for all citizens of this State.” N.C. Gen.Stat. § 1-267.10. The statute goes on to provide that unpaid funds should be used to fund the state’s Legal Aid system.

Business Court Judge Ben Tennille cited this statute in 2007, when he rejected settlement in Teague v. Bayer AG, a price-fixing case. The cy pres settlement would have distributed millions to the St. Jude Children’s Hospital and other nonprofit organizations. Judge Tennille objected that payments to these charities were “totally unrelated to the alleged victims and without regard to North Carolina public policy,” as expressed in the statute. He also took issue with the fact that most of the cy pres payments went to nonprofits in Tennessee, even though the funds were ostensibly paid to compensate for injuries to class members in North Carolina and other states. Because the Court of Appeals reversed Judge Tennille without discussing the cy pres issue, North Carolina law on these issues remains unresolved.

About Adam Doerr

Adam Doerr helps companies untangle complex litigation problems, with a special focus on class actions. He has handled class actions in state and federal court involving securities law, mergers and acquisitions, employment, and contract issues.