March 2014: Class Action Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP
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Cy pres disbursements have become a popular feature of class action settlement agreements, but given the recent denial of certiorari in Marek v. Lane, Supreme Court guidance in the law of cy pres will have to wait until another day. Fortunately, it should be a short wait. In a rare statement regarding the denial, Chief Justice Roberts noted that “fundamental concerns” of cy pres provisions remain unaddressed and that the Supreme Court “may need to clarify the limits on the use of such remedies.” Marek v. Lane, No. 13-136, slip op. at 14 (U.S. 2013) (Roberts, C. J., statement respecting denial of cert.). That the Chief Justice elected to enter such a statement means the Court may be willing to address cy pres relief when the right circumstances arise.

A cy pres remedy is a settlement feature that assigns plaintiffs an indirect benefit, typically in the form of defendant donations to a non-profit relevant to the plaintiff’s asserted rights. Cy pres provisions are used in class action settlements when there is an issue about funds remaining after distribution or when it is impractical or impossible to identify class members.

The facts of Lane were intriguing. A Facebook advertising program, named Beacon, allowed defendant Facebook to send news alerts to a user’s friends about purchases made online. To obtain this information, Facebook partnered with many third-party retailers that were already collecting data about online consumers, including Travelocity, Fandango, Overstock.com, Zappos, Hotwire, and Gamefly. The case gained media attention because of the story of one of its named plaintiffs: Sean Lane filed the lawsuit after he bought his wife a diamond ring on Overstock.com, only to have her spot the purchase in a Facebook news feed, spoiling the surprise. Ellen Nakashima, Feeling Betrayed, Facebook Users Force Site to Honor Their Privacy, The Washington Post (Nov. 30, 2007).

According to the settlement approved by the district court, Facebook would obtain a full release from class members in exchange for terminating the advertising program and establishing and funding a foundation dedicated to protecting the privacy rights of Internet users. Lane v. Facebook, Inc., No. 08-3845, 2010 WL 9013059 at *6 (N.D. Cal. Mar. 17, 2010). The settlement was heavily criticized because, although it provided for attorney’s fees and compensation to class representatives, the absent class members would not receive any monetary relief. Moreover, because the privacy foundation effectively would be controlled by Facebook, critics like the Electronic Privacy Information Center argued that the foundation would function more like a public relations organization for Facebook than an effective tool for consumer privacy protection.

Cy pres distributions have been increasingly questioned by federal district courts, which must consider whether they meet the standard for class action settlements of Federal Rule of Civil Procedure 23(e)(2). Under the Rule, all aspects of a settlement must be “fair, reasonable, and adequate” for class members. See, e.g., In re Hydroxycut Mktg. and Sales Practice Litig., No. 3:09-md-2087 (S.D. Cal. Nov. 19, 2013) (denying final settlement approval after finding cy pres provisions did not benefit the class and expressing concern over the large size of the cy pres distribution); In re Thornburg Mortgage, Inc. Sec. Litig., 885 F. Supp. 2d 1097, 1111 (D.N.M. 2012) (finding a cy pres award “a bad idea and inappropriate,” and questioning cy pres generally).

Scrutiny also has come from the appellate courts. The Third Circuit has stated that cy pres distributions are “most appropriate where further individual distributions are economically infeasible,” but that these types of distributions of leftover funds may also be appropriate in other contexts. In re Baby Prods. Antitrust Litig., 708 F.3d 163, 173 (3d Cir. 2013) (vacating a $35 million class action settlement that awarded only $3 million directly to the class members). In contrast, the Second, Fifth, and Seventh Circuits have all held that cy pres awards are permissible only where it is not possible to compensate class members directly. See, e.g., Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007); Klier v. Elf Autochem N. Am., Inc., 658 F.3d 468, 474-75 n.15-16 (5th Cir. 2011); Hughes v. Kore of Indiana Enter., Inc., 731 F.3d 672, 675-76 (7th Cir. 2013).

A number of circuits have emphasized that a nexus must exist between a cy pres award and the class members’ interests. See In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 683 (8th Cir. 2002); Nachshin v. AOL, LLC, 663 F.3d 1034, 1038-39 (9th Cir. 2011). The Ninth Circuit most recently articulated its position in Lane, affirming final approval of the controversial settlement agreement and noting, over an ardent dissent, that, the cy pres recipient organization need not be “ideal,” so long as the connection between the recipient and the class is “substantial.” Lane v. Facebook, Inc., 696 F.3d 811, 821 (9th Cir. 2012) cert. denied, 13-136, 2013 WL 5878083 (U.S. Nov. 4, 2013).

On petition for certiorari, the Lane settlement objectors argued that the Ninth Circuit had split with the Second, Third, Fifth, Seventh, and Eighth Circuits in upholding the approval of a settlement under which all monetary relief went to the cy pres recipient and absent class members received no direct benefit. Petition for Writ of Certiorari at 19, 25, Marek v. Lane, No. 13-136 (2013). Although the Supreme Court did not address the parties’ arguments, Justice Roberts’ unexpected statement set forth a list of fundamental concerns relating to the use of the cy pres remedy in class actions, including “when, if ever, such relief should be considered”; “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.” Marek v. Lane, No. 13-136, slip op. at 14 (U.S. 2013). Although certiorari was denied in Lane, given the Supreme Court’s recent attention to class action jurisprudence, the activity in the federal courts, and the Chief Justice’s apparent interest, it may not be long before the fate of cy pres class action settlements is conclusively determined.

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