Supreme Court Expresses Skepticism Towards Cy Pres Class Action Settlements. On October 31, 2018, the Supreme Court heard arguments in Frank v. Gaos, an appeal from a Ninth Circuit case involving objections to a cy pres class action settlement for alleged privacy violations. Cy pres is short for the French phrase “cy près comme possible” (“as close as possible”), referring to an equitable doctrine from trusts and estates law for effectuating a testator’s intent in making a charitable gift. In re Google Referrer Header Privacy Litig., 869 F.3d 737, 741 (9th Cir. 2017), cert. granted sub nom. Frank v. Gaos, 138 S. Ct. 1697, 200 L. Ed. 2d 948 (2018). In class actions, cy pres allows a court to distribute unclaimed or non-distributable portions of a class action’s settlement fund to the “next best” class of beneficiaries for the indirect benefit of the class. Id. Courts have discussed potential dangers of cy pres in class actions, such as issues of fairness, self-interest, and the appearance of impropriety of judges and outside entities dealing in the distribution of settlement money. See, e.g., Nachshin v. AOL, LLC, 663 F.3d 1034, 1038-39 (9th Cir. 2011) (expressing concerns and criticisms).
Facts of the Case and Settlement. The plaintiffs claimed that the defendant included user’s search terms in the URLs of its search results pages—meaning that if a user clicked a link on a results page, the destination website would receive the user’s search terms in a “referrer header.” In re Google Referrer Header Privacy Litig., 87 F. Supp. 3d 1122, 1126–27 (N.D. Cal. 2015), aff’d, 869 F.3d 737 (9th Cir. 2017). Web analytics services could also obtain and disseminate this information. Id. The plaintiffs complained that the disclosure of their search information could include personal or highly sensitive information, and asserted claims for violation of the Stored Communications Act, 18 U.S.C. § 2701, and numerous state claims. 87 F. Supp. 3d at 1127.
The parties in the case ultimately agreed to settle. The defendant was to pay $8.5 million to a settlement fund, to be divided by: (1) distributions to certain cy pres beneficiaries, such as the World Privacy Forum, AARP, and to various universities, including alma maters of some of the plaintiffs’ attorneys; (2) $2.125 million in attorneys’ fees and costs; and (3) $5,000 for each named plaintiff. Id. at 1129-30. The defendant would also provide certain “FAQ” information on its website and provide other disclosures relating to how information from users’ searches would be disclosed, but was not required to change its search, analytics, or web history practices or functionality. Id.
District Court and Ninth Circuit Decisions. A district court approved the final settlement in March 2015, finding that the settlement met Federal Rule of Civil Procedure Rule 23(e)’s requirements for being “fair, adequate, and reasonable.” Id. at 1138. The court also found that it would treat the plaintiffs, some 129
million individual users, as a class, and also rejected objectors’ arguments for decertification of the class unless class members received direct payments from the proposed settlement. Id. at 1128-29. The court found that (1) a wholly cy pres award was appropriate because the award was non-distributable, (2) Rule 23(b)(3)’s superiority requirement was unaffected by whether the award was cy pres, (3) there was a substantial nexus between the cy pres recipients and the interests of the class members and there was no evidence that the parties’ relationships with beneficiaries influenced the selection process, and (4) the attorney’s fees were reasonable. See generally id. The Ninth Circuit also approved the settlement; however, one judge dissented in part, noting “[that] 47% of the settlement fund is being donated to alma maters of class counsel raises an issue.” In re Google Referrer Header Privacy Litig., 869 F.3d at 739, 748; see id. at 750 (suggesting vigilance for explicit collusion and for more subtle self-interest and conflicts in dissent).
Issues on Appeal and Supreme Court Oral Arguments. The issues presented to the Supreme Court were whether a cy pres class action settlement that provided no direct relief to class members supported class action certification, and whether the settlement met requirements to be “fair, reasonable, and adequate.” During oral argument, significant discussion involved standing issues of the class plaintiffs. The Court was also skeptical of cy pres-only settlements. The comments of the Justices ranged from noting that such settlements are very rare, to proposing not to foreclose them completely (but subjecting such settlements to greater scrutiny), to expressing severe doubts regarding the propriety of such settlements at all. Id.
Supreme Court Request for Further Briefing on Standing. In November 2018, the Court requested supplemental briefing on whether the plaintiffs have standing. Thus far, the Court has not requested reargument, which indicates that the Court may decide the case on standing issues alone. Such a decision may leave open utilizing similar cy pres settlements such as the one in Frank v. Gaos, at least in the near term.
Takeaways on Cy Pres Class Action Settlements. In sum, in cy pres class action settlements, parties should be wary of how beneficiaries are selected, who they are, and should conduct robust due diligence, particularly where class members will receive little or no compensation or direct benefit.
Further, cy pres settlements similar to Frank v. Gaos that provide no direct benefits to class members may be susceptible to greater scrutiny, skepticism, and risk of challenge, even if courts may nevertheless ultimately approve them.