Will SCOTUS Close Cy Pres Loophole in Class Action Litigation?

Suppose there were a company whose minions went around whacking people in the head with two-by-fours.  Then, suppose that in response, the multiple victims of said whacking joined a class-action lawsuit against the corporation and won their case.  Now, imagine that rather than any damage award going to the plaintiff class members, the money instead went to various organizations, including non-profit and academic institutions, that advocate policies favoring two-by-four head-whacking by the very industry that includes the defendant company.  If that seems absurd, welcome to the often maddening outcome known as the cy pres award in the world of class-action litigation.

From the French cy près comme possible, meaning “as near as possible,” cy pres is supposed to provide a reasonable alternative to awarding damages stemming from class-action lawsuits where the members of the injured class cannot effectively be compensated by the penalties collected in settlement.  So, in my exaggerated example above, if ten million class members are whacked by two-by-fours, and the company settles for $20 million, it may not be practical to distribute two bucks a head (literally) to the class, especially after the plaintiff attorneys take their cut (more about them below).

So, in lieu of paying the class members themselves, the court may order a cy pres award to an organization, or organizations, that, in theory, work to benefit the class members’ interests indirectly.  For example, the money in my hypothetical scenario might go to the American Society for the Prevention of Two-By-Four Whacking.  But this is often not what happens.  

In fact, just the opposite occurs according to the petition granted cert by the Supreme Court in Frank v. Gaos, for which oral arguments will be heard tomorrow.  The petition alleges that district courts too-frequently approve cy pres awards without “rigorous analysis,” and this results in (among other problems) victim classes winning settlements that only serve to fund institutions who advocate on behalf of the very parties they sued.  

Cy Pres Awards Fund Google’s Anti-Copyright Agenda

The aberrant nature of cy pres awards is the basis on which three musician/copyright activists—David Lowery, Blake Morgan, and East Bay Ray—filed an amicus brief in Frank v. Gaos, written by attorney Antigone G. Peyton. The brief describes how cy pres awards, resulting from lawsuits Google has settled, end up funding policy advocacy that favors Google, including the company’s global assault on copyright law.  “Artists such as amici watch in powerless amazement as the lower courts allow millions in cy pres awards to be funneled to Google’s academic and nonprofit influencers through dubious class action settlements, …” the brief states.

For instance, the Electronic Frontier Foundation apparently received $1 million of the $17 million Google paid in 2011 to settle a consumer privacy lawsuit (the Google Buzz case) filed by the Federal Trade Commission.  An otherwise reasonable circumstance for issuing a cy pres award, this is just one example where Google wins for losing—paying a “fine” for one transgression that directly funds organizations that generally advocate public policy in its favor.  Plus, Google gets a tax break for giving money to non-profit institutions!

Thus, Lowery et al demonstrate, in context to the larger complaint against cy pres, how copyright owners are injured through what almost amounts to shadow funding of organizations and academic institutions that consistently attack copyright through litigation and amicus briefs, academic papers, and public communications. Other parties named in the brief as receiving Google money through cy pres settlements include Public Knowledge, the Center for Democracy and Technology, the Berkman Center, and Stanford’s Center for Internet and Society.  

The Bigger Picture

Naturally, the broader complaint in Frank v. Gaos demonstrates the negative effect of cy pres awards in class actions beyond complaints against the internet industry, although the litigants here do arise from yet another Google privacy violation case settled in 2010. The petitioners’ complaint lays out the means by which an $8.5 million settlement in that case first paid class counsel a substantial fee and then funded organizations with existing relationships to Google.  From the petition …

“There are recognized conflicts of interest between class counsel and the class, because the defendant cares only about its total cost of settlement, while every dollar going to class members is a dollar that will not go to class counsel’s fees.  In the absence of legal rules explicitly forbidding such gamesmanship, class counsel and settling defendants have a variety of gimmicks available in a class-action settlement to maximize class counsel’s proceeds while minimizing the cost of settlement to the defendant.”

Essentially, the courts’ tendency to “rubber stamp” cy pres awards in these settlements creates a powerful incentive for class counsel to abrogate its responsibility to the class members because counsel’s interests and those of the defendant become deviantly aligned.  To put it in stark terms, the attorney who graduated from Harvard Law has an all too-tempting opportunity to earn a substantial fee for himself and also negotiate a donation to his alma mater and call it a “win” for his clients, who get nothing.  

Further, the petition asserts a constitutional complaint arising from the fact that a cy pres award may infringe class members’ First Amendment rights by way of forcing them to support organizations or institutions they would never choose to fund.  For instance, because the AARP was one of six recipients of the cy pres award in this particular Google settlement, the petition states, “Petitioners also objected to being compelled as a class member to subsidize the AARP’s advocacy and lobbying on controversial policy issues, which petitioner Frank often opposes.” 

Few readers of this blog need to be convinced that “digital rights” organizations such as those mentioned above present themselves as a public-serving groups while advocating policy positions that are often insidiously industry-serving.  But at least direct donations by Google to EFF et al are clearly identifiable, while cy pres awards create a layer of obfuscation between the effective “donor” and the recipient of substantial operating funds.  

From the broader petition, it seems that every citizen who doesn’t want to be whacked by a metaphorical two-by-four has an interest in the Supreme Court’s decision in this case; but copyright owners should be keenly aware of the outcome in Frank v. Gaos for the reasons described.  As the amicus brief concludes, “Allowing cy pres awards to continue along their current path means that the courts are complicit in allowing Google to fund its network of academics, think tank partners, and friendly nonprofits at the expense of class members.”  

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