Class Action Settlement Agreement May Establish Cy Pres Fund for Charitable Purposes — Issue of First Impression for 1st Circuit

From In re Pharma. Indus. Average Wholesale Price Litig. 2009 U.S. App. LEXIS 25536 (1st Cir. Nov. 19, 2009):

This circuit has not had occasion to consider whether settlement agreements in class actions may establish cy pres funds. Other circuits have approved agreements that provide for cy pres funds, particularly those negotiated at arm's-length by the parties. See A. Conte & H.B. Newberg, 4 Newberg on Class Actions § 11:20, at 28-31 (4th ed. 2002).

A cy pres distribution results from application of a legal doctrine that courts have imported into class actions from trusts and estates law. In trusts and estates law, cy pres, taken from the Norman French expression cy pres comme possible ("as near as possible"), "save[s] testamentary gifts that otherwise would fail" because their intended use is no longer possible.... Courts permit the gift to be used for another purpose as close as possible to the gift's intended purpose....

In class actions, courts have approved creating cy pres funds, to be used for a charitable purpose related to the class plaintiffs' injury, when it is difficult for all class members to receive individual shares of the recovery and, as a result, some or all of the recovery remains.... The use of a cy pres fund sometimes "prevent[s] the defendant from walking away from the litigation" without paying a full recovery because of practical obstacles to individual distribution....

Court-mandated cy pres distributions, as opposed to court-approved settlements using cy pres, are controversial. See Democratic Cent. Comm. of D.C. v. Washington Metro. Area Transit Comm'n, 84 F.3d 451, 455 n.2 (D.C. Cir. 1996); 3 Conte & Newberg, supra, §§ 10:20-24, at 529-39; 4 id. § 11:20, at 28. But "courts are not in disagreement that cy pres distributions are proper in connection with a class settlement, subject to court approval of the particular application of the funds." 4 Conte & Newberg, supra>, § 11:20, at 28. Because this case involves a settlement, we need not reach the questions raised by court-created cy pres funds.

Courts have approved cy pres funds in settlements in at least two circumstances.... First, cy pres settlement funds have been approved when it is economically infeasible to distribute money to class members.... Distribution of all funds to the class can be infeasible, for example, when class members cannot be identified, when the class changes constantly, or when class members' individual damages — although substantial in the aggregate — are too small to justify the expense of sending recovery to individuals. Mirfasihi, 356 F.3d at 784; Powell v. Ga.-Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997); 3 Conte & Newberg, supra, § 10:16, at 513 n.1. In these cases, some courts have permitted the parties to create a cy pres fund in lieu of a class payout.... That is not our situation. [The majority of the fund was to be paid out to victims.]

Second, courts have allowed parties to establish cy pres funds when money remained from the defendant's payout after money for damages had been distributed to class members.... This situation often arises because some class members never claimed their share.... Among other solutions, courts have approved giving money unclaimed after payout to class members to charities related to the plaintiffs' injuries.... This kind of cy pres fund is at issue in this case.

The settlement provision creating a cy pres fund here is somewhat unusual in its timing. Under the final settlement, all class members will receive treble damages before any money goes to cy pres. The parties already know that some original class members will not file claims because they are elderly or have died and their heirs will not stand in their shoes. They expect a significant amount of the $24 million will go unclaimed, and that expectation is supported by expert evidence predicting that class members will claim only about $ 17.2 million, leaving approximately $6.8 million left over. The parties have agreed that any remainder will go, after distribution of treble damages to class members, to cancer or patient-related charities.

Although unusually timed, the cy pres fund in this case, contrary to Howe's argument, is not taking damages away from the class members. The settlement permits all plaintiffs to claim and be paid their damages — indeed treble their damages — before any money is paid to charity through cy pres. This process is like other, routinely approved cy pres distributions. See, e.g., Powell, 119 F.3d at 705-06 (refusing, after money in a settlement fund remained, to distribute the rest to class members because "neither party ha[d] a legal right" to the unclaimed funds); In re Folding Carton Antitrust Litig., 744 F.2d 1252, 1253-54 (7th Cir. 1984) (holding a cy pres distribution was appropriate when $ 6 million remained in a fund created to pay costs and extra claims in a settlement because "neither the plaintiff class nor the settling defendants ha[d] any right" to the money). It would elevate form over substance to require the parties to wait until after all claims are paid before reaching an agreement as to how to distribute any remaining money to charity.

Howe nevertheless insists that the class members are entitled to receive any remaining money. She argues that, when deciding how to allocate remaining money, the primary consideration is whether it is economically infeasible to distribute the remaining proceeds to all claimants. Howe relies on and, in our view, Howe misunderstands the American Law Institute's ("ALI") recent draft of the Principles of the Law of Aggregate Litigation discussing the appropriateness of cy pres distributions in settlements. See American Law Institute, Principles of the Law of Aggregate Litigation § 3.07 (Apr. 1, 2009) (proposed final draft) [hereinafter "ALI Aggregate Litigation Draft"]. 11 The question before us is not whether the settlement complies with the ALI draft, but whether the district court abused its discretion in approving the cy pres part of the settlement. Cf. Bobby v. Van Hook, S. Ct. , 2009 WL 3712013, at *3 (Nov. 9, 2009) (noting, in a criminal appeal arguing that the defendant's counsel was ineffective, that "'American Bar Association standards and the like' are 'only guides' to what reasonableness means" (quoting Strickland v. Washington, 466 U.S. 668, 688 (1984))) (per curiam).

The district court's actions in this case were entirely congruent with the proposed draft's purposes. The ALI's proposed draft expresses a policy preference, when settlement money remains, for redistributing that money to class members to ensure they recover their losses. The ALI was concerned that cy pres funds are often inappropriate because "few settlements award 100 percent of a class member's losses, and thus it is unlikely in most cases that further distributions to class members would result in more than 100 percent recovery." ALI Aggregate Litigation Draft § 3.07 cmt. b. The ALI also believed "that in most circumstances distributions to class members better approximate the goals of the substantive laws than distributions to third parties that were not directly injured by the defendant's conduct." ***

The district court shared these concerns. The court ultimately insisted that the settlement pay class members treble damages before any money is distributed through cy pres. This set the benchmark well above the ALI's hope that class members might receive 100 percent recovery.

And the court recognized that the cy pres fund serves the goals of civil damages by ensuring AstraZeneca fairly pays for the class's alleged losses. We asked at oral argument why AstraZeneca would be willing to pay a total sum more than the treble damages for each class member. Counsel for Plaintiff Townsend replied that the plaintiffs had insisted on AstraZeneca paying a larger sum to better represent the losses of the entire class, including those class members who would never claim their recovery.

The district court's approval reflected another important concern: facilitating a settlement in a hard-fought, complex class action. See Durrett v. Housing Auth., 896 F.2d 600, 604 (1st Cir. 1990) (recognizing a policy encouraging class action settlements). Achieving settlement in such cases is not easy. District judges must realistically evaluate settlements based on the circumstances of the case. "[T]he ultimate decision by the judge involves balancing the advantages and disadvantages of the proposed settlement as against the consequences of going to trial or other possible but perhaps unattainable variations on the proffered settlement." Nat'l Ass'n of Chain Drug Stores, 582 F.3d at 44. The court's judgment here was not an abuse of discretion.

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