Class Actions — Cy Pres Doctrine Applicable Only Where Plaintiffs Fully Compensated — Reasonable Approximation Test — Unlimited Judicial Discretion Inadvisable
In Re: Lupron Mktg. & Sales Practices Litig., 2012 U.S. App. LEXIS 8263 (1st Cir. April 24, 2012):
Appellants, a small dissident group ("the Samsell plaintiffs"), are within a larger class of medical patient consumers in a case alleging fraud in overcharging for the medication Lupron. These plaintiffs, along with insurers and private health care providers, have achieved a major settlement agreement which was approved by the district court. The total amount of the settlement was $150 million, of which $40 million was allocated to consumers. That agreement provided that if there were unclaimed monies from the $40 million consumer settlement pool even after full recovery to consumer plaintiffs, all unclaimed funds would go into a cy pres fund to be distributed at the discretion of the trial judge.
The Samsell plaintiffs appeal from the district court's distribution of the $11.4 million cy pres fund to the Dana Farber/Harvard Cancer Center and the Prostate Cancer Foundation ("DF/HCC") for work on the treatment of the diseases for which Lupron is prescribed. The Samsell plaintiffs make a series of subordinate attacks, all designed to increase the sums paid to them, though they have already recovered more than 100% of their actual damages. The award is defended by the plaintiff class and, naturally, by the recipient DF/HCC. The defendant manufacturer of Lupron, having settled the case, has not filed a brief with us.
We address for the first time the procedural and substantive standards for distribution of cy pres funds; in doing so, we express our unease with federal judges being put in the role of distributing cy pres funds at their discretion. ***
Challenge to the Cy Pres Distribution
When class actions are resolved by settlement, unclaimed money may remain in the settlement fund after initial distributions to class members because some class members cannot be located, some decline to file a claim, or some have died. Settlement agreements often dispose of these unclaimed monies by providing for "cy pres" distributions. Cy pres is an equitable doctrine that has been imported into the very different class-action context from the field of 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.
In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24, 33 (1st Cir. 2009) (citations omitted) (quoting In re: Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679, 682 (8th Cir. 2002)).
In In re Pharmaceutical Industry Average Wholesale Price Litigation, we recognized for the first time in this circuit that settlement agreements may establish cy pres funds for the distribution of residual unclaimed funds. Id. at 33-36. There, this court affirmed the approval of a cy pres fund where it was part of a settlement agreement that was negotiated at arm's length by the parties; was not court mandated; some class members would not otherwise receive recovery; more than actual damages were paid out to class members; the creation of the cy pres fund facilitated the settlement of a hard-fought complex action; and the cy pres fund was meant to benefit absent and non-claimant class members. We rejected the argument that claimants are entitled to receive any unclaimed residual money, in preference to a cy pres distribution, regardless of whether they have already been compensated for their losses. Id. at 35. We held that the district court did not abuse its discretion in approving the cy pres part of the settlement because the settlement agreement met the American Law Institute's benchmark of "100 percent recovery" for all class members before any money would be distributed through cy pres. Id. at 35-36 (citing Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 cmt. b (Apr. 1, 2009) (proposed final draft)). This case involves an agreement with these same characteristics. In our earlier case we did not address questions concerning the distributions from cy pres funds. We do so for the first time here. ***
The settlement agreement, which appellants are not free to attack, explicitly anticipated that there could be unclaimed funds after the distribution to claimants, and expressly granted the district court broad discretion to make awards from the cy pres fund. The agreement anticipated that a distribution might be made to appropriate charitable institutions. It granted TAP tax deduction rights if "all or part of any unclaimed funds is distributed to one or more charitable organizations."
Footnote 5. This is not a situation in which the primary purpose of the cy pres fund is to assure a settlement fund large enough to guarantee substantial attorney's fees or to make the bringing of the class action worthwhile, a danger pointed out by commentators. See Martin H. Redish, Peter Julian, & Samantha Zyontz, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617 (2010).
***Here, the district court considered a supplemental consumer claims process designed to reach more consumers using previously unavailable patient data from the Centers for Medicare and Medicaid Services. The district court was concerned, however, that only 11,000 individuals out of the estimated tens or hundreds of thousands of class consumers filed claims despite extensive notice procedures. The district court appropriately decided that a supplemental consumer claims process would be prohibitively expensive, time-consuming, and, given the high mortality rate among members of the class, would likely recruit few new claimants.***
We turn to the law on distribution of cy pres funds. To the extent the American Law Institute's Principles of the Law of Aggregate Litigation ("ALI Principles") provides guidance, it does not support a claim of abuse of discretion. The ALI Principles set forth proposed rules for the use of a cy pres distribution in class action settlements. See Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 (2010) [hereinafter "ALI Principles"]. The ALI Principles express a policy preference that unclaimed funds be redistributed to ensure class members recover their full losses. [Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07(b) (2010).] This policy preference was motivated by a concern that "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." In re Pharm. Indus., 588 F.3d at 24 (quoting Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 cmt. b (Apr. 1, 2009) (proposed final draft)). Where class members have been fully compensated for their losses, this presumption does not apply.
The ALI Principles also reject the presumption, suggested by a concurring opinion in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), that any residual funds must be returned to the defendant. Id. at 482 (Jones, J., concurring). The ALI Principles explain that returning unclaimed funds to the defendant "would undermine the deterrence function of class actions and the underlying substantive-law basis of the recovery by rewarding the alleged wrongdoer simply because distribution to the class would not be viable." ALI Principles, § 3.07 cmt. b. Courts have generally agreed with the ALI Principles. See 3 Newberg on Class Actions § 10:17 (4th ed. 2011). The ALI Principles also reject escheat to the state as a more preferable option. See ALI Principles, § 3.07 cmt. b.
Instead, ALI Principles § 3.07(c) sets up an order of preference: when feasible, the recipients should be those "whose interests reasonably approximate those being pursued by the class." Id. If no recipients "whose interests reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class." Id.
Both case law and the ALI Principles support our adoption of the "reasonable approximation" test. As to whether distributions reasonably approximate the interests of the class members, we consider a number of factors, which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipient. Failure to meet the reasonable approximation test can lead to reversal.
Footnote 7. As Judge Posner has pointed out, the cy pres doctrine under the trust law "is based on the idea that the settlor would have preferred a modest alteration in the terms of the trust to having the corpus revert to his residuary legatees. So there is an indirect benefit to the settlor." Mirfasihi v. Fleet Mortg. Corp. 356 F.3d 781, 784 (7th Cir. 2004). He contrasts this with a different rationale in the class action context:
[T]he reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement . . . to the class members. There is no indirect benefit to the class from the defendant's giving the money to someone else. In such a case the 'cy pres' remedy [is] . . . badly misnamed.
Id. That is another reason to require the cy pres fund to provide some benefit to class members, even if indirect.
Footnote 8. One commentary has suggested that abandonment of "next best" relief intended to be an alternate means of indirectly compensating victims who could not feasibly be compensated directly would create issues of constitutional dimension. See Redish at 641-51.
For example, in In re Airline Ticket Commission Antitrust Litigation, 268 F.3d 619 (8th Cir. 2001), a national antitrust class action against airlines concerning caps on ticket commissions earned by travel agencies, the Eighth Circuit held that a cy pres distribution of unclaimed funds to Minnesota law schools and charities was invalid. Id. at 625-26. On remand, the district court ordered the funds distributed to the National Association for Public Interest Law, "to support attorneys providing legal services to low income clients by paying the interest on grant recipients' outstanding student loans." In re: Airline Ticket Comm'n, 307 F.3d at 682. The Eighth Circuit reversed again, explaining that the "next best" recipients were not public interest organizations, but rather the travel agencies in Puerto Rico and the U.S. Virgin Islands who suffered from the same allegedly unlawful caps. Id. at 683-84. The court remanded the case, ordering that the cy pres fund be distributed on a proportional basis to those travel agencies. Id. at 684.
Other courts have similarly applied the reasonable approximation test. See, e.g., Nachshin v. AOL, LLC, 663 F.3d 1034, 1040 (9th Cir. 2011) (rejecting, in a nationwide privacy class action, a cy pres distribution to local Los Angeles charities because it did not "account for the broad geographic distribution of the class," did not "have anything to do with the objectives of the underlying statutes," and would not clearly "benefit the plaintiff class"); Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1311-12 (9th Cir. 1990) (invalidating a cy pres distribution to the Inter-American Fund for "indirect distribution in Mexico," id. at 1304, in a class action brought by undocumented Mexican workers regarding violations of the Farm Labor Contractor Registration Act, because the distribution was "inadequate to serve the goals of the statute and protect the interests of the silent class members," id. at 1312); Houck v. Folding Carton Admin. Comm., 881 F.2d 494, 502 (7th Cir. 1989) (invalidating settlement agreement, in a national antitrust class action, that made a cy pres distribution to local law schools, and directing the district court to "consider to some degree a broader nationwide use of its cy pres discretion"); In re Folding Carton Antitrust Litig., 744 F.2d 1252, 1253-54 (7th Cir. 1984) (invalidating, in a national antitrust class action, a cy pres distribution that would establish a private antitrust research foundation on the basis that "[t]here has already been voluminous research" on the subject). As these cases make clear, the mere fact that a recipient is a charitable or public interest organization does not itself justify its receipt of a cy pres award.
***Against these criteria we turn to the Samsell plaintiffs' arguments. They first argue that the residual funds should have been used first to pay the claimants their "full out-of-pocket expenses." That is not the measure of their damages. Only a portion of the sum charged for Lupron was an overcharge. The Samsell plaintiffs have already received their full damages, and more. Their damages are not the full price they paid for Lupron; rather, their damages are the money they paid above the market value of the drug as a result of the inflated price. The district court found that 30% of the price the class paid for Lupron was a reasonable estimate of the class's full damages. The implementation agreement paid the class 50% of the price they paid for Lupron, which amounts to 167% of their damages.
The Samsell plaintiffs argue that even though they have received their full damages, the district court abused its discretion by choosing to make a cy pres distribution instead of using the residual funds to award treble damages to the claimants. We disagree. The 11,000 claimants have already received an enhanced payment beyond single damages. Because the consumer fund was established for the benefit of all consumer purchasers of Lupron, not just the 11,000 who filed claims, the court appropriately determined that the "next best" relief would be a cy pres distribution which would benefit the potentially large number of absent class members. Such relief may yield tangible benefits for class members in the form of lower prices for existing drugs, more effective or more cost-efficient versions of current drugs, or even new cures altogether. Such benefits would accrue both to the claimant class members and to the living absent class members, most of whom would enjoy the advantages of less expensive or more effective drugs that combat the multitude of conditions the class faces, which this research may produce. Moreover, the parties themselves contemplated such use of any unclaimed funds: the tax provisions of the settlement agreement clearly provided for the possibility that unclaimed funds would go to a charity to benefit silent class members.
*** Commentators have agreed that distributing residual funds to claimants who have already recovered their losses "necessarily results in an undeserved windfall for those plaintiffs, who have already been compensated for the harm they have suffered." Martin H. Redish, Peter Julian, & Samantha Zyontz, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 639 (2010); see also 2 McLaughlin on Class Actions § 8:15 (8th ed. 2011); Susan Beth Farmer, More Lessons From The Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought By State Attorneys General, 68 Fordham L. Rev. 361, 393 (1999).
We agree that allowance of such windfalls "could create a perverse incentive among victims to bring suits where large numbers of absent class members were unlikely to make claims. It might also create an incentive for the represented class members to keep information from the absent class members." Redish at 632; see also Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 785 (7th Cir. 2004); Van Gemert v. Boeing Co., 553 F.2d 812, 816 (2d Cir. 1977) (explaining that such windfalls may "encourage the bringing of class actions likely to result in large uncollected damage pools"). ***
Although we find no abuse of discretion in this case, and indeed the process followed was admirable, we express our concerns that district courts are given discretion by parties to decide on the distribution of cy pres funds. Our concerns are also stated in the ALI Principles, which stress in § 3.07(c) that "the court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class." *** In the commentary, the ALI Principles also note that the court should give weight to the parties' choice of recipient as demonstrated by the settlement agreement. ALI Principles § 3.07 cmt. b.
It is true that the court attempted to compensate for the parties' failure to designate recipients in the agreement by taking proposals from the parties and fully involving them in the selection process. But the choice would have been better made by the parties initially and then tested by the court, against the principles we have identified.
It is one thing for the district court to exercise its traditional judicial function to approve class action settlement agreements. See Fed. R. Civ. P. 23(e). It is quite another for the parties to abandon the task of agreement over the assignment of residual funds and just hand that task to the court. The parties expressly contemplated that significant sums might remain here, and indeed $11.4 million out of $40 million remained. The amounts involved also raise concerns. We recognize, as class counsel candidly articulated, that there are imperfections in all methods of handling the issue of disposition of residual funds. But the adversary process is better suited to the parties making the decisions and leaving less to the discretion of the judges.
Distribution of funds at the discretion of the court is not a traditional Article III function, as many courts have recognized***
.Moreover, having judges decide how to distribute cy pres awards both taxes judicial resources and risks creating the appearance of judicial impropriety. A growing number of scholars and courts have observed that "the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety." Nachshin, 663 F.3d at 1039; see also SEC v. Bear, Stearns & Co., 626 F. Supp. 2d 402, 415 (S.D.N.Y. 2009). These concerns have been noted in the media. See George Krueger & Judd Serotta, Op-Ed., Our Class-Action System is Unconstitutional, Wall St. J., Aug. 6, 2008, at A13; Editorial, When Judges Get Generous, Wash. Post, Dec. 17, 2007, at A20; Adam Liptak, Doling out Other People's Money, N.Y. Times, Nov. 26, 2007, at A14.
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