Another Circuit Weighs in on Cy Pres Awards in Class Settlements

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In an April 30th post, we described the First Circuit’s recent decision in In re: Lupron Marketing and Sales Practices Litigation, in which the court for the first time articulated the standards district courts are to apply when reviewing cy pres awards in class action settlements.  As we explained then, the court adopted the “reasonable approximation” test of the American Law Institute’s Principles of Aggregate Litigation, and warned that failure to meet the test could result in the reversal of district court orders approving class action settlements that include cy pres components.  Nevertheless, although the court expressed discomfort with a settlement agreement that did not identify the recipients of the cy pres benefits, it upheld the approval of a class action settlement where the district judge exercised his discretion to apply the cy pres payments to charities whose goals were found to be sufficiently aligned with the interests of the class.

On July 13th, the Ninth Circuit, applying a similar analysis, arrived at a different result, striking down a settlement in significant part because it disapproved of the settlement’s cy pres provisions.  The Ninth Circuit’s analysis is instructive for parties and their counsel in either circuit who hope to gain approval of class action settlements calling for cy pres distributions.

In Dennis v. Kellogg Company, plaintiffs alleged that the defendant’s advertising concerning the nutritional value of one of it’s breakfast cereals was false and misleading.  They commenced a class action on behalf of a putative nationwide class of consumers.  The parties agreed to participate in mediation, and the mediation produced a settlement agreement.  The agreed-upon terms of settlement included a $2.75 million fund to be distributed to class members on a claims-made basis, with any unclaimed funds being donated to “charities chosen by the parties and approved by the Court pursuant to the cy pres doctrine.”  The defendant also agreed to distribute $5.5 million worth of specific food items to charities that feed the indigent, without specifying how the food would be valued.

Two class members objected to the settlement.  They argued that the cy pres relief was improper because “the only relationship between [the] lawsuit and feeding the indigent is that they both involve food in some way.”  They also argued that the cy pres distributions would benefit class counsel and the defendant, but not the class members.

The district court approved the settlement and the Ninth Circuit reversed.  The principles articulated by the Ninth Circuit, drawn from some of its prior decisions, closely resemble the ALI principles that the First Circuit adopted earlier this year in Lupron.

The driving principle behind the Ninth Circuit’s decision is that the settlement retain an appropriate connection to the class members’ claims and represent “‘the next best distribution’ to giving the funds directly to class members.”  The breakfast cereal settlement did not satisfy the first of these criteria, the court held, because feeding the indigent, however noble, has little or nothing to do with the lawsuit’s claims of false advertising.  “Thus, appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.”  The court also rejected the argument that its concerns would be placated by the settlement provisions that the charities would be identified at a later date and approved by the court.  As the court held, once the cy pres recipients were selected, the objectors might again object, leading to another appeal, and on the record then before it, it was entirely possible “that the asserted $5.5 million value of the cy pres award will only be of serendipitous value to the class purportedly protected by the settlement.”  As the court explained:

The difficulty here is that, by failing to identify the cy pres recipients, the parties have restricted our ability to undertake the searching inquiry that our precedent requires.  The cy pres problem presented in this case is of the parties’ own making, and encouraging multiple costly appeals by punting down the line our review of the settlement agreement is no solution.

Finally, the court held that, because it did “not have the authority to strike down only the cy pres portions of the settlement,” the entire settlement must fall.  Anticipating that the parties on remand might negotiate a new settlement, the court identified two additional concerns with the agreement’s vagueness.  First, the settlement did not explain how the $5.5 million worth of food to be distributed would be valued, and second, the settlement did not explain how the defendant would account for the cy pres distribution, or whether the distribution would be in addition to the company’s already planned giving.

Although the First and Ninth Circuits arrived at different outcomes, one affirming the approval of a settlement and the other reversing, the principles they applied were essentially the same.  The take-aways for parties entering into class action settlements in either circuit are straightforward.  First, settling parties should strive to ensure that any cy pres component of a class action settlement is reasonably connected to the purpose of the lawsuit and that the interests of the cy pres recipients reasonably approximate the interests being pursued on behalf of the class.  Second, the settling parties should identify the cy pres recipients in the settlement agreement, and not leave their selection to future determination.

Written by former litigation partner, Donald R. Frederico.