The First Circuit and Cy Pres

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In 2009, the First Circuit held, as a matter of first impression, that class action settlement agreements may, in appropriate circumstances, include provisions for cy pres distributions.  In re Pharmaceutical Industry Average Wholesale Price Litigation, 588 F.3d 24 (2009).  On April 24, 2012, the court “address[ed] for the first time the procedural and substantive standards for distribution of cy pres funds” and, “in doing so, . . . express[ed its] unease with federal judges being put in the role of distributing cy pres funds at their discretion.”  In re:  Lupron Marketing and Sales Practices Litigation (“Lupron”), Nos. 10-2494 and 11-1329 (1st Cir., April 24, 2012).

Plaintiffs in Lupron included patients who alleged fraud in being overcharged for Lupron, a medication often prescribed by physicians for the treatment of certain forms of cancer.  The parties agreed to a settlement in the amount of $150 million, of which $40 million was allocated to the consumer class.  The agreement further provided that all unclaimed funds from the consumers' allocation would go into a cy pres fund to be distributed at the discretion of the trial judge.  At the conclusion of the claims process, approximately $11.4 million remained unclaimed.

Plaintiffs then requested that the district court determine a plan for the distribution of the unclaimed funds.  After hearing, the court declared its intention to make a cy pres award and distribute the residual funds for the purpose of funding research into the causes and treatments of Lupron-related conditions.  Certain objectors appealed, arguing that the entire amount should be distributed to members of the plaintiff class through a supplemental claims process.  The First Circuit rejected the objectors' arguments, and affirmed the district court's distribution plan.  Its decision marks the first time the court has addressed questions about the distributions of cy pres funds.

The court first ruled that the district court did not abuse its discretion in rejecting a supplemental claims process that would distribute the remaining funds to class members, because the “process would be prohibitively expensive, time-consuming, and, given the high mortality rate among members of the class, would likely recruit few new claimants.” 

Next, the court began its review of the substance of the distribution order by turning for guidance to the American Law Institute's Principles of the Law of Aggregate Litigation (“ALI Principles”).  The ALI Principles, the court explained, express a policy preference for redistributing unclaimed funds to class members, but because that preference was motivated by a concern that few settlements award 100 percent of a class member's losses, the court held it did not apply to the Lupron settlement, in which all claimants would be fully compensated.  The court noted that the ALI Principles also reject any presumption that residual funds be returned to the defendant. 

The court then referred to ALI Principles Section 3.07(c), which “sets up an order of preference:  when feasible, the recipients should be those 'whose interests reasonably approximate those being pursued by the class.'”  “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.'”

The First Circuit adopted the “reasonable approximation” test, and set forth the following non-exclusive factors to guide its application:

  • 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.

The court also made it clear that “[f]ailure to meet the reasonable approximation test can lead to reversal,” and that “the mere fact that a recipient is a charitable or public interest organization does not itself justify its receipt of a cy pres award.”

Applying these principles to the Lupron settlement, the court upheld the district court's cy pres award.  The court rejected the objectors' argument that claimants should receive an award of treble damages from the residual funds, noting that the claimants received more than their actual losses and that the research funded by the cy pres award could benefit absent class members who did not submit claims. The court also reasoned that allowing residual funds to be distributed to claimants who have already recovered their losses would result in a windfall to the claimants that could create improper incentives for plaintiffs to file suits in which they expect large numbers of absent class members not to file claims, and to keep information from absent class members.

Finally, the court expressed the view that district court judges should not be given discretion by the settling parties to decide how cy pres funds should be distributed.  Rather, the parties should choose the cy pres recipients as part of their settlement agreement, which the district courts can then test against the principles identified in the First Circuit's decision.