Cy Pres Distributions of Class Action Settlement Funds

When large class actions are settled, money often remains in the settlement fund even after one or more distributions to class members  because some class members either cannot be located or decline to file a claim. Courts and/or the parties agree to dispose of these unclaimed funds by making what are known as cy pres distributions. The purpose of cy pres distributions is to put the unclaimed fund to its next best compensation use, e.g., for the aggregate indirect, prospective benefit of the class. See Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007) (quoting 2 HERBERT B. NEWBERG & ALBA CONTE, NEWBERG ON CLASS ACTIONS § 10:17 (4th ed. 2002)).

Recently, in Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 2011 U.S App. LEXIS 19650, at *1-2 (5th Cir. 2011y, in Klier v. Elf Atochem North America, Inc., 658 F.3d 468, 2011 U.S App. LEXIS 19650, at *1-2 (5th Cir. 2011),the Fifth Circuit reversed the district court’s cy pres distribution to three charities suggested by the defendants and one selected by the court.  The Klier settlement fund had been allocated among three subclasses, one of which received medical monitoring. Upon completion of the monitoring program, substantial sums remained unused. The Protocol for Distribution of Settlement Fund drafted by the parties provided for the reallocation of available funds among the subclasses if considerations of equity and fairneess required reallocation.The district court denied the settlement administrator’s request to distribute the unused funds to another subclass of persons who suffered serious injuries. Id. at *2.

Underlying the Court’s decision was the principle that each class member has a constitutionally recognized property right in her claims, and that the settlement fund proceeds (having been generated by the value of those claims)belonged solely to the class members. 2011 U.S. App. LEXIS 19650, at *12. Because the settlement funds were the property of the class, a cy pres distribution to a third party is permissible “only when it is not feasible to make further distributions to class members.” Id. at *12-13. Because the feasibility of distribution to other class members was undisputed, the Fifth Circuit found that the district court abused its discretion by ordering a cy pres distribution rather than a re-distribution of the unused settlement funds to members of another of the subclasses.

While there is nothing about this decision that is surprising, the concurring opinion by Chief Judge Edith H. Jones seems to diverges from the general practice.  Chief Judge Jones suggests that if the defendant had not waived its right to request a refund, it would have been entitled to the excess in the event the funds were not distributed to other class members. 2011 U.S. App. LEXIS 19650, at *30. Although she recognized that the constitutionality of cy pres distributions was not presented to the Court,  Chief Judge Jones said that in the “ordinary case, to the extent that something must be done with unclaimed funds, the superior approach is to return leftover settlement funds to the defendant because any other use of the funds would result in charging the defendant an amount greater than the harm it bargained to settle.” Id. at *35.  This is the first time we have seen this theory espoused by a court.

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