Is the Rejection of Cy Pres Distributions of Class Action Settlement Funds Becoming a Trend?

Earlier this month, we reported on the decision in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir. 2011), in which the Fifth Circuit rejected a cy pres distribution of the remaining funds in a class action settlement. This may be a growing trend, as the Ninth Circuit also recently rejected a cy pres distribution in a class action against AOL.

In Nachshin v. AOL, LLC, No. 10-5129, 2011 U.S. App. LEXIS 23244 (9th Cir. Nov. 21, 2011), the Court reversed the district court’s approval of the cy pres distributions because it found that the distributions did not comport with the Ninth Circuit’s standards. The Court objected to the distributions because although the donations were made on behalf of a nationwide class, they were distributed to geographically isolated and substantively unrelated charities. In fact, two-thirds of the donations were to be made to local charities in Los Angeles, California.

In August 2009, four plaintiffs brought this class action against AOL on behalf of a putative class of more than 66 million paid AOL subscribers alleging that AOL wrongfully inserted footers containing promotional messages into e-mails sent by AOL subscribers. The parties entered into a voluntary mediation that resulted in a settlement that called for the certification of a settlement class consisting of “all current AOL members.” The settlement required certain remedial measures to be taken by AOL. In addition, all parties agreed that since monetary damages were small and difficult to ascertain, in lieu of a cost–prohibitive distribution of monetary damages, AOL would make a series of charitable donations. Because the more than 66 million class members were geographically and demographically diverse, the parties claimed they could not identify any charitable organization that would benefit the class or be specifically germane to the issues in the case. Thus, the parties agreed that AOL would donate $25,000 to three charities: (1) the Legal Aid Foundation of Los Angeles; (2) the Federal Judicial Center Foundation; and (3) the Boys and Girls Club of America (shared between the chapters in Los Angeles and Santa Monica). In addition, the parties agreed to compensate the class representatives by awarding $35,000 to four charities of the class representatives’ choice, including: (1) New Roads School of Santa Monica; (2) Oklahoma Indian Legal Services; and (3) the Friars Foundation.

The Court found that the cy pres distribution failed to meet any of the standards set forth by that Court in Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1307-08 (9th Cir. 1990). Specifically, the Court found that the proposed award failed to: (1) address the objectives of the underlying statues; (2) target the plaintiff class; or (3) provide reasonably certainty that any member will be benefited. The Plaintiffs’ claims were brought for breach of electronic communications privacy, unjust enrichment and breach of contract, yet none of the cy pres donations to the Legal Aid Foundation, Boys and Girls Club or the Federal Judicial Center Foundation have anything to do with the objectives of the underlying statutes upon which plaintiffs based their claims. Moreover, even though a small portion of the class members did reside in Los Angeles, there was no indication that those class members would benefit from the donations to the charities in Los Angeles.

In addition, the Court was not persuaded that the size and geographic diversity of the class members made it impossible to select an appropriate charity to receive the cy pres donations within the guidelines set forth by the Ninth Circuit. The Court pointed out that all class members used the internet and their claims against AOL arose from a purportedly unlawful advertising campaign that exploited users’ outgoing email messages. Therefore, the Court posited, the parties should have selected an appropriate charity from a number of non-profit organizations that work to “protect internet users from fraud, predation and other forms of online malfeasance.” Finally, the Court suggested that if a suitable cy pres beneficiary could not be located, the district court should consider escheating the funds to the United States Treasury.

Given these recent decisions rejecting cy pres distributions, counsel should use care in selecting the recipients of any cy pres to ensure that the recipients are substantively and/or geographically related to the Class and its claims in the litigation.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm with a concentration in employment law.