First Circuit Approves Cy Pres Distribution in Consumer Class Action

I have previously blogged about decisions in which the U.S. Court of Appeals for the Fifth Circuit and the Ninth Circuit rejected cy pres distributions of remaining funds in class action settlements. Recently, however, the Court of Appeals for the First Circuit, in addressing the procedural and substantive standards for distribution of cy pres funds, affirmed a district court’s decision to award $11.4 million of remaining funds. In re: Lupron Mktg. & Sales Practices Litig., Nos. 10-2494; 11-1329, 2012 U.S. App. LEXIS 8263 (1st Cir. Apr. 24, 2012).

The Lupron litigation was brought by medical patient consumers, insurers and private health care providers alleging fraud in the overcharging for the medication Lupron which is used to treat prostate cancer, among other things. In re Lupron involved a $150 million settlement, of which $40 million was allocated to consumers. The settlement agreement provided that if there were unclaimed monies from the $40 million consumer settlement pool, even after full recovery to the consumer plaintiffs, all unclaimed funds would go into a cy pres fund to be distributed at the discretion of the trial judge. 2012 U.S. App. LEXIS 8263, at *2. Consumers were allowed more than four years to file their claims, but despite these efforts, only about 11,000 individuals filed claims, given the high mortality rate among members of the class. At the conclusion of the claims administration process, approximately $11.4 million remained unclaimed. Id. at *10. Ultimately, on August 6, 2010, the court issued a memorandum and order stating that it had decided to make a cy pres award of all of the unclaimed settlement funds to Dana Farber/Harvard Cancer Center (DF/HCC) to be made in three installments. Id. at *13.

In determining that the district court did not abuse its discretion in issuing the cy pres award, the First Circuit adopted the “reasonable approximation test.” As to whether cy pres distributions reasonably approximate the interests of the class members, the Court set forth a number of factors it considered, but which are not exclusive. 2012 U.S. App. LEXIS 8263, at *29. 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 recipients. Id. Applying this test, the Court rejected the arguments made against the award.

The group of plaintiffs objecting to the cy pres award did so on several bases: (1) that they were entitled to greater distributions in preference to distributions for the benefit of absent class members because they have not received treble damages; (2) that the process used was flawed, including on the grounds that the judge should have recused himself; and (3) that no award can be made to DF/HCC because: (a) its doctors are precluded from being recipients of awards by the terms of the agreement; and (b) the principles of cy pres are violated in that this is not a “next best” award to absent class members because DF/HCC is located in Massachusetts and the research will be primary focused on prostate cancer. 2012 U.S. App. LEXIS 8263, at *26. The Court found that many of these assertions were factually untrue. Id.

First, the Court rejected the plaintiffs’ argument that the remaining funds should have been paid to the 11,000 claimants because the consumer fund was established for the benefit of all consumer purchasers of Lupron and not just those who filed claims and that the district 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. 2012 U.S. App. LEXIS 8263, at *34. The Court found that ordering that the remaining funds be re-distributed would provide those 11,000 claims with an “undeserved windfall” and create a “perverse incentive among victims to bring suits where large numbers of absent class members were unlikely to make claims.” Id. at *37.

Second, with regard to the “next best” requirement, the Court rejected the argument that the “next best” requirement was not met because DF/HCC was in Boston while the injuries are to a national class because it is not the location of the recipient which is key; it is whether the projects funded will provide “next best” relief to the class. Because DF/HCC is required to do work which will have benefits well beyond Boston, the district court did not abuse its discretion in selecting it to receive the cy pres award. The proposal approved by the district court uses a venture capital model to invest in high-impact, high-risk research projects across the globe, with the expectation that promising results will attract grants from more traditional funding sources. 2012 U.S. App. LEXIS 8263, at *38-39.

Although the Court held that there was no abuse of discretion in this process used or as to the selection of the recipient, the Court expressed its concerns that district courts are given discretion by parties to decide on the distribution of cy pres funds. 2012 U.S. App. LEXIS 8263, at *43. While the court acknowledged that the district 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 set forth by the Court. Id. at *44.

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