The legal doctrine of cy pres-from a French phrase meaning "as close as possible"-certainly has the best of intentions. Cy pres holds that when it's not possible or not feasible to distribute funds to beneficiaries (of, for instance, a trust or inheritance), the court should do the next best thing and give the money away in a manner that's in line with the donor's wishes. In practice, as Georgetown law school professor Brian Wolfman explained in an appellate brief challenging a cy pres award, cy pres awards have become a controversial device in big-money class actions. When class members don't step up to claim their share of settlements (sometimes because their share is so small or otherwise intangible that they don't consider it worth the trouble), judges donate the unclaimed money to a charity of their choice.
"These cases have raised suspicion when the entity awarded is a favorite of counsel or the court," Wolfman's brief said. "But even the most innocent-seeming choices are contributing to the emergence of a 'cy pres industry' in which charities lobby for awards from settlements with no regard for the purposes of the class action or potential benefits to class members."
For all the grumbling they've generated from class action reformists, cy pres awards are rarely challenged-mostly because there's no one to challenge them. Remember, they only come into play when there's a settlement, so plaintiffs lawyers and defense counsel are already aligned. The defendants have already agreed to put up the settlement money, the plaintiffs lawyers have already put in for fees based on the entire value of the settlement, and the class members whose money is part of the cy pres award didn't care enough to stake a claim to it.
That's why Wolfman, a longtime class action watchdog who used to work at Public Citizen, considered the Elf Atochem case such a rare opportunity: He had a client who wanted to raise a stink about a cy pres award. The result, Wolfman said, is a ruling by the U.S. Court of Appeals for the Fifth Circuit that's going to sets new limits on whether judges can make such awards.
The Elf Atochem settlement at issue in the Fifth Circuit panel's opinion dates back to the 1990s, when (after extensive litigation) Elf Atochem, a chemical company, agreed to a three-tiered, $41 million settlement with people allegedly injured by the release of arsenic from an industrial plant in Bryson, Tx. One subclass of plaintiffs who could show they suffered physical injury from their alleged exposure got $23 million. A second class of people who lived farther from the plant got much smaller "nuisance" payments. A third class could participate in a $2 million medical monitoring program.
When the medical monitoring program expired, almost $1 million was left over, mostly because only a tiny percentage of eligible class members actually signed up for tests and follow-up. The trial judge who approved the settlement, Lynn Hughes of Houston federal court, worked with defense counsel from Vinson & Elkins and came up with four charities-including a scholarship fund with ties to the defendants--that would receive the leftover $830,000 in a cy pres award.
Wolfman's client, a class member who allegedly suffered serious injuries as a result of exposure to arsenic emissions, objected to the cy pres award. He argued that the settlement money belonged to the class, so anything left over from the medical monitoring program should be distributed to him and the other victims. (In the alternative, the Wolfman brief argued, the money should to a charity with a closer tie to the class than the ones Judge Hughes picked.)
The Fifth Circuit agreed that the leftover medical monitoring money should go to class members. In a 22-page opinion written by Judge Patrick Higginbotham for a panel that also included Chief Judge Edith Jones and Judge Leslie Southwick, the appellate court found that class members have a constitutionally protected right to settlement proceeds.
"Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible 'only when it is not feasible to make further distributions to class members,'" the opinion said. "Where it is still logistically feasible and economically viable to make additional pro rata distributions to class members, the district court should do so."
Particularly in this case, in which the terms of the settlement do not preclude additional recovery for class members like Wolfman's client, "there is no occasion for charitable gifts and cy pres must remain offstage," the Fifth Circuit said.
Wolfman told me that the ruling should apply to most class actions, even if settlement agreements don't specifically address the rights of class members. "You have to think of the money in the first instance as belonging to class members," he said.
Even defense counsel Lewis Sutherland of V&E (speaking for himself and not his client) agreed that the Fifth Circuit intended to send a message. "The judges wanted to send directions to the district courts on cy pres generally," he said.
(Reporting by Alison Frankel)
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