For the second time in two months, a circuit court has found that charities selected to receive cy pres payments -- funds that go to nonprofits when payments to the plaintiffs are not feasible -- are the wrong parties to get the cash.

The latest decision, by the 9th Circuit, stems from a 2009 lawsuit in which some AOL customers complained about promotional messages that AOL inserted into their emails. (On The Case also covered a decision in September in which the 5th Circuit held that the leftover funds should go to class members, not charities.)

AOL and the plaintiffs agreed to mediation. Because even the maximum potential monetary damages would have resulted in about 3 cents per class member, the parties agreed to ask the mediator, retired U.S. District Judge Dickran Tevrizian, to select charities to which AOL would make donations. He suggested AOL should donate $25,000 each to the Legal Aid Foundation of Los Angeles, the Federal Judicial Center Foundation, and the Boys and Girls Club of America. The settlement also required that AOL make certain notifications to class members and future subscribers and compensate the named class representatives via payments to charities of their choice.

The district court granted preliminary settlement approval and provisional certification of the class. In December 2009, one of the class members, Darren McKinney, objected to the proposed settlement on three grounds: that the charitable demand didn't meet the standard for cy pres, that the district court judge should have recused herself because her husband was on the board of one of the charities scheduled to receive money, and that AOL's notice to the class about the settlement was defective. The district court denied McKinney's objections, and he raised the same ones to the circuit court. Ted Frank, of the Center for Class Action Fairness, represents McKinney.

In its opinion this week, the 9th Circuit ruled that the lower court judge did not abuse her discretion. But it agreed that the cy pres distributions failed to meet the legal standard. Because of that, the court did not need to address the notice issue, the opinion said.

The court found that the charities selected for the cy pres funds did not "address the objectives of the underlying statutes," target the class, nor did they "provide reasonable certainty that any member would be benefitted." The cy pres doctrine can pose "many nascent dangers to the fairness of the distribution process" when "unbridled by a driving nexus between the plaintiff class and the cy pres beneficiaries," the court wrote.

The court suggested the parties choose a charity that addressed the two things the class had in common (they use the Internet and their claims arise from purportedly unlawful advertising), such as a non-profit organization that protected users from fraud.

Brian Fitzpatrick, an associate professor at Vanderbilt Law School who focuses on class action litigation, said the court's opinion is "part of a slight uptick in the scrutiny that appellate courts are giving class action settlements these days." It is a result, at least in part, of the willingness of attorneys like Frank to represent objectors all the way through the appeals process, Fitzpatrick said.

When judges select charities that have nothing to do with the class, many feel it simply looks bad. Nevertheless, cases like this raise the question of whether the outcome is worth the effort. In this case, the result of the appeal is just that some charities do not get a donation. In the end, the most important thing for purposes of discouraging corporate malfeasance is that the defendant pays out the money; it's less pressing from a public interest standpoint who the cash goes to, Fitzpatrick said.

As far as the law goes, however, Fitzpatrick noted that the nexus is required, even if some judges have ignored it, something they were able to get away with until organizations like Frank's started to push the issue.

For their parts, both Frank and AOL are claiming to be happy with the decision.

Frank cheekily proclaimed on Twitter that, "Ninth Circuit rules in my favor on the cy pres claim, but I still think I'm right." He told On the Case that it "puts settling parties on notice that they need to tighten their use of cy pres."

AOL is prepared to pay whichever charities are deemed appropriate, its attorney, Mark Litvack of Pillsbury Winthrop Shaw Pittman, said. "AOL's primary concern on appeal was that settlement was approved as fair," he said.

The plaintiffs' attorney, Richard Kellner of Kabateck Brown Kellner, did not respond to a request for comment.

(Reporting by Erin Geiger Smith)

Follow Erin on Twitter: @erin_gs

Follow Alison on Twitter: @AlisonFrankel

Follow us on Twitter: @ReutersLegal

EDITOR'S NOTE: Alison Frankel is off this week.