A federal appeals court in California rejected a settlement of AOL e-mail privacy claims that would have distributed nothing to the 66 million plaintiffs but $110,000 to a collection of charities including one affiliated with the trial judge’s husband.
The Ninth Circuit Court of Appeals, saying the “specter of judges” distributing the spoils from a lawsuit “may create the appearance of impropriety,” threw out the settlement negotiated by Richard Kellner of Kabatack Brown Kellner and several other firms. Among other problems, the settlement gave two-thirds of the money to charities in Kellner’s hometown of Los Angeles and $25,000 of it was targeted for the Legal Aid Foundation of Los Angeles, whose directors included the husband of U.S. District Judge Christina Snyder, who approved the settlement. AmLaw reported the decision here.
The ruling is a powerful rebuke of the so-called cy pres doctrine, a legal theory that has sprung up, despite dubious academic credentials, to deal with an intractable problem with class actions: Unclaimed funds. Since lawyers typically negotiate a settlement that returns highly meaningful amounts of money for themselves but vanishingly small amounts for their individual “clients,” most class actions are left with large amounts of undistributed funds. (How much, plaintiff lawyers and compliant judges keep a closely guarded secret.)
Rather than admit the legal procedure is deeply flawed and riddled with nearly unsolvable conflicts of interest, class-action lawyers and judges dusted off an ancient concept from trust law — roughly translated, cy pres means “as good as” — and adapted it to giving away money they negotiated, but nobody wants.
Unfortunately, when people are given sole discretion to give away other people’s money they are tempted to give it to causes that might benefit them: Schools they want to get their children into, or charities whose balls they wish to attend. Antitrust settlements have gone to the San Jose Museum of Art and the American Jewish Congress, and Duke Children’s Hospital and the Make-a-Wish Foundation got money from a lawsuit over NASCAR merchandise pricing.
In this case, Kellner and other lawyers sued AOL over its practice of slapping banner ads across the bottom of outgoing e-mails. Apparently this was a violation of subscribers’ privacy rights. (We’ll never know, since like virtually every class action, this one never went to trial.) Based on money alone, this case was a loser from the beginning. AOL only earned $2 million from the “footer ads,” the court noted.
Divided among the more than 66 million AOL subscribers, each member of the class would receive only about 3 cents. The cost to distribute these payments would far exceed the
maximum potential recovery.
So there was no rational economic reason to bring this case in the first place, if the lawyers were pressing a financial claim on behalf of their clients. But of course these lawyers don’t have clients. They have masses of consumers, most of whom have no idea they are being represented. And AOL, like most defendants, wants these lawyers to go away, as cheaply as possible. In this case they negotiated an end to the case for $250,000 in fees plus the cy pres awards suspiciously concentrated in Los Angeles.
Citing an earlier decision in a case involving Mexican migrant workers, the Ninth Circuit said the settlement was too geographically concentrated to serve a nationwide class and the groups selected offered “no reasonable certainty that any member will be benefited.”
The court rejected calls for Snyder to recuse herself, saying her husband was an unpaid director of the Legal Aid Foundation and thus had no financial interest in the settlement
With this decision, the Ninth Circuit has strengthened the law in its region and offered guidance to judges who, just as much as defendants, are inclined to rubber-stamp these settlements without inquiring into their fairness to the ostensible clients. It also rebuked lawyers who argued the court had no right to go poking around in a settlement freely negotiated by AOL and the class-action bar. Their argument, the court said, conflated two basic legal principles, first that the court must approve a settlement for fairness, and second that cy pres awards, must be given to groups that offer a reasonable substitute for the absent plaintiffs. Time to go back and hit the books.
Finally, the court offered a reasonable solution to the problem of undistributed funds (it would work for punitive damages awards, too):
If a suitable cy pres beneficiary cannot be located, the district court should consider escheating the funds to the United States Treasury.
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