Modernizing class action cy pres through democratic inputs: a return to cy pres comme possible.

• Author: Chasin, Chris J.

INTRODUCTION I. INCORPORATING CY PRES INTO THE CLASS ACTION A. Cy Pres in Trust Law B. Importing Cy Pres into Class Actions C. Judicial Importation of Cy Pres D. Academic Responses II. WHY CY PRES GETS IT WRONG A. Inequitable Outcomes B. Courts Are Poorly Suited to Direct Cy Pres Awards C. Ethical Dilemmas D. Systematic Bias E. Legal Flaws III. TOWARD A DEMOCRATIC CY PRES A. Distributions to Substantially Identifiable Classes 1. Crowdsourcing 2. Pure Voting B. Distributions to Unidentifiable Classes C. Benefits and Costs CONCLUSION INTRODUCTION

"When selection of cy pres beneficiaries is not tethered to the nature of the lawsuit and the interests of the silent class members, the selection process may answer to the whims and self interests of the parties, their counsel, or the court."

--Judge N. Randy Smith (1)

Forty-five years ago, the ancient doctrine of "cy pres" was lifted from the pages of trust law and applied, for the first time, to the class action context. Cy pres stood for the proposition that, when the explicit purpose of a charitable trust became impossible, the court should look to the testator's (2) intent and apply the trust to its next best use. In the class action context, cy pres was an equitable "patch" necessitated by the expanding scope of the class action mechanism at the state and federal levels. Generally, the concept has come to mean that when distributing damages to an individual class member is impossible or impractical, the court should use those damages for the benefit of the class at large.

However, the current class action litigation system does not consistently follow this standard. Cy pres awards lack the procedural and adversarial protections needed to ensure their fairness and accuracy. Courts, even when trying to apply cy pres for the benefit of the member class, are poorly suited to decide how best to benefit the class. And, unfortunately, cy pres awards are all too often diverted to general charity or directed to charitable projects of interest to the judge or lawyers involved in the case. These outcomes deprive class members of the benefits of their suit and cast a pallor of impropriety on the class action mechanism.

Fortunately, a remedy exists and can be deployed discretionarily without legislation or amendment to the Federal Rules. Because cy pres aims to approximate the benefit that individual damages would provide to class members, courts should ask the class how best to utilize cy pres awards. Through a crowdsourced, democratic voting process, courts could seek the input of identified class members at low marginal cost. This mechanism would add a democratic element to the cy pres process and largely obviate potential or perceived ethical violations. Moreover, it would improve judicial accuracy in awarding cy pres funds, enabling more of their compensatory value to flow to the injured class. This proposal modernizes class action cy pres while honoring its ancient origins by returning to cy press core goal: adhering as closely as possible to the intended outcome.

1. INCORPORATING CY PRES INTO THE CLASS ACTION

   1. Cy Pres in Trust Law

      Although legal historians dispute the origins of the term, (3) the principle of cy pres can be traced back at least as far as the sixth-century Roman Empire. (4) The close relation between law and religion during the Middle Ages, especially at the time of death, likely gave rise to cy pres in English law. (5) In medieval England, the deceased's estate was commonly divided, with one third ("the dead's part") applied by the administrators "for the good of his soul in such pious works as they shall think best according to God and good conscience." (6) The courts recognized that the public benefit of charitable acts, and the value to the testator's soul, would be lost if such charitable donations reverted to the heirs when the gift intended could not be completed. (7) To avoid this outcome, the courts would rededicate the gift to an alternative use in line with the donor's intentions. These early principles of cy pres were adopted and codified in the Statute of Charitable Uses, (8) a broad statute with "such medicinal qualities in it, as to heal every imperfection in a charitable disposition, provided the party had a legal capacity to give at all." (9)

      In England, cy pres took on two distinct forms: judicial cy pres and prerogative cy pres. While judicial cy pres arose from the king's equitable powers, prerogative cy pres originated in the king's protective powers over his subjects as "parens patriae" (or "parent of the nation"), making him the constitutional trustee of all gifts devoted to the public or to "charity" generally. (10) With time, these prerogative powers transferred to the chancellor as proxy for the king, while the judicial cy pres powers simultaneously resided in the chancellor in his judicial capacity. (11) The chancellor's judicial cy pres powers eventually became part of the Chancery Court's inherent jurisdiction. (12) The remainder, in the form of prerogative cy pres, were retained by the crown. (13)

      Judicial cy pres evolved as an "intent-enforcing doctrine"; the chancellor or the courts could act only when the donor manifested a specific charitable intention that could be effectuated. (14) The crown retained its prerogative cy pres powers in situations when the testator's intent was too broad to guide the courts, such as gifts to "charity" generally or when the testator's intent was illegal. (15) Although multiple theories abound as to why these specific powers were retained, the best explanation is that illegal donations revert to a broad charitable intent, which is the core of prerogative cy pres. (16) When such a general charitable intent existed, the king (as parens patriae) was better situated than a court to decide how the gift could best serve the public good. Prerogative cy pres thus operated at the crown's discretion, "without regard for the donor's intended purpose." (17)

      The United States was slow to adopt cy pres principles. The colonists feared that prerogative cy pres would trump individual rights (18) and confused prerogative and judicial cy pres because the English case law did not distinguish between the two. (19) They therefore feared that the principle's adoption would vest too much power in the judiciary, allowing judicial efficiency to override the testator's intent. (20) Early American decisions also confused the legal status of cy pres, mistakenly concluding that it was not part of the common law prior to its codification. (21) Despite this initial reluctance, many states later affirmed the use of cy pres by the courts, and judicial cy pres has since been codified in an overwhelming majority of states. (22)

   2. Importing Cy Pres into Class Actions

      Throughout its extensive history and into the twentieth century, the concept of cy pres was limited to the law of trust and estates. There was no need to invoke cy pres in the remedies context because the existing legal structure did not allow for many situations in which damages could arise without a clear recipient. The framework, however, shifted dramatically in the 1960s. At the federal level, Federal Rule of Civil Procedure 23 was revised to expand the class action mechanism. (23) The expanded rule allowed the inclusion of absent class members in mandatory class actions. (24) The amendments thus enabled substantial funds to remain unclaimed, either because the class members were too difficult to identify, the administrative costs of reaching the individual class members were prohibitively burdensome, or the class members failed to receive or respond to notifications of their inclusion in the class award. (25) At the state level, courts have also grappled with whether to allow and how to conduct class actions on behalf of unidentifiable injured parties. (26)

      One of the many academic works inspired by this shift was a comment by University of Chicago law student Stewart R. Shepherd, which proposed using the cy pres doctrine to guide the distribution of unclaimed class action damages. (27) Shepherd argued that "[w]hen distribution problems arise ..., courts may seek to apply their own version of cy pres by effectuating as closely as possible the intent of the legislature in providing the legal remedies on which the main cause of action was based." (28) This solution responded to the problems posed by class members' failure to act, preserving the equity of the class action mechanism and the deterrent value of the damages. (29)

      Shepherd proposed three forms of cy pres distribution: (1) redistribution of uncollected damages to collecting class members; (2) distribution to the state, unconditionally or with restrictions, to benefit the class; and (3) distribution through the free market. (30) Shepherd retained the cy pres doctrine's core: each proposed alternative sought to find a "next best" means of compensating class members who could not be compensated directly. (31) It was, furthermore, heavily based on existing case law, rendering it as much an objective study as a theoretical exercise. (32) Nonetheless, Shepherd also allowed that "[a]s it becomes more difficult, or even impossible, to ascertain which alternate recipients the legislature would prefer, it may be appropriate to devote the funds to a broader public service in order to maximize the benefit to society." (33) Later scholarship built on Shepherd's work and extended his logic to justify the use of charitable trusts, sometimes in lieu of direct distributions. (34) Although critics contend that this line of scholarship led cy pres astray, (35) cy press rapid growth and expansion more likely resulted from the realities of judicial administration and the difficulty of crafting accurate, effective cy pres remedies. (36)

   3. Judicial Importation of Cy Pres

      The courts quickly adopted cy pres in class actions. The earliest nominal use came in 1974 in a shareholder suit against the...