A New Generation of Class Action Cy Pres Remedies: Lessons from Washington State

• Publication year: 2021

A NEW GENERATION OF CLASS ACTION CY PRES REMEDIES: LESSONS FROM WASHINGTON STATE

Cecily C. Shiel

Abstract: The use of cy pres as a mechanism to distribute residual funds in class actions has become increasingly common and the subject of much controversy. In the class action context, cy pres is an equitable remedy used by courts to appropriate class action settlement funds remaining after all identified class parties have been compensated to the funds' "next best use," usually to a charity. The controversy has stemmed primarily from a lack of clear judicially enforced standards on how and when to use cy pres. In light of recent controversy, both the Federal Rules Committee, and potentially the Supreme Court, are now considering stepping-in to consider changes to the doctrine. While most of the debate has focused on the federal courts, some states have been codifying their own approaches to provide structure and guidance to courts in the use of cy pres. In 2006, Washington State passed a groundbreaking amendment to Civil Rule 23, requiring that at least twenty-five percent of residual class action funds go the Legal Foundation of Washington, a charity providing legal aid services to indigent persons in the State of Washington. This rule is representative of a larger state trend towards adopting statutory approaches to cy pres that promote legal aid charities as appropriate cy pres recipients. Focusing primarily but not exclusively on Washington, this Comment argues that states have been effective "laboratories of innovation" in reaching workable solutions to the residual funds dilemma in consumer class actions. These codified state approaches to cy pres have shown to be effective methods for selecting and approving cy pres awards that provide for appropriate relief while curbing improper incentives and bias in the cy pres selection process.

INTRODUCTION

In 2013, ATandT agreed to pay $45 million to settle a class action lawsuit in Washington State.(fn1) The class action lawsuit alleged that ATandT failed to disclose call rates on collect calls placed by inmates in Washington State Department of Correction facilities.(fn2) The rate disclosure was required by law under Washington's Consumer Protection Statute, RCW Chapter 19.86.(fn3) The harms from ATandT's disclosure violations were accentuated by the fact that the rates for prison collect calls were quite high.(fn4) During the relevant time period, intrastate collect call rates from prisons in Washington State included a $3.95 flat fee plus additional charges of $0.90 per minute, thus making a twenty-minute phone call $21.95.(fn5) The only way for inmates to make phone calls to family members and loved ones was by making these collect calls, and without disclosure of the associated charges, some recipients of these calls racked up more than $10,000 in collect call charges.(fn6) After years of bouncing back and forth between hearings before the Washington Utilities Commission, King County Superior Court, the Washington State Supreme Court, and back to superior court, the settlement brought to an end twelve years of litigation.(fn7) The settlement class was certified to include all persons who received a collect call from an inmate in a qualifying Washington State Department of Corrections facility between 1996 and 2000.(fn8) At the time of settlement, it was anticipated that between 70,000 and 172,000 individuals would be eligible for refunds from the settlement fund.(fn9)

The ATandT settlement illustrates a common problem encountered when resolving class actions. With such an expansive plaintiff class, and given the length of time over which the litigation took place, it would be nearly impossible today to track down every individual who received a phone call from an inmate during the relevant period-now more than ten years ago-in order to give them the recovery to which they are entitled.(fn10) Furthermore, the damages suffered by each individual class member were, on average, relatively minor. Each class member's recovery consisted only of the cost of all qualified collect calls accepted during the relevant time period, plus two hundred dollars in statutory damages.(fn11) Thus, the money spent tracking down potentially qualifying plaintiffs would eat away at, or perhaps entirely consume, the already small recovery. Complete distribution in this case was expected to be both administratively and financially infeasible. In fact, the parties anticipated at the time of settlement that nearly $20 million of the settlement amount would remain in uncollected residual funds.(fn12) What should be done with the money that cannot be distributed? The solution: Distribute the remaining funds through cy pres.

Cy pres, which means "as near as possible," is an equitable remedy that courts use to disburse class action settlement funds remaining after all identified class parties have been compensated, to the funds' "next best use," usually to a charity.(fn13) However, the use of cy pres as a mechanism to distribute residual funds in class action suits has been the subject of much controversy. The controversy stems from the fact that cy pres has been characterized by a surprising lack of judicially enforced standards. Without clear limits on when and how to use cy pres, it is feared that the appropriation of class funds to charitable recipients will become an instrument of abuse by self-interested judges and attorneys.(fn14) Cy pres distributions have been criticized for going to unrelated causes or causes with suspicious ties to attorneys and judges.(fn15) Others criticize cy pres for spurring inappropriate charitable lobbying, as needy, albeit worthy, charitable causes have begun soliciting parties and courts for cy pres awards.(fn16) Some commentators question whether the use of this doctrine is ever appropriate.(fn17)

The controversy over cy pres recently boiled over in response to a widely publicized class action settlement in Lane v. Facebook, Inc.(fn18) The case was a class action against Facebook for privacy violations as a result of Facebook's Beacon program.(fn19) The Beacon program operated by updating a Facebook user's online profile automatically with information about the user's activities on other participating websites- displaying such items as movie rentals from Blockbuster.com and online purchases from Overstock.com.(fn20) Facebook made it difficult for users to avoid the public broadcasting of their online activities by requiring users to affirmatively opt out of the program if they wanted to avoid these disclosures.(fn21)

The lawyers for the parties reached a settlement agreement for $9.5 million, and in lieu of any individual payments to class members, the settlement earmarked $6.5 million of the funds for cy pres distribution.(fn22) The cy pres award was to go to a newly created charity called the Digital Trust Foundation. Notably, a former Facebook executive was to serve on the three-person board of the Foundation, and the Foundation had no track record upon which to evaluate its legitimacy.(fn23) Media erupted with cries of foul play.(fn24) Not without controversy, the settlement was approved by the district court,(fn25) and affirmed by the Ninth Circuit in a two-to-one vote(fn26) with Judge Kleinfield dissenting.(fn27) A petition for rehearing en banc was denied over the dissent of six judges.(fn28) In both decisions, the dissents sharply criticized the cy pres award and questioned the incentives behind Facebook and the lawyers who structured it.(fn29) It is easy to see why: With the settlement, Facebook purchased a release of all liability for claims from millions of affected consumers, without attempting to provide individual compensation, and while effectuating a charitable donation over which they retained significant control of the charity's objectives.

The settlement approval was appealed to the United States Supreme Court, which denied certiorari.(fn30) In a statement accompanying the denial of certiorari, Chief Justice Roberts supported the Court's decision not to review the case because he felt the Facebook case would likely not have provided the Court with the opportunity to answer the "fundamental concerns" surrounding cy pres remedies, "including when, if ever, such relief should be considered."(fn31) "Citing a law review article that criticized [cy pres] settlements . . . [Chief Justice Roberts] posed six questions, ending with 'and so on,' which implied that there was quite a bit more that he wanted to know."(fn32) It is clear that at least some members of the Supreme Court are looking skeptically at the class action cy pres remedy, and are poised and ready for the "right" case to weigh in on cy pres.(fn33)

But while most of the debate about when and how to use cy pres remedies has focused on the federal class action arena, states have been finding their own innovative ways of dealing with the residual funds dilemma. In 2006, Washington State became one of the first states to expressly codify cy pres as the preferred method for distributing residual class action funds by amending Washington's Civil Rule 23(f).(fn34) Washington's Civil Rule 23(f) requires that at least twenty-five percent of all residual class action funds be distributed to the Legal Foundation of Washington, the legal aid fund that administers Washington State's Interest on Lawyer's Trust Accounts (IOLTA)(fn35) program and provides civil legal aid to low-income...