Cy Pres: Better to Give than Receive?

cypres

Class action settlements are intended to benefit a group of consumers who were harmed in a similar way by the same wrongdoer. More often than not, after all of the consumers have been paid, there is money leftover – sometimes a substantial amount of money.

Enter the legal doctrine of cy pres, a French term that means “as close as possible.” Courts use the cy pres doctrine to order that unclaimed funds from class action settlements be paid indirectly to class members – usually via a nonprofit organization whose work relates to the topic of the case – rather than return them to the defendant – usually a large corporation.

The legal community is split over the use of the cy pres doctrine. Some lawyers and judges favor it. Others are vehemently opposed to it. The business community is highly critical of it.

Patrick Perotti is a passionate believer in the distribution of cy pres funds – money unclaimed from class action settlements – to charities and nonprofits. He even co-founded Ohio Lawyers Give Back to promote the use of cy pres.

A lawyer for 30 years, Perotti got involved in cy pres after a distribution of $864,000 in a consumer case settlement was completed but money was left over. Certain class members could not be located and there were no instructions as to do what to do with the unclaimed funds. After conducting some research, Perotti learned that absent any other action by the plaintiff or the court the money reverts to the defendant.

“But I also found case law saying the money could be given to a charity using the cy pres doctrine,” said Perotti.

Since then, Perotti and his firm, Dworken and Bernstein, have distributed more than $25 million in cy pres from their class action settlements and judgments.

The practice can benefit groups that need the funds to help others. It can also be used by lawyers to support organizations of their choice with little oversight from the court.

It is for this reason that in May 2012 the Supreme Court of Pennsylvania mandated that unclaimed money from class action lawsuits be given to fund legal services for low-income residents. It took the choice away from the courts and lawyers.

Some in the legal profession believe cy pres is more a hindrance than a help. Others say it is unethical. Still others say it is unconstitutional.

Perotti bristles at these accusations.

“It surely is not unconstitutional since, in most cases, it is achieved by agreement of the parties, not by court mandate,” he said. “When there is a verdict against a defendant for a specific amount of money, that money must be paid and cannot be returned to the defendant, since that would defy the verdict. In contrast, cy pres happens in the context of settlements, where the parties agree, in advance, what is to happen.”

He believes that class actions, including class settlements, serve twin objectives. One purpose is compensation of class members who are harmed. The other is deterrence of wrongdoing by large corporations.

“After all, what person would sue over a $3 overcharge? But when done to one million customers? You are now talking about real money. The longer the defendant drags out the litigation, the higher the rate of attrition – the loss of the ability to find the class members,” Perotti opined.

His theory is that if a company overcharges customers $3 million, but knows that the penetration rate in class action payments is below 20 percent, they know they will be able to keep most of the money.

“On the other hand, if they know that through a demand by plaintiff counsel for cy pres that they will have to disgorge large portions of money if caught overcharging customers, they are more likely to avoid such misconduct,” he said.

Attorney Ted Frank founded of the Center for Class Action Fairness, which represents defendants in class action cases. He is a leading critic of cy pres. Frank has won some of the leading federal appellate decisions on cy pres.

He feels that the use of the cy pres doctrine does not fulfill the obligations of an attorney.

“An attorney has an obligation to his clients,” Frank explained. “When a lawyer uses cy pres, he is structuring the settlement to give money to charity instead of to his clients. If the charity is affiliated with the attorneys or the defendants or the judge, there are conflicts of interest that should preclude the award.”

3 Comments

  1. Ellsworth Delancey

    March 26, 2014 at 1:02 pm

    I must admit I am a little torn by this. I can see points on both sides. Yes, the companies should not think they can skate by. But lawyers should not use this as a way to enhance their reputations.

  2. Joel Sims

    March 26, 2014 at 2:03 pm

    Cy Pres is an incredible ripoff. It rips off the victims of the defendant’s wrongdoing, because the victims get nothing. Instead, the two legal firms involved make a sweetheart deal and give the money to some “charity” that doesn’t do anything for the victims. A classic example is the Bank of America case, in which BofA colluded with telemarketing swindlers to cheat BofA’s own customers. BofA enabled the frauds by illegally providing private account information to the swindlers, then shared the loot with the crooks. In this classic Cy Pres scheme, the victims got nothing, not one thin dime. Instead, the plaintiffs lawyers got millions, and a donation was made to some purported charity spokesman for privacy rights! The courts should never allow Cy Pres except in the most unusual and compelling circumstances. Anything less is colluding in the cheating of the class victims.

    • Patrick

      March 31, 2014 at 10:29 am

      Joel,

      You make a good point. Cy pres is not at all proper when the class members can be located and actually receive their money back.

      But cy pres used properly is not a rip off at all. It is exactly to prevent defendant from getting away with a rip off.

      Using a bank, as in your example, let’s say a suit is brought because a bank charged each customer an illegal “federal tariff” of $14 on their account. We investigate and find that there is no such federal tariff. We file suit and the bank is forced to disclose its records which show it charged 5 million customers this illegal fee. That equals $70 million dollars unlawfully collected by the bank.

      If the case goes to trial and the bank loses a judgment of $70 million, it cannot keep the money.

      So what if the case settles, instead? Should the settlement provide any less incentive for the bank to avoid wrongdoing in the future?

      Use a settlement which agrees to pay $10 to each class member. That equals $50 million dollars. Without cy pres, if only 20% of the class members can be found or participate, a huge amount of the supposed “settlement” goes back to the defendant. That does not accomplish any deterrence.

      Cy pres makes sure that every class member who can be found will get their share, and ALSO the money from class members who are not found or do not make their claim does not go back to the wrongdoer.

      Thanks for allowing me to explain that aspect of the process.

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