In Oetting v. Green Jacobson, P.C., a panel of the Eighth Circuit earlier this month reversed the district court’s cy pres award to Legal Services of Eastern Missouri (Legal Services) in a nationwide securities class action. The cy pres award amounted to less than .5 percent of the original settlement fund and followed two distributions to class members. The Eighth Circuit decision is one of several recent appellate decisions to restrict cy pres awards in class action settlements. Such settlements may be undermined if the cy pres remedy becomes too difficult to use effectively.
The Majority’s Holding
The majority noted that cy pres distributions “have been controversial in the courts of appeals” and that Chief Justice Roberts has stated that cy pres raises “fundamental concerns . . . in class action litigation.” The court held that the decision to award cy pres should be based on the application of criteria proposed by the American Law Institute (ALI) and that the district judge erred in not applying the ALI “test.” The ALI has recommended that settlement proceeds should be distributed directly to class members if they can be identified through reasonable means and individual distributions are economically feasible. If funds remain after this distribution, the settlement should “presumptively provide for further distributions to participating class members.”
Based on the parameters of the ALI test, the majority opined that courts should award cy pres only if “the amounts involved are too small to make individual distributions economically viable,” or further distribution would be impossible or unfair. The opinion held that further compensation should be given to the class victims. The majority concluded that the district court did not inquire whether “the amounts involved are too small to make individual distributions economically viable” and reversed the finding that further distributions would be infeasible.
The Eighth Circuit decision went on to hold that the parties must identify a “recipient whose interests reasonably approximate those being pursued by the class.” A court can award cy pres to a recipient whose interests do not reasonably align with the class if, and only if, no party can be identified after “thorough investigation and analysis.” The majority also held that the trial judge improperly failed to solicit comments from class members on a “next best” recipient and that Legal Services, “though unquestionably a worthy charity, is not the ‘next best’ recipient of unclaimed settlement funds in this nationwide class action seeking damages for violations of federal and state securities laws.”
Judge Murphy’s Dissent
Judge Murphy dissented. Quoting Eighth Circuit precedent, she wrote that “cy pres awards are appropriate where class members ‘are difficult to identify or where they change constantly’ or where there are unclaimed funds.” The dissent reviewed the district court’s relevant factual findings for clear error and cy pres award to Legal Services for abuse of discretion. Because significant time had passed since the securities law violations, Judge Murphy explained that the district court was reasonable in concluding that another round of distribution was not likely to be successful.
Judge Murphy stated that the Third Circuit, although it has endorsed the ALI test, has not limited cy pres awards only to circumstances in which additional individual distributions are economically infeasible. Moreover, Legal Services was an appropriate recipient of cy pres money because much of the harm “was felt by individuals in the St. Louis region” and that Legal Services’ work, in part, involves representing victims of fraudulent conduct.
The American Antitrust Institute (AAI), a recipient of cy pres grants in other cases, believes that Oetting v. Green Jacobson P.C. is a seriously flawed decision. The majority applied the ALI test, even though the ALI criteria were published long after the case was settled. Moreover, the decision holds that the ALI test must be applied even if the cy pres award was crafted by the settling parties, rather than the trial court.
The majority also adopted an unrealistic assessment of when a further distribution is feasible, focusing solely on the cost of claims administration rather than the history of the first two distributions in which few individual investors came forward and the claims process was riddled with problems.
The majority also failed to recognize that those who did come forward to assert claims (primarily large institutional investors) had been more than fully compensated within the terms of the settlement. While the majority took the position that full compensation means that class members receive 100 percent of their claimed damages, such a position is untenable when the case was settled and not tried to a categorical victory by the plaintiffs. Under the circumstances, when the vast majority of a settlement fund is returned to class members, further costly distributions beyond the agreed upon estimated value of the claims should not be required.
The AAI is encouraged, however, by the Eighth’s Circuit’s emphasis on cy pres being limited to the next best recipient who can directly or indirectly assert the interests of the class. In fact, the AAI has been found to be a qualified recipient in certain antitrust class actions, which is consistent with the ALI’s commentary on its test. The court’s requirement that the cy pres recipient reflect a geographic market that is related to the case is also consistent with AAI positions.