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Class Action Countermeasures Discussions of the Strategic Considerations Involved In Class Action Defense

Cy Pres & the Optimal Class Action

Posted in Scholarship, Settlement

Cy pres relief remains controversial among courts , but it’s like catnip to legal academics. Now, Notre Dame professor Jay Tidmarsh has published his take on it: Cy Pres and the Optimal Class Action. Like many other academics, Professor Tidmarsh is attracted by the argument that cy pres relief can deter corporate misconduct by increasing the amount a defendant must pay to escape liability through settlement. But Professor Tidmarsh’s argument relies on his conception that class actions should provide "optimal" solutions to the problems in aggregated litigation

Professor Tidmarsh admits that the "compensatory" justification for cy pres relief (that it helps compensate the class indirectly) is largely a dead letter.

It is evident that the strength of the arguments for cy pres varies with the circumstance. In all cases, as the third form of cy pres [in which funds are distributed to third parties even when class members could receive them] shows most directly, the principal argument for cy pres relief lies in deterrence. The argument from victim compensation never supports cy pres relief, although it can perhaps tolerate cy pres of the first and second types as a matter of administrative necessity.

(Emphasis added.)  He does believe, however, that it may help increase the size of the class that receives relief because it reduces the cost of providing that relief.

[W]hat cy pres relief does is to drop the variable per-claim cost by reducing the cost of administering the remedy. The immediate effect of that reduction is that the optimal class size becomes greater.

Of course, the real problem with cy pres has never been that it is too costly. The real problem is that it creates an incentive for class counsel to act against the interests of the class. Cy pres costs less than direct relief, and it will not be undermined by apathy (or active hostility) among class members. (Indeed, third-party charities compete to receive cy pres relief.) So cy pres relief can disguise the flaws in an ill-conceived class action. Since attorneys’ fees tend to correlate with relief given "to the class," there are large temptations to inflate the amount of cy pres relief relative to direct relief to the class. Professor Tidmarsh is less worried about this:

A solution to this dilemma exists. In an insufficiently noticed article written thirty-five years ago, Kevin Clermont and one of his students recommended that attorneys’ fees be based on a combination of an hourly rate and a percentage of the recovery, with the percentage of the recovery calculated on the gross amount of the recovery minus the hourly-rate portion of the fee.

(Emphasis in original.) And this explains the largest problem with cy pres relief: it works best when attorneys’ fees are limited. But no rational plaintiff’s attorney is going to agree to limit his fees. So, as constituted, cy pres remains ripe for abuse. That’s an important point for defense lawyers to remember as they negotiate class action settlements.