This week’s article is a student comment: George Mason 3L Jennifer Johnston has published an interesting discussion of the problems that arise from cy pres distributions, Cy Pres Comme Possible to Anything is Possible: How Cy Pres Creates Improper Incentives in Class ActionSettlements, 9 J.L. Econ. & Pol’y 277 (2013). Her primary argument is that, since cy pres relief changes the incentives for key personnel in a class action settlement, it should only be used when there are assurances it will actually benefit absent class members.
Charitable cy pres distributions effectively add third parties to adversarial proceedings, in the form of charities and nonprofit organizations. Compared to the traditional incentives in the adjudicatory process, introducing another party into a traditionally bilateral proceeding generates significant changes in incentives structures. Judges are often given great discretion in approving a settlement. Typically, the judge is also given wide latitude to decide where to direct the cy pres award, thus giving the judge incentives to consider his own interests and those of a third party organization he views as worthy to receive the funds. Incentives that stem from the judge’s discretion can create conflicts of interest, which in turn can create an appearance of impropriety on the part of the judge.
Other times, the plaintiffs’ attorney or the defendant is left to decide where to direct the funds, pending approval from the opposing side and the judge. Since the plaintiffs’ attorney’s fee is often based on a percentage of the entire award, including the cy pres award, counsel for the class has a financial incentive to seek such an award. Cy pres has also created a "cy pres industry" where charities, nonprofits, and even law schools lobby the judiciary to direct funds to their organizations. In evaluating how cy pres has changed the incentives of parties involved, it is necessary to look at models of incentive structures for each party in a traditional adjudicatory class action proceeding and how these parties should ideally behave.
(Footnotes omitted, emphasis added.)
Johnston’s solution is twofold: (1) keep more class actions in state court, where it may be easier to identify class members, and where unused funds may revert to the state, or (2) for federal class actions, require a second round of notice if there are significant unused funds. I’d question whether a second round of notice will accomplish much when many absent class members don’t read the first notice in a class action, but that is an empirical debate worth having.
Johnston’s comment is a cogent, well-researched, and clearly-organized discussion of the problems that arise from cy pres relief. It’s well worth a read.