Introduction
Class action settlements typically aim to compensate individuals harmed by a defendant's alleged wrongdoing. But what happens when settlement funds remain after all eligible class members have received their share? Or when distributing small amounts to millions of class members becomes logistically impractical or prohibitively expensive?
In these situations, courts may approve what's known as a "cy pres" distribution, redirecting settlement funds to charitable organizations instead of class members. While this practice has existed for decades, it remains both controversial and widely misunderstood by the general public.
This article explains the concept of cy pres distributions in class action settlements, exploring when they're used, how recipient charities are selected, and why this practice has faced increasing scrutiny in recent years.
What Are Cy Pres Distributions?
The term "cy pres" comes from the French expression "cy près comme possible," meaning "as near as possible." In the context of class action settlements, cy pres distributions direct settlement funds to charitable organizations whose missions align with the interests of class members or the issues raised in the lawsuit.
Rather than sending tiny amounts to individual class members or returning unclaimed funds to the defendant, cy pres distributions allow settlement money to benefit class members indirectly through organizations that work on related issues or advocate for similar causes.
Cy pres distributions can take several forms:
- Residual cy pres: After distributing funds to all claiming class members, any remaining money is directed to designated charitable organizations.
- Direct cy pres: When individual distribution is impractical from the outset, the entire settlement fund (minus attorneys' fees and administrative costs) goes directly to charitable organizations.
- Partial cy pres: A portion of the settlement fund is designated for cy pres distribution, while the remainder goes to individual class members.
The core principle behind cy pres is that the funds should benefit class members indirectly if direct compensation isn't feasible or practical.
When Are Cy Pres Distributions Used?
Cy pres distributions typically come into play in specific situations:
- Unclaimed funds: When class members fail to submit claims or cash settlement checks, leaving a substantial pool of unclaimed money.
- Small individual recoveries: When the administrative costs of distributing funds would exceed the value of individual payments. For example, if each class member would receive only 25 cents after accounting for postage and processing.
- Unidentifiable class members: When it's impossible or extremely difficult to identify all affected individuals, such as in privacy cases involving millions of users.
- Supplemental distributions impractical: When funds remain after distribution but sending additional payments to class members would be inefficient due to high administrative costs relative to payment amounts.
Courts generally prefer direct compensation to class members whenever feasible. Cy pres is considered a last resort when direct distribution is impossible, impractical, or would result in de minimis payments.
Consumer class actions involving inexpensive products are particularly likely to utilize cy pres, as the individual harm to each consumer might be measured in cents or a few dollars—amounts too small to justify the cost of cutting and mailing individual checks.
Legal Foundation and History
The cy pres doctrine originated in trust law, where it allowed courts to modify charitable trusts that had become impossible to execute exactly as written. If a trust's specific purpose became unfeasible, courts could direct the funds to the next closest purpose rather than allowing the trust to fail entirely.
In the class action context, cy pres was first adopted in the 1970s and gained wider acceptance throughout the 1980s and 1990s. Courts recognized that in some cases, distributing settlement funds to charitable organizations aligned with class interests was preferable to returning unclaimed money to defendants or having the funds escheat to the state.
The legal justification for cy pres in class actions stems from courts' equitable powers and the recognition that class actions serve not only compensatory functions but also deterrence purposes. By ensuring defendants disgorge ill-gotten gains even when direct compensation is impractical, cy pres helps maintain the deterrent effect of class litigation.
While no federal statute explicitly authorizes cy pres distributions, the practice has been recognized by numerous federal and state courts, and some states have adopted specific rules or statutes governing cy pres in class actions. The American Law Institute's Principles of the Law of Aggregate Litigation also provides guidance on appropriate use of cy pres.
How Cy Pres Recipients Are Selected
The selection of cy pres recipients is a critical aspect of the distribution process. Courts review proposed recipients to ensure they have a sufficient nexus (connection) to:
- The subject matter of the lawsuit
- The geographic scope of the class
- The interests and characteristics of class members
- The objectives of the underlying statutes
For example, in a case involving misleading food labeling, appropriate cy pres recipients might include consumer advocacy organizations focused on food labeling transparency or nutrition education programs in regions where the product was sold.
Potential cy pres recipients are typically proposed by:
- The parties as part of their settlement agreement
- Class counsel or defense counsel separately
- The court itself
- Class members or outside organizations through suggestions or applications
Courts scrutinize proposed recipients to ensure they're legitimate non-profit organizations with proven track records and no significant conflicts of interest with the parties or their attorneys. Judges must approve all cy pres recipients as part of the settlement approval process.
In recent years, courts have become increasingly rigorous in their review of proposed cy pres recipients, requiring clear demonstrations of how the organization's work relates to the issues in the case and benefits class members indirectly.
Controversies and Criticisms
Despite its practical utility, the cy pres doctrine in class actions has faced significant criticism from various quarters:
- Conflict of interest concerns: Critics argue that attorneys may propose their alma maters or preferred charities as recipients, potentially creating conflicts of interest.
- Disconnect from class interests: Some cy pres distributions have been criticized for benefiting organizations with only tenuous connections to class members' interests or the underlying case.
- Misaligned incentives: Critics suggest cy pres can motivate class counsel to accept settlements with limited direct benefits to class members while securing substantial attorneys' fees.
- Constitutional questions: Some legal scholars have raised concerns about whether cy pres distributions exceed courts' authority under Article III or violate parties' due process rights.
- Political controversies: When cy pres funds go to organizations with advocacy missions, critics may view the distributions as improperly advancing particular political or social agendas.
These controversies have intensified scrutiny of cy pres distributions and led to more stringent requirements for demonstrating the nexus between recipients and class interests. Some courts now require detailed explanations of why direct distribution to class members is impractical before approving cy pres provisions.
Supreme Court Scrutiny
In recent years, the U.S. Supreme Court has signaled interest in examining the cy pres doctrine in class actions. In 2019, the Court was set to address the issue in Frank v. Gaos, a case challenging a settlement where all monetary relief went to cy pres recipients because distributing the $8.5 million settlement among millions of class members would have resulted in pennies per person.
While the Court ultimately remanded the case on standing grounds without resolving the cy pres question, several justices have expressed skepticism about the practice. Chief Justice Roberts has previously noted concerns about cy pres distributions, suggesting they may "undermine the requirement that settlement benefits be 'directly' linked to the interests of the plaintiff class."
Justice Thomas has been even more critical, arguing that cy pres settlements "violate Article III of the Constitution" when they distribute funds to non-parties. These expressions of concern from the highest court have led many practitioners to approach cy pres with increased caution.
Given the Court's interest in the issue, many legal experts anticipate that the Supreme Court will eventually provide definitive guidance on the permissible scope and circumstances for cy pres distributions in class action settlements.
Best Practices for Cy Pres Distributions
In response to increased scrutiny, courts and practitioners have developed best practices for cy pres distributions:
- Exhaust direct distribution options: Pursue all reasonable efforts to distribute funds directly to class members before considering cy pres.
- Establish clear nexus: Select recipients with missions clearly connected to the issues in the case and the interests of class members.
- Avoid conflicts: Ensure proposed recipients have no significant ties to the parties, their counsel, or the presiding judge.
- Geographic alignment: When possible, select recipients serving the geographic areas where class members are located.
- Transparency: Provide class members with clear information about proposed cy pres recipients and the reasons direct distribution is impractical.
- Monitoring and reporting: Require cy pres recipients to report on how funds were used to benefit causes related to class members' interests.
Some settlements now include provisions requiring competitive applications for cy pres funds, creating broader opportunities for organizations to demonstrate how they would use the money to benefit class members indirectly.
Other settlements establish independent foundation structures for distributing cy pres funds, further removing distribution decisions from the potential influence of parties or counsel.
Conclusion
Cy pres distributions represent a practical solution to the challenge of unclaimed or undistributable settlement funds in class actions. By directing these funds to organizations whose work benefits class members indirectly, cy pres prevents defendants from retaining ill-gotten gains while advancing causes aligned with class interests.
However, the practice requires careful implementation to avoid conflicts of interest and ensure meaningful connections between recipient organizations and class members' interests. As courts continue to refine the standards for cy pres distributions, both practitioners and class members should expect increasingly rigorous scrutiny of proposed recipients and clearer demonstrations of why direct distribution is impractical.
When properly executed, cy pres distributions can transform unclaimed settlement funds from administrative headaches into valuable resources for organizations working to prevent the types of harms that led to litigation in the first place—a result that serves both compensation and deterrence goals of class action litigation.