Cy Pres Distributions in Class Action Settlements

Abstract

In class action settlements, residual funds often remain after the class members have been compensated. If parties have not contemplated the allocation of the residual funds in their settlements, the judge has a great amount of discretion. The court can (a) order that the funds be returned to the defendant; (b) apply the funds prospectively for the indirect benefit of the class; (c) distribute the funds pro rata to the class members; or (d) declare that the funds escheat to the state or to the United States treasury.

This paper is primarily concerned with the most controversial of these options, applying the funds prospectively for the indirect benefit of the class. This is called the cy pres doctrine, an equitable doctrine that has its origins in trust law. While courts have wide latitude to determine how to distribute cy pres funds, the most common method is to give the residual funds to a third party, generally a charity.

This paper will argue that, while cy pres is a valuable process, the total discretion afforded judges often makes distributions arbitrary and unpredictable. The paper addresses two broad problems with the current approach. Often, the cy pres approach suffers from distribution problems: The lack of “nexus” between the chosen cy pres beneficiaries and the underlying litigation, and the potential for bias that exists when judges have complete discretion. Additionally, the cy pres approach, as currently implemented by the courts, often causes efficiency problems.

This paper proposes some solutions to the current situation. These solutions include using the other distributive mechanisms at the court’s disposal, limiting the role of the judge to that of an arbiter, limiting the role of the lawyers involved in the process, and encouraging parties to contemplate residual funds in their settlement agreements. An additional solution is that Congress could enact a statute to control cy pres procedure, modeling the statute after one of the several state statutes that have recently been enacted.

Keywords: cy pres, class actions, judicial discretion, settlements

JEL Classification: K40, K41