The Supreme Court recently granted review in a case that involves whether, or in what circumstances, cy pres relief may be used in class action settlements. In Frank v. Gaos, No. 17-961, the Court will review the Ninth Circuit’s decision in In re Google Referrer Header Privacy Litig., 869 F.3d 737 (9th Cir. 2017). The question presented in the petition for certiorari is: “Whether, or in what circumstances, a cy pres award of class action proceeds that provides no direct relief to class members supports class certification and comports with the requirement that a settlement binding class members must be ‘fair, reasonable, and adequate.’”

The case involves claims under the Stored Communications Act and various state common law claims, alleging that Google violated users’ privacy rights by disclosing the search terms used to owners of websites. The district court approved a settlement that called for Google to provide a disclosure of how it shares users’ search terms, and for an $8.5 million settlement fund. $5.3 million of the settlement fund would be distributed to six cy pres recipients, non-profit organizations that would use the funds to promote Internet privacy, and the remaining $3.2 million would go to attorneys’ fees, administrative costs and incentive payments for the named plaintiffs. The Ninth Circuit affirmed. It explained that cy pres-only settlements are “the exception, not the rule,” but that they are appropriate where the settlement is “non-distributable” because it would not be feasible to distribute money to individual class members. Here, the class size is estimated at 129 million class members, who would be entitled to 4 cents each, and the cost of sending out the payments would exceed the benefit. The objectors argued that there should be a lottery system whereby some class members would receive say $5 or $10, and that if the settlement was nondistributable, the court should instead rule that the superiority requirement for class certification was not satisfied. The Ninth Circuit found that the district court’s rejection of these arguments and approval of the settlement was not an abuse of discretion.

The objectors also argued that the cy pres recipients were inappropriate because Google had previously donated to some of them, three of them previously received funds in other Google class settlements, and three of them were affiliated with class counsel’s alma maters. The Ninth Circuit rejected these contentions, noting that the organizations had a strong nexus to the interests of the class, Google had previously donated to hundreds of organizations, there was no fraud or collusion, and the mere fact that class counsel graduated from schools that had connections to some of the organizations did not warrant rejecting the settlement. The Ninth Circuit also found the attorneys’ fees reasonable because they were 25% of the settlement fund and consistent with a lodestar calculation.

Judge Wallace wrote an opinion concurring in part and dissenting in part. He dissented only on the issue involving the relationships between the cy pres recipients and the alma maters of class counsel, concluding that the district court should have looked into that issue further. He wrote that “I would vacate the district court’s approval of the class settlement, and remand with instructions to hold an evidentiary hearing, examine class counsel under oath, and determine whether class counsel’s prior affiliation with the cy pres recipients played any role in their selection as beneficiaries.” Id. at 748 (Wallace, J., concurring in part and dissenting in part). In my view, requiring such a hearing could present substantial concerns about the protection of the attorney-client privilege and work product doctrine – ultimately it is the clients on both sides who are making settlement decisions, and examining counsel as to their thinking (or their advice to their client) behind such decisions seems problematic, although that may not be something the Supreme Court addresses in this case.

From a defense perspective, this case may present a challenge with respect to what position industry organizations may wish to take in amicus briefs. If the Court were to rule that cases where settlements would be “non-distributable” do not satisfy the superiority requirement and should never be certified class actions at all, defendants might welcome that result. But how would such a rule be applied, and where would the line be drawn? In most cases like this, one might be able to calculate a theoretical class recovery (e.g., with punitive damages) that might, in theory, be large enough to be distributable, although such an amount is very unlikely to be awarded. If a “non-distributable” settlement means only that the settlement is rejected and the parties are forced to continue to litigate, that forces defendants to incur large litigation expenses and risk in cases that they would prefer to resolve. The reality is that there needs to be a route to settling cases like this when appropriate. To the extent the Court is granting certiorari to provide some guidance around when to use cy pres relief and how to do it, that may be welcomed by both sides, provided the Court does not make it unduly difficult to satisfy whatever criteria are ultimately adopted.