Groupon class action unsettled: the use of non-profits in class action settlements

October 4, 2012

Last Friday, the consumer class action against Groupon hit a snag when the court rejected a proposed $8.5 million class action settlement.  Specifically, the judge found fault with a provision in the settlement that would have set aside $75,000 to be divided among two non-profit groups as cy pres beneficiaries, saying that neither of the organizations were “expressly committed to righting the specific wrongs alleged in this case.”

The court cites to the 9th Circuit Court of Appeal’s reversal of a class action settlement, Dennis v. Kellogg Company, — F.3d —–, 2012 WL 3800230.  In that case, the class consisted of persons who were subjected to Kellogg’s advertisements that its cereal improved attentiveness, while the cy pres beneficiaries were intended to be charities that feed the indigent.  The court found the cy pres award was “divorced from the concerns embodied in consumer protection laws such as the UCL and the CLRA.”

Cy pres” is an old doctrine which historically referred to a court’s use of its equitable powers to reform a charitable gift to conform to the donor’s intent.  In recent years, the cy pres doctrine has seen a revival in the class action context as a means to distribute class-action settlement funds to a nonprofit charitable organization whose work indirectly benefits the class members and advances the public interest.  See Black’s Law Dictionary (9th ed).

But as the 9th Circuit pointed out in a decision last year, “…as a growing number of scholars and courts have observed, the cy pres doctrine—unbridled by a driving nexus between the plaintiff class and the cy pres beneficiaries—poses many nascent dangers to the fairness of the distribution process. … Some courts appear to have abandoned the ‘next best use’ principle implicit in the cy pres doctrine. These courts have awarded cy pres distributions to myriad charities which, though no doubt pursuing virtuous goals, have little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved.”  Nachshin v. AOL, 663 F.3d 1034.

Nachshin pointed to a few cases as examples of this type of distribution:  One settlement, In re Motorsports Merch. Antitrust Litig., 160 F.Supp.2d 1392, distributed $1.85 million remaining from a price fixing class action settlement relating to merchandise sold at professional stock car races to ten organizations including the Duke Children’s Hospital and Health Center, the Make–a–Wish Foundation, the American Red Cross, and the Susan G. Komen Breast Cancer Foundation.  Another, Superior Beverage Co., Inc. v. Owens–Illinois, Inc., 827 F.Supp. 477, awarded $2 million from an antitrust class action settlement to fifteen applicants, including the San Jose Museum of Art, the American Jewish Congress, a public television station, and the Roger Baldwin Foundation of the American Civil Liberties Union of Illinois.

To find other cases that discuss this issue, I used the following simple plain-language search in All Federal Cases on WestlawNext (use natural language on Westlaw Classic):

“cy pres” “class action”

In addition to Nachshin and Dennis, you’ll see a variety of cases in other circuits that deal with this issue.  Using the same search, I also found some great secondary sources:

“Cy pres, fluid recovery, escheat, and deterrent distributions of unallocated class recovery funds—Cy pres distributions of class damages,” 3 Newberg on Class Actions § 10:17 (4th ed.)

“Criticisms of cy pres class recovery distributions,” 3 Newberg on Class Actions § 10:20 (4th ed.)

“Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis,” Martin H. Redish et. al., 62 Fla. L. Rev. 617 (2010)