The Ninth Circuit reversed the district court’s approval of a class action settlement last Monday in Nachshin v. AOL, remanding the two-year old case back to the district court for a new round of settlement negotiation and approval. No. 10-55129 (9th Cir. Nov. 21, 2011). The class action was brought in 2009, alleging that the Internet company violated the Electronic Communications Privacy Act (ECPA) when it inserted footers containing promotional messages into e-mails sent by its users. The complaint also alleged unjust enrichment, breach of contract, and violations of state law.
The problem with the settlement was not that the class representatives failed to adequately represent class members, as in the Second Circuit’s recent decision in the latest iteration of the Tasini v. New York Times case, or that the interests of the members of the proposed class (all 66 million of them) were too factually and legally different to proceed in a class action, as in the Ninth Circuit’s recent decision in Ellis v. Costco Wholesale Corp. Instead, the Ninth Circuit reversed the settlement on the less common ground that it provided for distributions from the settlement fund to charities that were unrelated to the claims underlying the lawsuit.
The cy pres doctrine permits courts to distribute class action settlement funds to charities when distributions to individual members would be of such small value that the costs of distribution outweigh the benefit to the class. The doctrine originated in the context of charitable trusts: When the original objective of the testator became impossible or impracticable to perform, courts redirected the funds to a purpose that was most closely related to the testator’s intent. (Cy pres comme possible is old Norman French, meaning “as near as possible.”)
In Nachshin, the parties agreed that providing monetary distributions to the 66,069,441 settlement class members would be impracticable given the small value of each member’s potential recovery. Instead, the parties agreed that the defendant would make a series of charitable donations: $25,000 to each of the Legal Aid Foundation of Los Angeles, the Federal Judicial Center Foundation, and the Boys and Girls Club of America (shared between the Los Angeles and Santa Monica chapters), and an additional $35,000 total to four charities of the class representatives’ choice.
After the district court preliminarily approved the settlement, a class member objected because the cy pres awards did not relate to the issues in the case and were too narrow in geographic scope, among other reasons. The district court denied the objections, but the Ninth Circuit reversed, agreeing with the objector on his cy pres argument.
Quoting a class actions hornbook, the Ninth Circuit wrote that “a court may employ the cy pres doctrine to ‘put the unclaimed fund to its next best compensation use, e.g., for the aggregate, indirect, prospective benefit of the class.’” The court then criticized other jurisdictions for awarding cy pres distributions to charities with no connection to the purposes underlying the lawsuit or the class of plaintiffs, warning that “[w]hen selection of cy pres beneficiaries is not tethered to the nature of the lawsuit and interests of the silent class members, the selection process may answer to the whims and self interests of the parties, their counsel or the court.”
In the case before it, the Ninth Circuit observed that none of the cy pres distributions related to the class’s claims for breach of electronic communications privacy, unjust enrichment, or breach of contract, arising from the defendant’s provision of e-mail services. Furthermore, the distributions did not account for the nationwide scope of the class, instead targeting local charities.
The Ninth Circuit’s decision in Nachshin offers a cautionary tale to all companies and their counsel who seek to settle consumer class claims—such as those arising from Internet transactions—that would result in such small payouts to class members that individual distributions would be impracticable. Cy pres may be the best alternative, but a hiccup in selecting the charities could send the entire settlement back to the drawing board.