Frank v. Gaos

Issues 

When, if at all, does a cy pres award of class action that provides no direct relief to class members support class certification and comport with the requirement that a settlement binding class members be “fair, reasonable, and adequate”?

Oral argument: 
October 31, 2018

Cy press settlements allow courts to distribute portions of class action settlement funds to outside beneficiaries—such as non-profit organizations—for the indirect benefit of the class. This case asks the Supreme Court to decide whether lower courts violated Federal Rule of Civil Procedure 23(e) when they certified a cy pres settlement, which did not award settlement money to class members, in a class action against Google. Petitioner and class member Theodore H. Frank asserts that the courts should not have certified the cy pres class settlement because it was not “fair, reasonable, and adequate” in the meaning of Rule 23(e), given that it did not compensate class members for their injuries. Frank argues that the attorney fees of class counsel were disproportionate given that class members received no return and contends that cy pres awards generate potential conflicts between interests of class counsel and their clients. Finally, Frank contends that in the case at hand, class counsel had conflicts with the beneficiaries of the cy pres settlement. Other class members, such as Paloma Gaos, and Google respond that the cy pres settlement was “fair, reasonable, and adequate,” as distributing settlement money to each class member would be infeasible. Google and Gaos further indicate that the attorney fees were court-approved and state that Frank does not actually contest the award of attorneys’ fees. Finally, Google and Gaos assert that class counsel had no conflicts with the beneficiaries of the cy pres settlement, as the beneficiaries were chosen on their own merits. The outcome of this case has large implications for class action members, their freedom of speech, their due process rights, and to the awarding of cy pres settlements.

Questions as Framed for the Court by the Parties 

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.”

Facts 

Google Search users Paloma Gaos, Anthony Italiano, and Gabriel Priyev (“Plaintiffs”) filed consolidated class action claims against Google, Inc. (“Google”), alleging privacy violations, violations of the Stored Communications Act, 18 U.S.C. §2701, breach of contract, breach of the covenant of good faith and fair dealing, and unjust enrichment, among other things. Plaintiffs took issue with Google’s practice of recording user search histories and sharing those histories with third parties. The parties entered into mediation and reached a cy pres settlement, in which Google agreed to pay $8.5 million, $3.2 million of which was set aside for attorneys’ fees, incentive payments for the named plaintiffs, and other costs. Cy press settlements allow courts to distribute portions of class action settlement funds to outside beneficiaries—such as non-profit organizations—for the indirect benefit of the class. Of the $8.5 million, $5.3 million was designated for six cy pres recipients, including alma maters of class counsel, provided that the recipients use the funds for public goods like education and research initiatives related to protecting internet privacy. No funds were allocated for the class members.

Following a hearing, the United States District Court for the Northern District of California, San Jose Division, certified the class for settlement and preliminarily approved the cy press settlement. Five class members, including Theodore H. Frank, objected to the settlement. However, on March 31, 2015, the district court, after hearing from the parties and the objectors to the settlement, gave final approval to the settlement. The district court found that the cy pres-only settlement was appropriate because the settlement fund could not be distributed, the cy pres recipients were sufficiently related to the interests of the class members, and there was no evidence that the relationships between the parties and the recipients factored into the selection of the recipients. The objectors to the settlement appealed to the United States Court of Appeals for the Ninth Circuit in 2017.

The Ninth Circuit affirmed the district court, holding that the district court did not abuse its discretion in approving the cy pres-only settlement. The Ninth Circuit rejected the objectors’ claim that the selection of cy pres recipients was improper because the class counsel graduated from many of the schools that will receive funds. The Ninth Circuit reasoned that there was a sufficient connection between the interests of the class and the recipients, that there was no showing of fraud or collusion to indicate any conflict between the cy pres beneficiaries and counsel, and that the district court gave a sufficient response to the objectors’ allegations of unfairness. The Ninth Circuit further found that the district court had concluded correctly that the distribution of funds addressed the goals of the Stored Communications Act and the interests of the class members because the recipients have the established means to further public education about online privacy protection.

Frank and another class member who had objected to the settlement filed a petition for a writ of certiorari to the United States Supreme Court in January 2018. The petition was granted in April 2018.

Analysis 

FAIRNESS OF THE SETTLEMENT AND DIRECTNESS OF CLASS COMPENSATION

Frank asserts that, under Federal Rule of Civil Procedure Rule 23(e), courts can only approve settlements that are “fair, reasonable, and adequate.” Frank explains that the settlement between Google and the class does not satisfy this requirement as it does not directly compensate the class members for their alleged injuries. Frank also argues that cy pres settlements disproportionately award large attorney fees to class counsel, despite resulting in little to no reimbursement for class members. A settlement that creates such disproportion, Frank continues, cannot be “fair” or “reasonable” as required by Rule 23(e). Frank asks that the Court adopt a comparative test to determine whether the attorneys’ fees paid out of the award are disproportionate. This test, Frank maintains, should hold that a settlement is fair if the attorneys’ fees are proportional to the amount distributed to the parties. Frank explains that a proportional settlement ensures that class counsel meet their fiduciary duties toward the class members. In the present case, Frank points out, class counsel received a large sum while the class received nothing because the entire amount of the settlement was donated to cy pres beneficiaries. This arrangement is problematic, Frank argues, because it incentivizes counselors to take low-merit class actions and to agree to cy pres settlements for their own personal benefits, without compensating victimized class members. Moreover, Frank states, even though a class settlement may be understood as a contract between parties, the settlement should still be closely reviewed by judges given that it will affect the rights of class members absent at the negotiation table.

Class members, represented by Gaos, (“Gaos”) respond that Rule 23(b)(3) and Rule 23(e) do not preclude cy pres settlements allocating awards to non-profit beneficiaries when the alternative settlement would be that class members receive no relief whatsoever. Gaos explains that the present settlement gives class members direct relief in the form of injunction by requiring that Google change its disclosure explaining that search queries are transmitted to third parties. Although the relief is not monetary, Gaos contends, it is valuable because it forces Google to change its disclosure policy and better inform its users. Therefore, the class’s interests will still be served through a cy pres settlement, states Gaos. Gaos also asserts that Frank’s proposed test for attorneys’ fees is outside the scope of the question presented to the Court, as it relates to Federal Rule of Civil Procedure Rule 23(h), which governs fee awards, rather than Rule 23(c). Google argues that a settlement is a contract that the parties are free to shape it as they wish, so long as it does not violate public policy. As in any contract, Gaos and Google both maintain, the performance in a class settlement can be the promise to give something to a third person.

FEASIBILITY OF THE DISTRIBUTION TO CLASS MEMBERS

Frank argues that the Ninth Circuit should not have certified the cy pres award because, under Rule 23(e), cy pres compensation is only available when compensating any class members is not “feasible.” According to Frank, the Ninth Circuit mistakenly assessed feasibility on whether it would be possible to compensate everyone in the class. Rather, the test for “feasibility,” Frank explains, should be whether it is possible to distribute settlement money to at least a few class members. According to Frank, the parties never disputed that it was possible to distribute the settlement money to some class members, therefore making compensation for the class members “feasible” and a cy pres award inappropriate.

Gaos responds that the distribution of a settlement award to class members is “infeasible” if the amount of the settlement is small by comparison to the costs of administrating the settlement funds—for example, the costs of issuing notices to potential class members, verifying claims made by alleged class members, and distributing money to class members. Gaos explains that, in this case, the distribution of the $8.5 million settlement funds was infeasible because of the large size of the class, which constituted over one hundred million individuals. According to Gaos, even without computing administration costs, each class member would receive only 6.5 cents from the settlement. This, Gaos claims, is why the distribution of the settlement award was infeasible here. Furthermore, Gaos and Google indicate that it would be virtually impossible to prove and verify potential class members’ claims in this case, which further complicates the distribution of the settlement award.

CHOICE OF THE CY PRES BENEFICIARIES

Frank argues that, under Rule 23(e), courts should not certify cy pres awards when counsel have ties with the beneficiaries of the settlement money. Indeed, Frank contends, both the appearance of impropriety and the actual potential for conflicts of interest to arise should be considered when choosing cy pres beneficiaries. According to Frank, the Ninth Circuit was wrong when it required Gaos to make a showing of fraud or collusion. Rather, Frank argues, courts should place the burden on parties reaching a cy pres settlement to show that neither the parties nor the courts face a conflict of interest with the beneficiaries and, here, a conflict of interest arose when class counsel chose their alma maters as beneficiaries.

Gaos responds that the choice of cy pres beneficiaries is proper so long as they pursue the same interests as the class members involved in the settlement. Here, Gaos and Google contend that the cy pres beneficiaries in this settlement were selected on their merits given that they actively challenge and investigate Google’s practices and are involved with technology and Internet policy questions—two aspects which align with the interests of the class members. Furthermore, Gaos argues, the relationship between counsel and cy pres beneficiaries is irrelevant as long as beneficiaries are selected on their own merits. Although three of the six beneficiaries were schools that class counsel attended, Gaos explained that class counsel had no connection to the recipients and that, without more evidence, having attended a school is not enough to create an impression of impropriety.

Discussion 

NECESSITY AND EFFECTIVENESS OF CY PRES SETTLEMENTS

Attorneys General in several states (“the Attorneys General”), in support of Frank, argue that cy pres-only settlements ought to be declared inherently invalid. Cy pres-only settlements, the Attorneys General claim, unjustly shift the benefits of a class action settlement away from the class members, and thereby burden the already disadvantaged class.

The CATO Institute (“CATO”) and Americans for Prosperity, in support of Frank, claim that cy pres awards are an ineffective means of class action resolution because they frustrate the rights of individual class members. CATO and Americans for Prosperity argue that both defendants to class actions and, more importantly, class counsel are incentivized to increase the size of the class, raising concerns about due process for the individual class members. They argue that defendants reduce their exposure to future litigation by increasing the class size and that class counsel are incentivized to take actions which will ultimately increase their own net payout, rather than benefit their class member clients.

The Center for Constitutional Jurisprudence (“CCJ”), in support of Frank, echo CATO and Americans for Prosperity’s concerns, and further assert that cy pres awards are problematic because they reduce or eliminate the neutrality of the judge making the award. CCJ contends that a judge may be led to endorse cy pres-only awards benefiting his or her favored charities, and charities may also lobby judges for funds.

The American Association for Justice (“AAJ”), in support of Gaos, counters that cy pres awards are both efficient and necessary means of resolving some class action disputes. AAJ argues that cy pres-only settlements serve the interests of class members by providing non-monetary benefits, such as preventing any similar future harms. Cy pres awards are necessary for arriving at a just outcome, AAJ continues, because they are the most effective means of achieving the goals of a class action in cases where funds cannot be distributed to class members. Without cy pres awards, AAJ claims, class action suits for consumer protection would be drastically weakened because some suits would be prevented by administrative costs, and cy pres settlements are therefore vital for ensuring consumer access to the court system.

The Center for Democracy and Technology (“CDT”), the Electronic Frontier Foundation (“EFF”), and the National Consumers League (“NCL”), in support of Gaos, argue that cy pres settlements effectively benefit all class members by creating a strong deterrent effect to prevent future harms, and are more practical than distributing a few cents to each class member. The CDT, EFF, and NCL maintain that legislative and judicial protections already in place ensure that cy pres recipients use the award to benefit the class.

A group of law professors (“Law Professors”), in support of Gaos, argue that the problems created by modern technology require the use of cy pres awards in class action suits to protect consumers. Law Professors assert that because modern digital technologies can and do affect millions, class actions with very large class sizes are more likely than ever before. Law Professors contend that cy pres-only awards are uniquely well suited to these types of cases where it may be difficult to determine the extent of harm suffered by a class member.

COMPELLED SPEECH AND FIRST AMENDMENT CONCERNS

The Center for Individual Rights (“CIR”), in support of Frank, argue that cy pres awards effectively force class members to support speech they may disagree with by transferring funds from class members to third parties who may then use those funds to engage in political speech or action. Class actions are not sufficiently regulated under a unified scheme, CIR asserts, to permit forcing class members to support speech or actions by the cy pres recipients. CIR further contends that requiring class members to opt out of the class to avoid this outcome unjustifiably shifts the burden on them, especially because class members cannot know what they are subsidizing, and thereby violates the First Amendment.

A number of states (“States”), in support of Gaos, argue that cy pres awards do not compel speech by class members. States instead claim that the funds are not owned by class members because the court has already determined the funds are unclaimed or cannot be distributed. The States also claim that the opt out requirement is sufficient to protect the rights of class members, and that class members have enough opportunity to object to a cy pres recipient to prevent concerns about forced support of political speech or action.

Edited by 

Acknowledgments 

Additional Resources