CHICAGO (Legal Newsline) - A new paper being showcased by the Searle Center for Law, Regulation, and Economic Growth at Northwestern University's law school criticizes the practice of giving unclaimed funds in class action lawsuits to charities that perform work related to the litigation.
Professor Martin Redish of Northwestern University Law School wrote the paper, released Monday, to explain what he feels are problems with cy pres awards, given in class action suits in which the award is so small for each class member that he or she chooses not to claim it.
Cy pres awards justify large plaintiffs' attorneys fees, as well as punish corporations for their alleged conduct, in order to "make the entire class proceeding seemingly worthwhile," Redish wrote.
"(C)y pres gives rise to serious problems of constitutional law and democratic theory," he added.
"By awarding defendant's money to a charity, cy pres introduces into the class adjudication an artificially interested party who has suffered no injury at the hands of the defendant."
Redish makes the case that the cy pres process violates the separation of powers clause of the U.S. Constitution by altering federal class action law.
"It has somehow become common practice among many courts, scholars and members of the public to view the modern class action as a free-standing device, designed to do justice and police corporate evil doers," he says.
Class compensation, Redish says, becomes just an illusion with cy pres awards.
Cy pres has its origins in trust law but, as class actions grew more popular, began to be used in that area.
The first instance came in 1974, when more than 4 million shareholders of Baldwin-Lima-Hamilton Corp. sued a company with which BLH merged.
The judge approved a plan to have the settlement funds, which were deemed "modest," sent to the Trustee of the BLH Retirement Plan.
Other examples noted by Redish include a California settlement being donated to an organization that educated consumers on credit transactions, a cy pres award to the National Guild of the Community School of Arts in a compact disc pricing suit and a cy pres award to the American Red Cross Disaster Relief Fund in an infant formula suit.
Redish certainly isn't the first to weigh in on the issue. Theodore Frank, the founder and president of the Center for Class Action Fairness, wrote his own paper in March 2008 for the Federalist Society.
Attorney Karen Lee Torre also authored an editorial that appeared in the Connecticut Law Tribune Sept. 28 -- "Unchecked, cy pres can easily become a form of court-sponsored money-laundering," she wrote.
West Virginia Attorney General Darrell McGraw has received his share of heat for similar arrangements, including from state lawmakers who are ticked that funds from some of his settlements never make it into the state's general fund.
In 2004, McGraw settled with OxyContin-manufacturer Purdue Pharma for $10 million. His suit had been brought on behalf of three state agencies.
Instead, the settlement authorized McGraw to spend the $10 million himself. More than $3 million went to trial lawyers hired by McGraw to pursue the case, and he spent the rest on causes like day report centers for those convicted of non-violent crimes. He also gave $500,000 to the University of Charleston for a pharmacy school.
The federal Centers for Medicare and Medicaid Services is trying to stake its claim to more than $4 million from that settlement. If part had gone to the state Department of Health and Human Resources (one of the plaintiffs), CMS would have been able to recover the amount it spent on the state's Medicaid program, which was alleged to have been harmed.
Another of McGraw's recent settlements resulted in $3.9 million for trial lawyers he hired and $11.6 million to be used on sales tax holidays on appliances with Energy Star labels. The suit was filed against Visa and MasterCard.
It alleged the two conspired to hold a monopoly over credit card transactions at stores.
Another state-backed example is former Massachusetts Attorney General Tom Reilly's lawsuit against Walgreens, which was alleged to have charged a different price for certain items than what was on the price tag.
Walgreens settled for $1.6 million in 2004. Instead of going to any consumers, $150,000 went to the Massachusetts Bar Association, $120,000 went to each of the American Heart Association, the American Cancer Society, and the Juvenile Diabetes Research Foundation; $100,000 each went to the National Consumer Law Center, the Roscoe Pound Institute of Washington, the New England Patients' Rights Group, and the Attorney General's Office; $50,000 went to Public Citizen, and $40,000 went to the Greater Boston Jewish Coalition for Literacy.
Class action attorneys employed by the State earned $550,000 in the settlement.
"There may also exist an additional dynamic at work in favor of the use of cy pres in the class action context," wrote Redish, who concluded that federal courts must abolish the use of cy pres awards.
"Empirical research has shown that, whether class attorneys are compensated by use of a percentage-of-the-fund method or by a lodestar method (which measures fees on a calculation of the amount of work the attorney put into the suit), the actual fee, on average, generally amounts to one third of the fund -- the size of which always includes the funds distributed to a designated charity through cy pres.
"If cy pres did not exist, the fund -- and, of course, the size of the attorneys' fee -- might well be far smaller. This is especially true when the cy pres relief is established by judicial order or class settlement ex ante.
"Thus, it is surely not unreasonable to speculate that one of the primary effects, if not purposes, of class action cy pres is to inflate the size of class attorneys' fees. Whether intended or not, it surely has that effect."
From Legal Newsline: Reach John O'Brien by e-mail at email@example.com.