Does Cy Pres Have a Future?

Michael P. Tremoglie Jul. 1, 2011, 10:00am




Some have described the cy pres doctrine, as applied to civil litigation, as a slush fund.

They say it is nothing more than a means to take undistributed funds in a class action suit and award them to a third party unrelated to the suit. They claim it is an unconstitutional process. They believe it is a bane on the American justice system - representing that which it is trying to deter.

Others have portrayed it as a tool to ensure that those who are found culpable in a tort action will pay a price for their misconduct. They claim it is a method of deterring future wrongdoing by large and powerful corporations. They allege that without it the powerful will escape justice.

The two camps are currently debating the issue in the public square, in the halls of state legislatures and on Capitol Hill. The practice of trial courts distributing the unclaimed funds of a class action case is nearly four decades old. But, at present, it is more controversial than ever.

Tort reform groups such as the American Tort Reform Association (ATRA) have been at the forefront of opposition to the practice of cy pres. ATRA and similar groups feel progress is being made towards reducing the implementation of cy pres to isolated instances -- or eliminate it entirely.

Class Action Fairness Act

Ted Frank is one of the leaders in the cy pres reform movement. He said positive steps have been made to curb the practice. He pointed to the Class Action Fairness Act of 2005 (CAFA) as one of such step.

While not directly addressing cy pres, the result of CAFA has been to take most class action suits out of state courts and into federal court. According to Frank, by taking class action suits out of state courts and into federal courts, trials are less likely to be influenced by political considerations. Also, a defendant is more likely to get a neutral judge in federal court, he said.

ALI weighs In

Another positive step Frank mentioned - and one that directly addresses cy pres - was the action taken by the American Law Institute (ALI) of the American Bar Association. It has issued some opinions about restricting who would be eligible for cy pres awards.

ALI's "Principles of the Law of Aggregate Litigation," which was published in 2010, provides that a court may approve a cy pres settlement subject to three criteria:

  • If individual class members can be identified through reasonable effort, and the distributions are sufficiently large to make individual distributions economically viable, settlement proceeds should be distributed directly to individual class members.

  • If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.

  • If the court finds that individual distributions are not viable based upon the criteria set forth in subjections (a) and (b), the settlement may utilize a cy pres approach only if the parties can identify a recipient involving the same subject matter as the lawsuit that reasonably approximates the interest being pursued by the class.

    While the ALI report does not have the force of law, it could be used to persuade a court.

    States are laboratories of reform

    Reform, if it is to occur, will be at the state level, according to Darren McKinney, the Communications Director for ATRA. He said that there has been a wave of pro-growth and pro-business legislation in certain states. He cited Wisconsin, Minnesota, Oklahoma, Tennessee, North Carolina and South Carolina as major tort reform states.

    "The trial lawyers' bars in many of these states have made extraordinary efforts to try to prevent passage of legislation," McKinney said. "But they were not successful."

    He also mentioned the Pennsylvania Fair Share Act (PAFSA) as another state driven reform attempt.

    The bill, which limits liability for defendants in civil cases, was signed into law by Penn. Gov. Tom Corbett on June 28. It holds that defendants who are found to be less than 60 percent at fault in a case would not have to pay a disproportionate amount of damages. It replaces a law which held deep-pocket defendants liable for damages if other liable defendants were unable to pay a plaintiff's claim.

    Another recent reform cited by both McKinney and Frank was the law recently enacted in Texas. The state passed a loser-pays statute in May. The Texas bill assesses legal fees against a party who files a lawsuit that is tossed out under a motion to dismiss for failing to state a valid legal claim. Texas is among eight states that do not allow motions to dismiss before evidence is presented in civil court.

    But, McKinney and Frank say the Texas law has no bite. The legislators compromised many of the effective provisions to enact the legislation. They both termed the law a "watered down" version of loser-pays.

    Both McKinney and Frank say that Congress will not pass substantive loser pay legislation either, despite the fact that such a law will curb abusive and frivolous lawsuits.

    The state of Ohio also is considering addressing cy pres by introducing legislation again this year. While passage is not a sure thing, it is on the table. Ohio's S.B. 157 would codify the cy pres doctrine.

    Last year, the Illinois Civil Justice League expressed interest in adding cy pres legislation to its legislative wish list.

    Looking to foreign law

    One place American tort reformers might look to is foreign law. Liberal legal reformers routinely point to foreign law, European law in particular, to push through their reforms.

    A few years ago U.S. Supreme Court Justices Stephen Breyer and Antonin Scalia did a series of debates about looking to foreign law to justify rulings made by the Court. Justice Breyer was an advocate and frequent practitioner, while Justice Scalia was contemptuous of the practice.

    American progressives, like Justice Breyer, point to European law or European policies to justify changes they want to impose in America.

    But when it comes to civil litigation, it appears they do the exact opposite of the European legal system.

    One reason may be that nations like Italy, politically a democratic socialist state, are actually quite conservative in both criminal and civil codes.

    In particular, most European laws are much more stringent in the area of torts. But the concept of American-style tort litigation is beginning to take root in Europe. In Italy for example, they have recently introduced the concept of class action lawsuits.

    Class action suits in Italian civil courts did not exist until January 2010 when a new law was passed to permit them. Only days after the class action legislation was signed into law, Aduc, an Italian consumer organization, filed a lawsuit against Microsoft.

    "Individual cases affect a limited number of users," said Aduc Chairman Vincenzo Donvito according to Reuters story. "Therefore, as there is a large number of users involved, and with the importance of the free market issue, we have decided to take a collective legal action against Microsoft."

    But there are substantial differences between the American and Italian class action laws. Their governing codes -- Rule 23 and Azione in Class -- have similarities and differences.

    While an exhaustive list of the differences is beyond the scope of this article, some need to be referenced.

    First, there are two important distinctions.

    One is that there is no pre-trial discovery in Italy and, two, there is no jury trial.

    Other significant provisions are that while Americans have to refuse to opt-out of a class, Italians must opt-in. And Italian plaintiffs cannot choose a forum, they must file in the defendant's jurisdiction.

    Finally, in the Italian system, the losing party pays the costs of litigation.

    "This guts the Italian class action law," said University of Pennsylvania law professor Stephen Burkhart, an avid proponent of class action suits and the application of cy pres.

    While Frank says learning from Italy might be helpful, he issues the caveat that Italy needs to demonstrate the efficacy of their new law. The Italian courts must show that under the legislation they can protect the rights of shareholders and consumers while filtering out the abusive suits.

    The other side of the story

    There are those, however, like Professor Burkhart, who think reforming the practice of cy pres specifically and tort reform generally is misguided.

    Jerry Latherow, president of the Illinois Trial Lawyers Association, thinks cy pres awards are extremely beneficial. He mentioned instances where cy pres funds have been funneled to "Lawyers Lend a Hand," a charitable group that gives grants to tutoring programs.

    "The point is that the defendant should pay," Latherow said. "People often complain that the attorneys are getting big fees or that the claimants do not always receive the judgment."

    Latherow claims the lawyers earned the money they receive in fees. As long as reasonable efforts are made to give money to those in the class, there should not be anything deemed inappropriate, he said. This is especially true where the individual class action award is so small that the claimants receive little or nothing. He said cy pres would be advantageous in such a case. The award would have more benefit by being concentrated and given to one charity, he said.

    "The reality is that there would not be any punishment if the lawyers did not take the case," Latherow said.

    He mentioned that at a recent legislative conference Sen. Harry Reid (D- Nev.) said that the U.S. Congress was not holding tobacco companies accountable. It was the plaintiff's lawyers that made the tobacco companies pay the penalty for their transgressions, he said.

    Down the road

    There was one opinion everyone shared, whether they were opposed to or in favor of the cy pres doctrine. Frank, McKinney and Latherow agreed there will be no big pushes to reform the practice of cy pres given the current political climate at both the state and federal levels.

    The say political will alone is not sufficient for American courts to adopt an Italian-like system of loser-pays which prohibits venue shopping and the distribution of funds awarded to those other than the claimants.

    "Right now there is too much influence to keep the status quo," McKinney said.

    Judge Rosa Anna Tremoglie of Catania, Italy, contributed to this article.

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