If a multimillion dollar class-action settlement basically doesn’t pay a single consumer, is it fair?
That’s not the start of a lawyer joke; it’s the crux of a case being argued Wednesday in the U.S. Supreme Court that, advocates say, has serious implications for the ways consumers benefit from duels with businesses in large-scale litigation.
“This is potentially billions of dollars going from everyday consumers to lawyers’ slush funds,” said Ted Frank, the litigation director at the Competitive Enterprise Institute, who’s disputing the $8.5 million settlement between Google
and 129 million class members before the Supreme Court.
The case, Frank v. Gaos, focuses on the question of whether it’s fair and reasonable to ever have class action settlements that give money to outside groups instead of the class members themselves.
A decision for Frank — who also happens to be a class member in the Google case and is a longtime gadfly questioning class action settlements — could require the money go directly to consumers and upend a class action pay out method that’s been around for decades.
Google’s $8.5 million settlement only paid $15,000 to three consumers
The underlying case has to do with Google’s 2013 agreement to pay $8.5 million to settle a case claiming widespread privacy rights violations. When any web surfer looked up topics on Google, the search engine beamed the search terms — like “depression” and “medical leave” — in the URL string to the third-party websites. The search term revelations broke various state and federal laws, plaintiffs said.
After about three years of litigation, the parties settled. Google added more online disclosures and opened its wallet without admitting liability.
The settlement’s payouts included a $5,000 award for each of the three named plaintiffs and $2.12 million for the legal fees of the plaintiffs’ lawyers. The remaining $5.3 million was divvied up among six universities and organizations pledging to put the money towards improving internet privacy.
Lawyers for both Google and the class members say Frank’s objections to the settlement are unfounded. The settlement’s compensation to six well-known institutions is valid, rare and does more good than a four-cent check sent to each and every class member, they argue.
Frank never explained “why a settlement that brings class members some benefit and requires the defendant to pay some recompense is unfair, unreasonable, or inadequate, when the alternative is nothing,” class members’ lawyers argued.
Google settlement money went to Harvard and other elite schools
The settlement’s recipients included the Berkman Center for Internet and Society at Harvard University, the Chicago-Kent College of Law Center for Information, Society and Policy and the Stanford Law School Center for Internet and Society.
Frank, who is also one of the case’s many class members, objected to the outcome. Among other arguments, he noted three of the plaintiffs’ attorneys graduated from schools now poised to receive money. The school ties had exactly zero to do with the court-approved awards, plaintiffs attorneys insisted.
A San Francisco federal judge signed off on the settlement. A three-judge panel in the Ninth Circuit Court of Appeals — comprised of appointees from the administrations of George W. Bush, Richard Nixon and Bill Clinton — affirmed it.
Circuit Judge J. Clifford Wallace partially dissented, saying with 47% of the award going to attorney alma maters — Harvard, Stanford and Chicago-Kent College of Law — the lower court should have dug more to be sure the school ties didn’t play “any role in their selection as beneficiaries.”
The Supreme Court decided to hear the case in April.
‘Cy pres’ distributions being eyed
The money award to the third-party organizations came through an arrangement called a “cy pres” distribution. That’s legalese lifted from old French, meaning “cy pres comme possible” which translates to “as near as possible.”
As a legal concept, “cy pres” distributions have their roots in trusts and estates law. For example, court papers noted, the cy pres doctrine let a Massachusetts judge in the wake of the Civil War refashion a trust for the abolition movement so it could help poor African-Americans.
Federal lawmakers green-lighted cy pres distributions for class-action cases in 1966. Cy pres distributions to charities are often used after all possible class members are located and paid, observers say. The Google case, where payouts to third-party groups came before payments to individuals, is a rare exception to the rule, they said.
Consumers are being deprived, some say
But Frank said cy pres awards have grown quickly since the 1980s, accelerating sharply recently, depriving consumers in the process.
Cy pres awards are a symptom of bigger problems, Frank says. In his opinion, many class-action lawyers don’t have the class’ best interests at heart, Frank said. “When courts treat a dollar of cy pres as equivalent to a dollar of direct class recovery, class attorneys’ natural preference will be to favor their favorite charities and causes over thousands or millions of anonymous class members.”
But attorneys for the class in the current case emphasized that lawmakers have repeatedly reviewed class action litigation rules. They’ve always kept the cy pres provisions in place, recognizing their utility.
Google acknowledged in court filings some class action cases and settlement can lead to abuse and excess — but the outcome here was a good example of a proper deal, the company said.
Frank was in search of a ban on cy pres distributions, the technology company said.
Getting rid of ‘cy pres’ will make these lawsuits more expensive for companies, they argue
Getting rid of these types of payouts would make it even harder to deal with massive cases where direct payments were impossible, Google insisted. “Banning cy pres settlements thus would make class action-action litigation even more costly and inefficient, imposing a cure that worsens the disease,” Google’s lawyers said.
Vanderbilt University Law School Professor Brian Fitzpatrick, an expert in class action law, said the application process for picking recipients in the Google case was “more rigorous than usual.”
“Usually someone just picks something,” without much clarity about the reasoning behind the award, he said.
Fitzpatrick said the case was addressing a narrow issue.
There are about 350 class action settlements in federal court every year, Fitzpatrick said. About 40% pertain to securities fraud, with shareholders suing companies over alleged material misstatements affecting stock prices. Consumer class actions accounted for 10% of the pacts, he said.
Class action cases often grab headlines. Recently, working-class investors alleged President Donald Trump bilked them years ago with a pitch to invest in a marketing company. Meanwhile, a short seller argued Elon Musk made a material misstatement of fact with his infamous August tweet about taking Tesla
Various backers for both sides
The cy pres payouts have their allies and foes.
Attorneys General from 19 states, mostly Republicans, echoed Frank’s concerns about cy pres awards and urged a remand on the case. The Chamber of Commerce of the United States of America didn’t take a position on the Google settlement itself in their own friend of the court brief, but argued that businesses frequently had to cope with “abusive” suits.
But consumer groups like the U.S. Public Interest Research Group Education Fund and the National Consumer Law Center argue the settlement shouldn’t be disturbed.
Class actions aren’t purely about restitution, the consumer groups said, they also correct wrongdoing on a systemic scale.
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