In 2010, Paloma Gaos filed a class action in the Northern District of California, seeking damages for the disclosure of her search terms to third-party websites through referral headers, claiming fraud, invasion of privacy, and breach of contract, among others. She eventually settled with Google on behalf of an estimated class of 129 million people in return for an $8.5 million settlement fund and an agreement from Google to revise its FAQ webpage to explain referral headers. Attorneys’ fees of $2.125 million were awarded out of the settlement fund, amounting to 25 percent of the fund and more than double the amount estimated based on class counsel’s actual hours worked.
But no class members other than the named plaintiffs received any money! Instead, the remainder of the settlement fund was awarded to six organizations that “promote public awareness and education, and/or…support research, development, and initiatives, related to protecting privacy on the Internet.” Three of the recipients were alma maters of class counsel.
This diversion of settlement money from the victims to causes chosen by the lawyers is referred to as cy pres. “Cy pres” means “as near as possible,” and courts have typically used the cy pres doctrine to reform the terms of a charitable trust when the stated objective of the trust is impractical or unworkable. The use of cy pres in class action settlements—particularly those that enable the defendant to control the funds—is an emerging trend that violates the due process and free speech rights of class members.
Accordingly, class members objected to the settlement, arguing that the district court abused its discretion in approving the agreement and failed to engage in the required rigorous analysis to determine whether the settlement was “fair, reasonable, and adequate.” The U.S. Court of Appeals for the Ninth Circuit affirmed the settlement, so two objecting class members, including Competitive Enterprise Institute lawyer Ted Frank, asked the Supreme Court to take the case (with a supporting brief from Cato)—which it has.
Cato has filed an amicus brief at this merits stage, arguing that the use of cy pres awards in this manner violates the Fifth Amendment’s Due Process Clause and the First Amendment’s Free Speech Clause. Specifically, each class member has a right to his claim, any compensation that arises from it, and representation that will defend the first two rights. The aggregate nature of class actions makes it easy to forget that their sole foundation is individual rights; class counsel and defendants end up ignoring that foundation and using the class as an aggregate tool for self-interest and collusion. When the settlement includes a cy pres award, it’s worse because class members’ property is involuntarily transferred to strangers. That those strangers are charitable organizations does not improve the situation, because it just gives class counsel and defendants’ collusion a philanthropic veneer. In the end, cy pres awards guarantee that every participant in the litigation derives some benefit except for the class members, the owners of the property being doled out. This perversion of the role of the judiciary is a gross violation of due process, and only a shift to an opt-out system and rigorous supervision by the courts can salvage individual rights.
