The U.S. Court of Appeals for the Third Circuit recently vacated an order approving the settlement of a class action certified under Rule 23(b)(2), where the only benefit to the class was the defendant's payment of a cy pres award to organizations that promoted data privacy.
In so ruling, the Third Circuit held that the trial court did not adequately scrutinize the settlement agreement's broad release of claims for money damages, and the parties' designation of cy pres recipients, as required by Rule 23(e).
A copy of the opinion is available at: Link to Opinion
An internet technology company created a web browser "cookie" that tracked an internet user's data. For some users, the cookie may have operated even if the user configured the browser's privacy settings to prevent tracking.
The class plaintiffs claimed that the defendant invaded their privacy under the California constitution and the state tort of intrusion upon seclusion. The plaintiffs asserted additional claims that were dismissed with the dismissal previously affirmed on appeal.
On remand, the parties agreed to a settlement and moved for certification under Rule 23(b)(2) and approval of the settlement.
As you may recall, Rule 23(e) requires that courts review proposed settlements for fairness, reasonableness, and adequacy.
In deciding whether to approve a class action settlement, a court considers the Girsh factors: "(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation." Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975).
The defendant agreed to stop using the cookies and to pay $5.5 million to cover class counsel's fees and costs, incentive awards for the named class representatives, and cy pres distributions. The class members did not receive any direct compensation. The six cy pres recipients were data privacy organizations selected by both parties.
In exchange, the defendant would obtain, among other things, a class wide release of all class member claims, including for money damages that did or could stem from the subject matter of the litigation.
The lone objector challenged the certification and the terms of the approved settlement. He argued that (1) the cy pres money belonged to the class as compensation, (2) the class should not have been certified due to inadequate representation, and (3) the cy pres recipients raised a conflict of interest concern because of the pre-existing relationship between the defendant and class counsel.
The trial court rejected these arguments and approved the settlement, finding that "the nature of the likely compensation to the class members has always been complicated by the substantial problems of identifying the millions of potential class members and then translating their alleged loss of privacy into individual cash amounts."
It further found that "payments to absent class members would be logistically burdensome, impractical, and economically infeasible, resulting (at best) with direct compensation of a de minim[i]s amount."
Because the cy pres money would be used by "preeminent institutions for research and advocating for online privacy," the trial court held that the cy pres awards bore "a direct and substantial nexus to the interests of the class members."
The trial court noted the objections to the pre-existing relationships between defendant, class counsel, and the cy pres recipients, and in one sentence concluded that "no conflict of interest" had "undermine[d] the selected cy pres recipients."
The objector timely appealed.
After oral argument, the Third Circuit held the appeal in abeyance pending the Supreme Court's resolution of Frank v. Gaos, which also involved a cy pres-only class action settlement based on alleged privacy violations. 139 S. Ct. 1041, 1043-44 (2019).
The Gaos court did not review the class action settlement in that case. Instead, it vacated the settlement under its decision in Spokeo, Inc. v. Robins, which clarified the concreteness requirement of the injury-in-fact prong of Article III standing, and remanded the case to resolve the standing question.
In the wake of Spokeo, the Third Circuit held that the defendant's alleged tracking of a person's internet browser activity without authorization was an intrusion to privacy and conferred Article III standing.
Next, the Third Circuit observed that a settlement is presumed to be fair if: "(1) the negotiations occurred at arms length; (2) there was sufficient discovery; (3) the proponents of the settlement are experienced in similar litigation; and (4) only a small fraction of the class objected." NFL Concussion Litig., 821 F.3d 410, 436 (3d Cir. 2016).
The Third Circuit described the usual cy pres case, where money is leftover after distributions because class members cannot be located or the parties overestimated the projected distribution. In those cases, parties may seek to distribute the excess settlement funds for their next best use -- a charitable purpose reasonably approximating the interest pursued by the class.
The Third Circuit noted that a settlement whose only monetary distributions are to class counsel, class representatives, and cy pres recipients present a heightened risk of conflict because the settlement clearly benefits these parties, "while any benefit to other class members [was] indirect and inconsequential monetarily."
The defendant argued that the settlement fund was never intended to compensate class members monetarily. Rather, the fund enhanced the settlement deterrent effect by funding data privacy institutions that will work to prevent similar potential privacy invasions from occurring in the future.
The Third Circuit agreed, explaining that "[d]irect monetary distributions typically would not accomplish the purpose of a (b)(2) class," and it was not an inherent abuse of discretion for the trial court to allow a cy pres only settlement.
However, in the Third Circuit's view, the trial court failed to adequately consider two features of the settlement agreement.
First, the parties sought to certify an injunction class under Rule 23(b)(2), not a damages class under Rule 23(b)(3), and thus avoided the heightened certification and notice requirements that apply to the latter.
Nevertheless, the defendant obtained the benefits that a Rule 23(b)(3) class gives to the defendant and class counsel, namely a broad class wide release of claims for money damages and a percentage of fund calculation of attorneys' fees for class counsel.
The Third Circuit held that the trial court's failure to scrutinize this aspect of the settlement agreement prevented it from reviewing its fairness, reasonableness, and adequacy.
On remand, the Third Circuit instructed the trial court to determine whether the defendant can obtain a class wide release of claims for money damages in a Rule 23(b)(2) settlement, and if so, whether a release of that kind requires a heightened form of notice either under Rule 23(c)(2)(B) or due process tenets.
Second, the Third Circuit observed that the trial court did not adequately scrutinize the selection of the specific cy pres recipients due to the longstanding ties that the defendant had to a number of the cy pres recipients.
Moreover, the trial court made no finding that the class's nationwide nature was reflected in the geographical scope of the cy pres recipients' work.
The Third Circuit acknowledged that it has never addressed the issue of when a prior relationship between a cy pres recipient and one of the litigants in a class actions undermines the proposed settlement's fairness, but regardless of the relevant standard, it concluded that the trial court's failure to conduct fact finding regarding the relationship between the cy pres recipients and the defendant warranted remand.
On remand, the Third Circuit instructed the trial court to consider whether these cy pre recipients have significant prior affiliations with the defendant, class counsel, or the court, and if so, whether the selection process failed to satisfy Rule 23(e)(2) by raising substantial questions of whether the recipients were chosen on the merits.
Accordingly, the Third Court vacated the order approving the settlement and remanded for further proceeding consistent with its opinion.
Ralph T. Wutscher
Maurice Wutscher LLP
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