Will the Supreme Court Like This Facebook Settlement?
Federal rules require that class-action settlements be “fair, reasonable, and adequate.” A petition before the U.S. Supreme Court in Marek v. Lane argues that a settlement that pays lawyers and helps a defendant, but leaves class members out in the cold, meets none of those requirements.
The deal in question came after Facebook users sued the company for publicizing their online purchases without permission. The social-networking site agreed it was in the wrong, but the settlement that the U.S. Court of Appeals for the Ninth Circuit approved did not compensate the more than three million absent class members, the petition argues.
Instead, the settlement paid their lawyers $2.3 million, and gave $6.5 million to a new foundation that Facebook helps run.
A divided Ninth Circuit panel invoked the doctrine of cy pres—which provides money to charities when it is impractical to compensate plaintiffs—to uphold the settlement in September 2012. The court later declined to hear the case en banc. Counsel of record David B. Rivkin, Jr., a partner at Baker & Hostetler, warns that the ruling ignores precautions that other circuits use to ensure that attorneys do not abuse cy pres at their clients’ expense.
“When you are representing clients, you have an ethical obligation to represent them zealously and obtain meaningful recovery,” Rivkin said. “In my view, this obligation is not met by creating a foundation that provides no meaningful relief to the plaintiffs.”
Traditionally found in trust law, cy pres is short for the French “cy pres comme possible” or “as near as possible.” Probate courts use the doctrine to reassign gifts from a defunct charity to one that has a similar mission. Since the 1970s, class actions have applied it to funds that would be inefficient or impossible to give to plaintiffs.
The Ninth Circuit found that payouts to individual class members in the Facebook case would have been miniscule, but the brief argues that some plaintiffs may have been eligible for $2,500 and that the court ignored alternate ways to structure the settlement. It also criticizes cy pres awards for creating conflicts of interest, and incentivizing class counsel and the defendant to make deals that benefit each other instead of the clients.
“I think cy pres should be a last resort,” said Ted Frank, who runs the Center for Class Action Fairness, which contributed to the brief. “You do it when you can’t do anything else, and you do it in such a way that the money is not going to any entity related to the plaintiff, any entity related to the defendant and any entity related to the judge.”
Frank, who started his non-profit in 2009 to combat unfair class-action settlements, has testified before Congress on cy pres. He said he gave his research to Rivkin and Baker & Hostetler attorney Andrew Grossman to “translate into ‘certiorari-ese.’” California attorneys John W. Davis and Steven Helfand also signed the petition.
The underlying lawsuit arose after Facebook’s 2007 launch of Beacon, a program that alerted site members when their friends bought items from certain online stores. Plaintiffs complained that disclosure of the racy movies they rented or cheap gifts that they bought violated privacy and consumer protection laws.
The settlement created the Digital Trust Foundation, a non-profit aimed at educating people about protecting their privacy online. While other jurisdictions require cy pres awards to advance class members’ interests, Rivkin argues that the charity in this case does not do so. Facebook’s chief lobbyist sat on the organization’s initial board, and, as dissenting lower court judges pointed out, it has no track record, a vague mission and could easily be a publicity stunt.
But the Ninth Circuit reasoned that the settlement had a “substantial nexus” with the plaintiffs’ interests, and that courts and class members should not be too involved in determining if a deal is ideal. Other circuits, though, require that cy pres get “special scrutiny” to ensure that there are no conflicts and that the award is the next best home for the funds, Rivkin wrote. They also use the doctrine only if there is no reasonable way to compensate class members directly.
The Supreme Court, which has been active in curtailing class actions in recent years, is scheduled to consider the petition on October 11. Rivkin warns that review is necessary to prevent forum shopping.
“There are a number of problems with class action suits, but this is probably the most compelling and easy to remedy,” Rivkin said.
Jamie Schuman is a freelance writer and graduate of The George Washington University Law School.