The U.S. Chamber of Commerce and a law professor have appealed to Congress to get rid of “cy pres” awards in class actions, arguing that they benefit lawyers and charities but not the class members.
During a hearing on Capitol Hill last week, the first on point since the Class Action Fairness Act was enacted seven years ago, Martin Redish of Northwestern University School of Law argued that the awards create “faux” class actions. Cy pres awards are charitable donations paid from unclaimed settlement funds.
All too often, class members are unaware the lawsuit is happening, or can’t be found, or are unreachable, or the award is so small that it wouldn’t make sense for them to seek any money, Redish told a House subcommittee on the Constitution on Friday.
“What happens in these cases is [that] the lawyers become the real parties of interest,” Redish said. “The charity is not an injured party—the charity has not suffered harm—and this is a symptom of the perversion of the class action process.”
John Beisner, a partner at Skadden, Arps, Slate, Meagher & Flom, testifying on behalf of the U.S. Chamber’s Institute for Legal Reform, said cy pres awards in many cases are used merely to justify attorneys’ fees by inflating the size of the class award.
“While the use of cy pres in class action settlements has benefited numerous organizations, ranging from art schools to law schools and from the American Red Cross to legal aid societies, the practice is troubling when there is no effort to compensate the actual class members, because in such cases the supposed relief fails to provide any real benefit to the purportedly injured class members,” Beisner said.
Cy pres awards have been under attack since the 2005 law limited attorney fees in coupon settlements. Plaintiffs' attorneys dismiss the concerns as sour grapes, arguing that defendants want to claim such residual funds for themselves.
Beisner noted that the law shifted countless interstate class actions into federal court, away from state jurisdictions that he said apply lax class-certification standards and exhibit bias towards out-of-state defendants.
“The result is more rigorous scrutiny of class action proposals, which in turn has led to a fairer and more just class action landscape,” Beisner said.
But Thomas M. Sobol, a partner at Hagens Berman Sobol Shapiro, said the law’s biggest impact has been to deny individuals access to the substantive state laws that protect consumers, including laws governing unfair and deceptive trade practices, warranties, antitrust, unjust enrichment, negligence and other torts.
“CAFA usurped from state courts the ability to interpret their own laws and protect their own citizens,” Sobol said.