Law & the Courts

Time for Lawyers to Stop Giving Away Their Clients’ Money

Trial lawyers can’t dole out clients’ money as treats to their favorite charities.

This morning, the Supreme Court will hear oral arguments in a case involving one of trial lawyers’ favorite tricks: Doling out their clients’ money as treats to their favorite charities. The case, Frank v. Gaos, involves a class-action lawsuit filed in 2010 on behalf of all who’ve used Google’s search engine. The suit alleges that Google violated its users’ privacy because information about the users’ search terms could be visible to websites accessed through a search on the site using an outside web browser.

Here’s the trick: The lawyers for Google and the plaintiffs agreed to settle the case for more than $8 million without paying a penny to the actual class of plaintiffs, aside from three $5,000 “incentive” payments to the three individuals whose names were attached to the lawsuit. Instead, the lawyers agreed to pay more than $2 million to the attorneys who brought the suit and millions more to six mutually agreed upon charities, including the plaintiffs’ lawyers’ alma maters and the American Association of Retired Persons (AARP).

Attorney Ted Frank, who founded a nonprofit group in 2009 to fight unfair class-action practices, objected to the settlement. Frank rightly argues that the settlement shortchanges the individuals in the plaintiff class. How can it be fair for lawyers to agree to extinguish the purported legal rights of their clients while paying themselves millions and their clients nothing?

That seems straightforward enough. But the Supreme Court also needs to answer a broader question that the Manhattan Institute (where I am director of legal policy) highlights in an amicus brief: What is the legal basis for a federal court to distribute class-action proceeds to third-party charities in the first place? We argue that there is none.

Congress has given the federal courts the power to adopt procedural rules governing litigation. But the font of this delegated power, the Rules Enabling Act, expressly reserves to Congress the power to change substantive rights afforded to parties to litigation. Substantive rights include the remedies for a law’s violation. In AmChem Products v. Windsor (1997), the Supreme Court disallowed a claims-settlement facility that a federal court had proposed to handle all asbestos-related claims. Whether or not the lower court’s remedy was a good one to handle such complex litigation, the Supreme Court opined, “Congress . . . has not adopted such a solution.”

Nor has Congress adopted paying class proceeds to charity as a “solution” for resolving difficult-to-administer payouts to sprawling class-action plaintiff groups such as Google’s. The idea traces not to Congress but to a 1972 student-authored comment in a law review, which suggested importing to class-action-settlement practice the charitable trusts cy pres doctrine. Derived from the French expression cy pres comme possible — “as near as possible” — the doctrine enables charitable trustees to change the terms of the trust as necessary in light of changed law or circumstances.

Shortly after the note was published, federal courts began rubber-stamping class-action settlements that distributed proceeds to charities rather than plaintiffs. Since 1978, federal courts have discussed the cy pres doctrine in at least 1,333 cases, predominately in class-action settlements. Today, cy pres distributions in class-action settlements total millions of dollars annually.

Manhattan Institute researchers examined a broad sampling of publicly available cy pres settlements and discovered that the charities benefiting from these awards have common characteristics. Most often, charities that receive these funds are substantially if not principally engaged in promoting or underwriting additional litigation. Among these beneficiaries are Public Citizen, Public Counsel, Public Justice, the Consumers Federation of America, the National Consumer Law Center, Consumer Action, and The Impact Fund. It’s little surprise that some of these very organizations have filed briefs in the Frank case defending the practice that feeds them, as has the plaintiffs’-lawyer lobby group the American Association for Justice.

Beyond charities that support lawsuits, class-action-settlement monies most often flow to universities — very often, as in the Frank settlement, those with ties to the lawyers for the plaintiffs, the defendants, or both. Many left-wing or left-leaning charities with broader missions also have received sizable allocations in cy pres distributions, such as the AARP, the American Civil Liberties Union, and the Equal Justice Foundation. None of the 65 organizations the Manhattan Institute identified in its survey of cy pres recipients had a conservative orientation.

That doesn’t mean that all or even most of the charities that benefit from class-action cy pres distributions are unworthy. But their funding streams cannot be authorized through federal courts when unauthorized by Congress. (In the Frank case, the congressional statute underlying the plaintiffs’ claim, the Stored Communications Act, authorizes courts to issue legal injunctions, money damages to plaintiffs, and attorneys’ fees — but not payments to third-party charities.)

Similarly, it is understandable that some corporate defendants, such as Google, may prefer to retain the cy pres option when facing massive class-action lawsuits, to enable them to resolve claims the attorneys value at mere pennies per plaintiff.

As Justice Ruth Bader Ginsburg noted for the court in AmChem, “Coping with claims too numerous to secure their ‘just, speedy, and inexpensive determination’ one by one” has often required “adventuresome” responses. But as the AmChem decision made clear, the adventure cannot involve adopting class-action remedies that compromise individual plaintiffs’ substantive rights.

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