Opinion ID: 798604
Heading Depth: 1
Heading Rank: 3

Heading: .Challenge to the Cy Pres Distribution

Text: When class actions are resolved by settlement, unclaimed money may remain in the settlement fund after initial distributions to class members because some class members cannot be located, some decline to file a claim, or some have died. Settlement agreements often dispose of these unclaimed monies by providing for cy pres distributions. Cy pres is an equitable doctrine that has been imported into the very different class-action context from the field of trusts and estates law: In trusts and estates law, cy pres, taken from the Norman French expression cy pres comme possible (as near as possible), save[s] testamentary gifts that otherwise would fail because their intended use is no longer possible. Courts permit the gift to be used for another purpose as close as possible to the gift's intended purpose.... In class actions, courts have approved creating cy pres funds, to be used for a charitable purpose related to the class plaintiffs' injury, when it is difficult for all class members to receive individual shares of the recovery and, as a result, some or all of the recovery remains. In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24, 33 (1st Cir.2009) (citations omitted) (quoting In re: Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679, 682 (8th Cir.2002)). In In re Pharmaceutical Industry Average Wholesale Price Litigation, we recognized for the first time in this circuit that settlement agreements may establish cy pres funds for the distribution of residual unclaimed funds. Id. at 33-36. There, this court affirmed the approval of a cy pres fund where it was part of a settlement agreement that was negotiated at arm's length by the parties; was not court mandated; some class members would not otherwise receive recovery; more than actual damages were paid out to class members; the creation of the cy pres fund facilitated the settlement of a hard-fought complex action; and the cy pres fund was meant to benefit absent and non-claimant class members. We rejected the argument that claimants are entitled to receive any unclaimed residual money, in preference to a cy pres distribution, regardless of whether they have already been compensated for their losses. Id. at 35. We held that the district court did not abuse its discretion in approving the cy pres part of the settlement because the settlement agreement met the American Law Institute's benchmark of 100 percent recovery for all class members before any money would be distributed through cy pres. Id. at 35-36 (citing Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 cmt. b (Apr. 1, 2009) (proposed final draft)). This case involves an agreement with these same characteristics. In our earlier case we did not address questions concerning the distributions from cy pres funds. We do so for the first time here. We review a district court's approval of a proposed class action settlement for abuse of discretion. Id. at 32-33. The abuse of discretion standard is highly deferential and not appellant-friendly. Texaco P.R., Inc. v. Dep't of Consumer Affairs, 60 F.3d 867, 875 (1st Cir.1995) (quoting Lussier v. Runyon, 50 F.3d 1103, 1111 (1st Cir.1995)) (internal quotation marks omitted). Of course, a material error of law is an abuse of discretion. Spooner v. EEN, Inc., 644 F.3d 62, 66 (1st Cir.2011). Ordinarily, however, an abuse of discretion will not be found unless the record provides strong evidence that the trial judge indulged a serious lapse in judgment, Texaco P.R., 60 F.3d at 875, such as if the decision ignores a material factor deserving significant weight, relies upon an improper factor, or assesses only the proper mix of factors but makes a serious mistake in evaluating them, Downey v. Bob's Disc. Furniture Holdings, Inc., 633 F.3d 1, 5 (1st Cir.2011) (quoting Gomez v. Rivera Rodriguez, 344 F.3d 103, 112 (1st Cir.2003)) (internal quotation mark omitted). We apply the same abuse of discretion standard to questions regarding a court's approval of distribution from a cy pres fund as part of a settlement agreement. The Samsell plaintiffs frame some of their challenges as attacks on the underlying consent decree, but they gave up that challenge to the agreement when they executed the implementation agreement. They have waived any right to object to the agreement on appeal; indeed they received consideration for that waiver. After extended negotiations resulting in a 67% increase in their full damages awards, the Samsell plaintiffs entered into the implementation agreement in which they agreed to be bound by all terms and provisions of the settlement agreement and agreed not to appeal from a final judgment. They also agreed to accept the roughly 167% of their damages as fair and reasonable compensation. [4] The settlement agreement, which appellants are not free to attack, explicitly anticipated that there could be unclaimed funds after the distribution to claimants, and expressly granted the district court broad discretion to make awards from the cy pres fund. [5] The agreement anticipated that a distribution might be made to appropriate charitable institutions. It granted TAP tax deduction rights if all or part of any unclaimed funds is distributed to one or more charitable organizations. We turn to the issue of whether the district court abused its discretion, under the evolving law of cy pres distributions in class action settlement agreements, in either the process utilized or in the decision to make a cy pres award of the unclaimed consumer settlement proceeds to DF/ HCC. Here, the district court considered a supplemental consumer claims process designed to reach more consumers using previously unavailable patient data from the Centers for Medicare and Medicaid Services. The district court was concerned, however, that only 11,000 individuals out of the estimated tens or hundreds of thousands of class consumers filed claims despite extensive notice procedures. The district court appropriately decided that a supplemental consumer claims process would be prohibitively expensive, time-consuming, and, given the high mortality rate among members of the class, would likely recruit few new claimants. The Samsell plaintiffs clarified at oral argument that they are no longer appealing the district court's choice to arrange a cy pres distribution rather than to recruit more claims by absent class members. In any event, there was no abuse of discretion in the district court's choice to forego a direct notice mailing given that the administrative burden of doing so appeared to outweigh the small potential for increased claims. Instead, the Samsell plaintiffs make several categories of arguments, which are essentially these: 1. That they were entitled to greater distributions in preference to distributions for the benefit of absent class members because they have not received treble damages. 2. That the process used was flawed, including on the grounds that the judge should have recused himself. 3. That no award can be made to DF/ HCC because: a) its doctors are precluded from being recipients of awards by the terms of the agreement; and b) the principles of cy pres are violated in that this is not a next best award to absent national class members because DF/HCC is located in Massachusetts and the research will be primarily focused on prostate cancer. Many of these assertions are factually untrue. We turn to the law on distribution of cy pres funds. To the extent the American Law Institute's Principles of the Law of Aggregate Litigation (ALI Principles) provides guidance, it does not support a claim of abuse of discretion. The ALI Principles set forth proposed rules for the use of a cy pres distribution in class action settlements. See Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 (2010) [hereinafter ALI Principles]. The ALI Principles express a policy preference [6] that unclaimed funds be redistributed to ensure class members recover their full losses. This policy preference was motivated by a concern that few settlements award 100 percent of a class member's losses, and thus it is unlikely in most cases that further distributions to class members would result in more than 100 percent recovery. In re Pharm. Indus., 588 F.3d at 24 (quoting Am. Law Inst., Principles of the Law of Aggregate Litigation § 3.07 cmt. b (Apr. 1, 2009) (proposed final draft)). Where class members have been fully compensated for their losses, this presumption does not apply. The ALI Principles also reject the presumption, suggested by a concurring opinion in Klier v. Elf Atochem North America, Inc., 658 F.3d 468 (5th Cir.2011), that any residual funds must be returned to the defendant. Id. at 482 (Jones, J., concurring). The ALI Principles explain that returning unclaimed funds to the defendant would undermine the deterrence function of class actions and the underlying substantive-law basis of the recovery by rewarding the alleged wrongdoer simply because distribution to the class would not be viable. ALI Principles, § 3.07 cmt. b. Courts have generally agreed with the ALI Principles. See 3 Newberg on Class Actions § 10:17 (4th ed. 2011). The ALI Principles also reject escheat to the state as a more preferable option. See ALI Principles, § 3.07 cmt. b. Instead, ALI Principles § 3.07(c) sets up an order of preference: when feasible, the recipients should be those whose interests reasonably approximate those being pursued by the class. Id. If no recipients whose interests reasonably approximate those being pursued by the class can be identified after thorough investigation and analysis, a court may approve a recipient that does not reasonably approximate the interests being pursued by the class. Id. Both case law and the ALI Principles support our adoption of the reasonable approximation test. As to whether distributions reasonably approximate the interests of the class members, we consider a number of factors, which are not exclusive. These include the purposes of the underlying statutes claimed to have been violated, the nature of the injury to the class members, the characteristics and interests of the class members, the geographical scope of the class, the reasons why the settlement funds have gone unclaimed, and the closeness of the fit between the class and the cy pres recipient. [7] Failure to meet the reasonable approximation test can lead to reversal. [8] For example, in In re Airline Ticket Commission Antitrust Litigation, 268 F.3d 619 (8th Cir.2001), a national antitrust class action against airlines concerning caps on ticket commissions earned by travel agencies, the Eighth Circuit held that a cy pres distribution of unclaimed funds to Minnesota law schools and charities was invalid. Id. at 625-26. On remand, the district court ordered the funds distributed to the National Association for Public Interest Law, to support attorneys providing legal services to low income clients by paying the interest on grant recipients' outstanding student loans. In re: Airline Ticket Comm'n, 307 F.3d at 682. The Eighth Circuit reversed again, explaining that the next best recipients were not public interest organizations, but rather the travel agencies in Puerto Rico and the U.S. Virgin Islands who suffered from the same allegedly unlawful caps. Id. at 683-84. The court remanded the case, ordering that the cy pres fund be distributed on a proportional basis to those travel agencies. Id. at 684. Other courts have similarly applied the reasonable approximation test. See, e.g., Nachshin v. AOL, LLC, 663 F.3d 1034, 1040 (9th Cir.2011) (rejecting, in a nationwide privacy class action, a cy pres distribution to local Los Angeles charities because it did not account for the broad geographic distribution of the class, did not have anything to do with the objectives of the underlying statutes, and would not clearly benefit the plaintiff class); Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1311-12 (9th Cir.1990) (invalidating a cy pres distribution to the Inter-American Fund for indirect distribution in Mexico, id. at 1304, in a class action brought by undocumented Mexican workers regarding violations of the Farm Labor Contractor Registration Act, because the distribution was inadequate to serve the goals of the statute and protect the interests of the silent class members, id. at 1312); Houck v. Folding Carton Admin. Comm., 881 F.2d 494, 502 (7th Cir.1989) (invalidating settlement agreement, in a national antitrust class action, that made a cy pres distribution to local law schools, and directing the district court to consider to some degree a broader nationwide use of its cy pres discretion); In re Folding Carton Antitrust Litig., 744 F.2d 1252, 1253-54 (7th Cir. 1984) (invalidating, in a national antitrust class action, a cy pres distribution that would establish a private antitrust research foundation on the basis that [t]here has already been voluminous research on the subject). As these cases make clear, the mere fact that a recipient is a charitable or public interest organization does not itself justify its receipt of a cy pres award. Against these criteria we turn to the Samsell plaintiffs' arguments. They first argue that the residual funds should have been used first to pay the claimants their full out-of-pocket expenses. That is not the measure of their damages. Only a portion of the sum charged for Lupron was an overcharge. The Samsell plaintiffs have already received their full damages, and more. Their damages are not the full price they paid for Lupron; rather, their damages are the money they paid above the market value of the drug as a result of the inflated price. The district court found that 30% of the price the class paid for Lupron was a reasonable estimate of the class's full damages. The implementation agreement paid the class 50% of the price they paid for Lupron, which amounts to 167% of their damages. The Samsell plaintiffs argue that even though they have received their full damages, the district court abused its discretion by choosing to make a cy pres distribution instead of using the residual funds to award treble damages to the claimants. [9] We disagree. The 11,000 claimants have already received an enhanced payment beyond single damages. Because the consumer fund was established for the benefit of all consumer purchasers of Lupron, not just the 11,000 who filed claims, the court appropriately determined that the next best relief would be a cy pres distribution which would benefit the potentially large number of absent class members. [10] Such relief may yield tangible benefits for class members in the form of lower prices for existing drugs, more effective or more cost-efficient versions of current drugs, or even new cures altogether. Such benefits would accrue both to the claimant class members and to the living absent class members, most of whom would enjoy the advantages of less expensive or more effective drugs that combat the multitude of conditions the class faces, which this research may produce. Moreover, the parties themselves contemplated such use of any unclaimed funds: the tax provisions of the settlement agreement clearly provided for the possibility that unclaimed funds would go to a charity to benefit silent class members. In In re Pharmaceutical Industry Average Wholesale Price Litigation, we voiced a concern about overcompensating claimant class members at the expense of absent class members. 588 F.3d at 34-36. There, we rejected the argument that claimants are entitled to receive a windfall of any unclaimed residual money regardless of whether they have already been compensated for their losses. Id. at 35. It is well accepted that protesting class members are not entitled to windfalls in preference to cy pres distributions. The Fifth Circuit, for example, has recently stated that [w]here it is still logistically feasible and economically viable to make additional pro rata distributions to class members, the district court should do so, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution. Klier, 658 F.3d at 475 (footnote omitted). [11] Commentators have agreed that distributing residual funds to claimants who have already recovered their losses necessarily results in an undeserved windfall for those plaintiffs, who have already been compensated for the harm they have suffered. Martin H. Redish, Peter Julian, & Samantha Zyontz, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 639 (2010); see also 2 McLaughlin on Class Actions § 8:15 (8th ed. 2011); Susan Beth Farmer, More Lessons From The Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought By State Attorneys General, 68 Fordham L. Rev. 361, 393 (1999). We agree that allowance of such windfalls could create a perverse incentive among victims to bring suits where large numbers of absent class members were unlikely to make claims. It might also create an incentive for the represented class members to keep information from the absent class members. Redish at 632; see also Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 785 (7th Cir.2004); Van Gemert v. Boeing Co., 553 F.2d 812, 816 (2d Cir.1977) (explaining that such windfalls may encourage the bringing of class actions likely to result in large uncollected damage pools). The Samsell plaintiffs argue next that in any event DF/HCC is not a proper recipient for several reasons. The initial argument is that DF/HCC profited from the fraudulent scheme and conspiracy alleged in this case through its for-profit members. This claim has no basis in the record. DF/HCC is a not-for-profit corporation organized under Massachusetts law; it is not a defendant and the conspiracy claims under RICO against doctors were dismissed early on. Nor do the Samsell plaintiffs point to any DF/HCC employee or affiliate who participated in the fraudulent Lupron scheme. Further, during the cy pres selection process, Samsell herself recommended that half of the cy pres funds go to DF/HCC. [12] The Samsell plaintiffs lodge several attacks against the cy pres selection process itself. First, the Samsell plaintiffs argue that the next best requirement is not met because the cy pres recipient, DF/ HCC, is in Boston while the injuries are to a national class. This objection fails. It is not the location of the recipient which is key; it is whether the projects funded will provide next best relief to the class. DF/HCC is required to do work which will have benefits well beyond Boston. The DF/HCC proposal uses a venture capital model to invest in high-impact, high-risk research projects across the globe, with the expectation that promising results will attract grants from more traditional funding sources. DF/HCC says it intends to be a catalyst for large-scale research collaboration by providing incentives to teams of researchers to join forces at the national and international levels. Moreover, the grants will be awarded by an Oversight Board composed of nationwide leaders in prostate cancer research. Additionally, the claim that only prostate cancer research is being funded is false. The DF/HCC proposal is specific that [t]he central and overarching goal of [the DF/HCC] program is to directly impact the treatment of prostate cancer and other Lupron-treatable diseases and conditions including endometriosis, uterine fibroids, and/or central precocious puberty. Indeed, Samsell recommended to the district court that half of the cy pres funds be distributed to DF/HCC precisely because it would support[ ] research in the treatment of infertility, endometriosis, ovarian and breast cancer, and precocious puberty, unlike the alternative Loughlin proposal which focused only on prostate cancer. The Samsell plaintiffs also argue that the district court judge erred by failing to recuse himself from participation in the cy pres distribution on account of his service as an uncompensated trustee on the board of the Vincent Memorial Hospital, which is affiliated with the Massachusetts General Hospital (MGH). MGH, in turn, is affiliated with both Brigham & Women's Hospital and Harvard Medical School. MGH, Brigham & Women's, and Harvard Medical School are all member institutions of DF/ HCC. This recusal claim is without merit. Recusal is only required by a state of mind so resistant to fair and dispassionate inquiry as to cause a party, the public, or a reviewing court to have reasonable grounds to question the neutral and objective character of a judge's rulings or findings. In re United States, 158 F.3d 26, 34 (1st Cir.1998). That test is not met here. More than that, no question is raised here that the selection of the recipients was made on any basis other than the merits. See ALI Principles § 3.07. This recusal claim has also been waived by being raised only on appeal, which is another indication of its invalidity. Litigants must raise a claim for disqualification of a district court judge after learning of the grounds for disqualification, and certainly may not wait and see how the court rules before acting. Giannetta v. Boucher, No. 92-1488, 1992 WL 379416, at  (1st Cir. Dec. 22, 1992) (per curiam) (holding that the appellant waived his claim of recusal under 28 U.S.C. § 455(a) because he failed to raise it in the district court); In re Abijoe Realty Corp., 943 F.2d 121, 126 (1st Cir.1991) (holding that a party knowing of a ground for requesting disqualification may not wait to raise the issue until after the judge issues a ruling that the party dislikes). Samsell was aware of the judge's service on the board of Vincent; was aware of the indirect affiliation of Vincent through MGH to DF/HCC; was aware DF/HCC was a potential recipient; and yet never raised a word of concern. The district court judge disclosed his affiliation with Vincent Memorial Hospital at the January 13, 2009 hearing to discuss cy pres award proposals. [13] The Samsell plaintiffs were present at the hearing and did not object upon hearing the disclosure to the judge's continued participation in the case. There is a double waiver. In 2010, when the judge submitted the final candidate proposals for public comment, Samsell expressly acknowledged the judge's participation on the Vincent board, and yet nonetheless recommended that half of the funds be distributed to DF/HCC. It is only now, for the first time on appeal, that the Samsell plaintiffs have raised an objection to the judge's participation in the cy pres selection process. In a related attack, the Samsell plaintiffs argue that the district court improperly appointed Dr. Jonathan L. Tilly, a Harvard Medical School professor, as the court's representative to a committee overseeing DF/HCC's use of the cy pres funds. As the district court disclosed in its August 6, 2010 order, Dr. Tilly has served as a special law clerk to the court, and is Chief of the Division of Research at the Vincent Center for Reproductive Biology at MGH. Dr. Tilly is also Chair of the Trustee Committee at the Vincent Memorial Hospital. We reject this argument for the same reasons articulated above. The Samsell plaintiffs also argue that the cy pres selection process was tainted because class counsel simultaneously represented one of the proposed, but not successful, cy pres recipients, Community Catalyst/PAL. This is a nonissue since class counsel's proposed cy pres recipient was not chosen by the district court. Nor was DF/HCC on the list of candidates selected by class counsel (in fact, class counsel objected to the court's consideration of DF/HCC). There was no abuse of discretion in the process used or as to selection of the recipient. Although we find no abuse of discretion in this case, and indeed the process followed was admirable, we express our concerns that district courts are given discretion by parties to decide on the distribution of cy pres funds. Our concerns are also stated in the ALI Principles, which stress in § 3.07(c) that the court, when feasible, should require the parties to identify a recipient whose interests reasonably approximate those being pursued by the class. (emphasis added). In the commentary, the ALI Principles also note that the court should give weight to the parties' choice of recipient as demonstrated by the settlement agreement. ALI Principles § 3.07 cmt. b. It is true that the court attempted to compensate for the parties' failure to designate recipients in the agreement by taking proposals from the parties and fully involving them in the selection process. But the choice would have been better made by the parties initially and then tested by the court, against the principles we have identified. It is one thing for the district court to exercise its traditional judicial function to approve class action settlement agreements. See Fed.R.Civ.P. 23(e). It is quite another for the parties to abandon the task of agreement over the assignment of residual funds and just hand that task to the court. The parties expressly contemplated that significant sums might remain here, and indeed $11.4 million out of $40 million remained. The amounts involved also raise concerns. We recognize, as class counsel candidly articulated, that there are imperfections in all methods of handling the issue of disposition of residual funds. But the adversary process is better suited to the parties making the decisions and leaving less to the discretion of the judges. Distribution of funds at the discretion of the court is not a traditional Article III function, as many courts have recognized: Federal judges are not generally equipped to be charitable foundations: we are not accountable to boards or members for funding decisions we make; we are not accustomed to deciding whether certain nonprofit entities are more deserving of limited funds than others; and we do not have the institutional resources and competencies to monitor that grantees abide by the conditions we or the settlement agreements set. In re Compact Disc Minimum Advertised Price Antitrust Litig., 236 F.R.D. 48, 53 (D.Me.2006); see also Redish at 642. Moreover, having judges decide how to distribute cy pres awards both taxes judicial resources and risks creating the appearance of judicial impropriety. A growing number of scholars and courts have observed that the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety. Nachshin, 663 F.3d at 1039; see also SEC v. Bear, Stearns & Co., 626 F.Supp.2d 402, 415 (S.D.N.Y.2009). These concerns have been noted in the media. See George Krueger & Judd Serotta, Op-Ed., Our Class-Action System is Unconstitutional, Wall St. J., Aug. 6, 2008, at A13; Editorial, When Judges Get Generous, Wash. Post, Dec. 17, 2007, at A20; Adam Liptak, Doling out Other People's Money, N.Y. Times, Nov. 26, 2007, at A14. With that cautionary note, we affirm the cy pres distribution, with one adjustment to the August 6, 2010 order. We add an explicit requirement that the district court must receive an annual audit at the expense of DF/HCC, in addition to the annual and semi-annual accountings to be submitted by DF/HCC to the court. This will ensure that the cy pres fund is distributed in a way that is both financially sound and comports with the interests of the class and that the auditing function will not fall on the district court. We believe that was intended by the court and is implicit in its orders. The district court's November 16, 2010 order, in which it references a required accounting of accrued expenditures, suggests it intended to include such an audit requirement in the August 6, 2010 order. So ordered.