Time to end class-action settlements that only reward lawyers, not plaintiffs.
By David B. Rivkin Jr. and Lee A. Casey
The Supreme Court will soon decide whether to hear a case that could determine the future of particularly abusive class-action settlements. Not abusive in the usual sense, where a class of injured plaintiffs is awarded an exorbitant amount. Instead, these settlements are abusive in that absolutely nothing goes to the injured plaintiffs. At issue is whether federal courts may approve such agreements rewarding lawyers and defendants, leaving plaintiffs out in the cold.
The case is Marek v. Lane, and it arose out of Facebook’s notorious 2007 “Beacon” program. Beacon gathered and published information about Facebook users’ other Internet activities as an advertising and marketing tool, invading the privacy of millions. It may also have violated a number of state and federal laws, including the 1988 Video Privacy Protection Act, which includes a liquidated-damages provision of $2,500 for each offense. A class-action suit was filed in 2008 on behalf of as many as 3.6 million injured social networkers.
Embarrassed (if unrepentant) and under media pressure, Facebook entered settlement negotiations, ultimately agreeing to pay $9.5 million. Of this, about $3.1 million (later reduced to $2.3 million) would go to the class-action lawyers, and the rest would be used to create a Digital Trust Foundation, controlled in part by Facebook. The DTF would sponsor programs and education regarding online threats to personal information and identity—including through funding consumer groups, such as the Electronic Frontier Foundation, that Facebook already supports and are often allied with Facebook on matters of regulation and public policy. Members of the class of injured plaintiffs, meanwhile, would get nothing and, unless they took action to “opt-out” of the settlement, their individual claims would be forever barred.
Such arrangements, through which a class recovery is diverted to purposes other than actually compensating the claimants, are known as “cy pres” awards, a term derived from the French legal expression cy pres comme possible (as near as possible). The idea is that where a court cannot directly achieve some remedial goal, such as meaningful payments to the injured parties, it may adopt other measures that, as nearly as possible, have the same compensatory result.
Cy pres remedies are very much an exception in the law, and are ordinarily subject to significant judicial policing due to the risk that defendants and class-action attorneys will use cy pres to cut a deal that benefits them both but gives plaintiffs little or nothing. For this reason, federal courts carefully assess whether proposed settlements are “fair, reasonable, and adequate” to the injured class members. A cy pres award can be approved only if a court finds that granting the recovery to a third party best advances member interests.
The Facebook settlement, however, provides zero benefit to class members. Breaking with all the other appeals courts to consider cy pres settlements, in February the U.S. Court of Appeals for the Ninth Circuit upheld a ruling that an award of millions to a foundation controlled in part by Facebook was good enough because it was not entirely “unrelated to the class’s interests.”
Yet the Ninth Circuit’s six dissenting judges wrote: “The DTF can teach Facebook users how to create strong passwords, tinker with their privacy settings, and generally be more cautious online, but it can’t teach users how to protect themselves from Facebook’s deliberate misconduct. Unless, of course, the DTF teaches Facebook users not to use Facebook. That seems unlikely.”
Nevertheless, both the trial court and the Ninth Circuit Court of Appeals approved this agreement, without assessing the value of class members’ claims. The agreement did not even forbid Facebook from reinstituting a program identical to Beacon under a different name in the future and injuring class members in the exact same fashion. If that’s “fair, reasonable, and adequate,” then anything goes.
The Ninth Circuit’s decision opens new vistas in class-action litigation, where lawyers (in the form of fat fees) and defendants (in the form of resolving expensive lawsuits on the cheap) could reap rich rewards simply by stiffing those actually injured. Sadly, even courts have been known to get in on the action by helping to choose the institutions or causes to receive cy pres payments—including awards to the alma mater of a plaintiffs’ lawyer, in one case, and to schools where judges either taught or served as a trustee, in others.
Only the Supreme Court can remedy this, by hearing Marek v. Lane and reversing a decision that carries the real and immediate danger of promoting significant abuse nationwide. Class actions should compensate the victims of genuine injuries, not promote some social good as defined by lawyers, defendants and judges.
Messrs. Rivkin and Casey served in the U.S. Justice Department under Presidents Reagan and George H.W. Bush. They are partners in the Washington, D.C., office of Baker & Hostetler LLP, representing claimants opposed to the Facebook settlement and who are now seeking Supreme Court review.