REVISED SEPTEMBER 27, 2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 26, 2011
No. 10-20305 Lyle W. Cayce
Clerk
RALPH KLIER,
Appellant
v.
ELF ATOCHEM NORTH AMERICA, INC.,
Defendant–Appellee
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and HIGGINBOTHAM and SOUTHWICK, Circuit
Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This appeal arises from the settlement of a class action. The defendant
paid substantial sums for res judicata protection from the claims of persons
assertedly injured by the toxic emissions of an industrial plant near Bryan,
Texas. The monies were allocated among three subclasses, one of which was to
receive medical monitoring. Upon the monitoring program’s completion,
substantial sums remained unused. The district court denied the settlement
administrator’s request to distribute the unused medical-monitoring funds to
another subclass of persons suffering serious injuries. Instead, the court
No. 10-20305
repaired to the doctrine of cy pres and ordered that the money be given to three
charities suggested by the defendant and one selected by the court.
The gift of class funds to charity is attacked on two fronts: that the district
court moved too quickly from the terms of the settlement agreement to a cy pres
distribution, and alternatively that the district court neglected a prerequisite of
the cy pres doctrine by not selecting charities with a sufficient nexus to the
underlying substantive objectives of the class suit. Persuaded by the first
contention, we do not reach the second. We hold that the district court abused
its discretion by ordering a cy pres distribution in the teeth of the bargained-for
terms of the settlement agreement, which required residual funds to be
distributed within the class. We reverse the district court’s order distributing
the unused medical-monitoring funds to third-party charities and remand with
instructions that the district court order that the funds be distributed to the
subclass comprising the most seriously injured class members.
I.
Lillian Hayden and five others instituted this action in April of 1992 by
filing suit in state district court in Brazos County, Texas. Seeking to represent
themselves and a class of others similarly situated, they sought compensation
for exposure to arsenic and other toxic chemicals alleged to have been emitted
into the air around Bryan, Texas, by an agrochemicals plant owned and operated
by the defendant, Arkema, Inc. (formerly known as Elf Atochem North America,
Inc.). The defendant removed the case to federal court supported by diversity
jurisdiction.
Settlement of this aging suit had several iterations as it confronted the
changing jurisprudence of federal class actions. The first settlement, confected
three years after the filing of the state-court suit, proposed to terminate the suit
with about $55 million in payments to a class certified under Federal Rule of
2
No. 10-20305
Civil Procedure 23(b)(2) with no opt-out provisions.1 This class was quickly
undercut on appeal by our intervening decision in Allison v. Citgo Petroleum
Corp.2 There we made plain that where the predominant relief sought is an
award of money damages, class certification must proceed through the (b)(3)
gate, with its mandatory opt-out provisions.3 On remand from this Court and
now proceeding under Rule 23(b)(3), the parties entered into a new settlement
agreement. The settlement was reduced to $41.4 million, a reduction reflecting
the value of individual settlements reached with opting-out class members.
The settlement agreement created three subclasses and allocated to each
subclass a portion of the $41.4 million settlement. The agreement allocated
$23.34 million to Subclass A, which was defined to include all persons who lived
or worked near the plant between 1973 and 1995 and had contracted any form
of cancer, endured a pregnancy that ended in stillbirth, or suffered from any of
several enumerated birth defects. A settlement administrator appointed by the
district court distributed the funds pro rata pursuant to an agreed-upon grid
deployed to score illness, its onset, and its seriousness. Ralph Klier, our
appellant here, was a member of Subclass A. Klier had lived close to the plant
and suffered from peripheral neuropathy and leukemia, the treatments for
which so weakened his heart that he required open-heart surgery in 2003. He
received $6,500 in settlement proceeds.
The settlement agreement allocated approximately $6.46 million to
Subclass B. Its members were not required to demonstrate physical injury; the
district court referred to Subclass B as the “nuisance-exposure/future claims”
subclass. If its members met proximity-to-plant and exposure standards, they
1
See generally FED. R. CIV. P. 23(c)(2)(B)(v).
2
151 F.3d 402 (5th Cir. 1998), adopted by Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct.
2541 (2011).
3
Id. at 413.
3
No. 10-20305
could either recover a small compensation sum or elect to participate in a
medical-monitoring program, which was funded by $2 million of the proceeds
allocated to the subclass. The remaining $4.46 million funded payments to the
more than 12,000 subclass members who elected not to participate in the
program. Responsive to the risk of latent illness, the settlement also gave
members of Subclass B—who by definition had suffered no injury or illness as
a result of their arsenic exposure as of the signing of the agreement—back-end
opt-out rights. Any member of Subclass B who later developed an
arsenic-related cancer or birth defect for which they could meet standards of
general causation retained the right to file a new lawsuit against Arkema.
Finally, $10.6 million was allocated to Subclass C, which included all class
members who, during the class time frame, owned property that was located
within the portion of the class area that was exposed to the highest levels of
arsenic emissions. The funds were to compensate members of Subclass C for
property damage and diminution in property value.
At issue on this appeal is the district court’s use of the cy pres doctrine to
dispose of approximately $830,000 that went unused during the administration
of the medical-monitoring program created for the benefit of Subclass B. The
program allowed members of Subclass B to forego receipt of a small cash
payment and instead enroll in a program through which they would receive
regular checkups and physician visits over a five-year period. The aim was to
assist members of the subclass in monitoring their health for any indication that
they were developing an arsenic-related illness. Two primary factors
contributed to the program’s not exhausting its allocated funds. First, the initial
participation rate was low. Some 329 members of Subclass B—less than three
percent of the total subclass membership—opted to receive medical monitoring
in lieu of a cash payment; just 221 attended their first monitoring examination.
Second, in the course of this monitoring, no significant health problems were
4
No. 10-20305
found. Among those who initially chose to participate, demand for monitoring
greatly diminished, yielding a high dropout rate. Only 46 class members
participated in all three rounds of screening as scheduled.
As activity in the case subsided, the settlement administrator filed a
status report in which he stated that the medical-monitoring program had come
to a close and that approximately $830,000 had gone unused and needed to be
distributed by the district court. The parties were in agreement that an
additional distribution to the members of Subclass B was not economically
feasible. The district court asked the parties for proposals for distribution of
remaining funds. Taking an inexplicably narrow view of their duty to the class,
class counsel did not respond. The defendant proposed seven entities as
potential beneficiaries of a cy pres distribution: five local charities, the Bryan
Independent School District, and the city of Bryan.
Klier opposed the proposal. He urged that the monies set aside but not
drawn down for medical monitoring be distributed pro rata to members of
Subclass A. Klier argued that an additional distribution to the members of
Subclass A was economically feasible and would be equitable since the members
of Subclass A had been found to suffer from arsenic poisoning, related cancers,
and birth defects that are compensable under the settlement. In the alternative,
Klier argued that the defendant’s proposed charities were not proper recipients
under the doctrine of cy pres, lacking a sufficient nexus to the injuries of the
class or the principles the class action sought to vindicate. Klier proposed that
the money instead be used to fund arsenic-pollution research at Texas A&M
University.
In April of 2010, some eighteen years after this litigation commenced and
fourteen years after the closing of the plant, the district court ordered
distribution of the remaining funds to three of the charities proposed by the
defendant: a scholarship program called Arkema New Horizons Scholarships
5
No. 10-20305
and two museums. The court then added a charity of its own, a local history and
genealogy library. The money was to be distributed in four equal shares.
Despite having pledged several years before to consider a proposal to reallocate
the medical-monitoring funds to other members of the class,4 the court never
addressed Klier’s primary request that the monies be distributed to the members
of Subclass A, denying it only implicitly. Instead, the district court proceeded
directly to Klier’s alternative proposal that the money be donated to Texas A&M,
which it rejected because it would not benefit the Bryan community. The district
court expressed its view that the distributions it ordered would provide benefits
“perhaps to friends and relatives of the claimants, perhaps to total strangers
who happen to live in Bryan.”
II.
When modern, large-scale class actions are resolved via settlement, money
often remains in the settlement fund even after initial distributions to class
members have been made because some class members either cannot be located
or decline to file a claim. Federal district courts often dispose of these unclaimed
finds by making what are known as cy pres distributions. Cy pres is an equitable
doctrine that has been imported into the class-action context from the field of
trust law:
The cy pres doctrine takes its name from the Norman French
expression, cy pres comme possible, which means “as near as
possible.” The doctrine originated to save testamentary charitable
gifts that would otherwise fail. Under cy pres, if the testator had a
general charitable intent, the court will look for an alternate
recipient that will best serve the gift’s original purpose. In the class
action context, it may be appropriate for a court to use cy pres
principles to distribute unclaimed funds. In such a case, the
unclaimed funds should be distributed for a purpose as near as
possible to the legitimate objectives underlying the lawsuit, the
4
The content of and reasons for this earlier pledge are detailed infra, slip op. at 12.
6
No. 10-20305
interests of class members, and the interests of those similarly
situated.5
In the class-action context, a cy pres distribution is designed to be a way for a
court to put any unclaimed settlement funds to their “‘next best compensation
use, e.g, for the aggregate, indirect, prospective benefit of the class.’”6
We review for an abuse of discretion a district court’s decision to resort to
the cy pres doctrine for the distribution of unclaimed class-action settlement
funds.7 By definition, a district court abuses its discretion when it makes an
error of law or applies an incorrect legal standard.8 As to errors of this latter
type, our review is de novo,9 as is our review of the district court’s interpretation
of an unambiguous settlement agreement.10
A.
We begin our analysis with a return to basic principles. As we will
explain, these core principles control and decide this appeal. First there is the
ever-antecedent and overarching limitation on class-action litigation, the Rules
Enabling Act. The Federal Rules of Civil Procedure cannot work as substantive
law.11 This core stricture demands a narrow construction of Rule 23, which must
5
In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 682 (8th Cir. 2002)
(internal citations and quotation marks omitted).
6
Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007) (quoting
3 WILLIAM B. RUBENSTEIN ET AL., NEWBERG ON CLASS ACTIONS § 10.17 (4th ed. 2002)
(emphasis omitted)).
7
See Wilson v. Sw. Airlines, Inc., 880 F.2d 807, 811 (5th Cir. 1989); see also In re
Holocaust Victims Assets Litig., 413 F.3d 183, 185 (2d Cir. 2005) (per curiam); Powell v. Ga.
Pac. Corp., 119 F.3d 703, 706 (8th Cir. 1997).
8
Koon v. United States, 518 U.S. 81, 100 (1996).
9
Benavides v. Chi. Title Ins. Co., 636 F.3d 699, 701 (5th Cir. 2011).
10
Guidry v. Halliburton Geophysical Servs., Inc., 976 F.2d 938, 940 (5th Cir. 1992).
11
28 U.S.C. § 2072.
7
No. 10-20305
be “applied with the interests of absent class members in close view.”12 Second,
a class settlement generates property interests. Each class member has a
constitutionally recognized property right in the claim or cause of action that the
class action resolves.13 The settlement-fund proceeds, having been generated by
the value of the class members’ claims, belong solely to the class members.14
These precepts define the first—and often the last—arena of analysis,
imposing foundational limitations on a district court’s discretion as it
administers a class-action settlement. Because the settlement funds are the
property of the class, a cy pres distribution to a third party of unclaimed
settlement funds is permissible “only when it is not feasible to make further
distributions to class members.”15 Where it is still logistically feasible and
economically viable to make additional pro rata distributions to class members,
12
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 629 (1997).
13
See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 807–08 & 812–13 (1985); Logan
v. Zimmerman Brush Co., 455 U.S. 442, 428–30 (1982).
14
See AM. LAW INST., PRINCIPLES OF THE LAW OF AGGREGATE LITIGATION (hereinafter,
“ALI PRINCIPLES”) § 3.07 cmt. b (2010) (“[F]unds generated through the aggregate prosecution
of divisible claims are presumptively the property of the class members . . . .”).
15
Id. § 3.07 cmt. a; see also 3 WILLIAM B. RUBENSTEIN ET AL., NEWBURG ON CLASS
ACTIONS § 10.17 (4th ed. 2002, Westlaw updated through June 2011) (“When all or part of the
common fund is not able to be fairly distributed to class members, the court may determine to
distribute the unclaimed funds with a cy pres . . . approach.”). In large class actions,
substantial administrative costs attend the distribution of settlement funds. As the settlement
funds are disbursed and the amount still available for distribution to the class declines, there
comes a point at which the marginal cost of making an additional pro rata distribution to the
class members exceeds the amount available for distribution. See, e.g., In re Am. Tower Corp.
Secs. Litig., 648 F. Supp. 2d 223, 224 n.1 (D. Mass. 2009). It is only at this point that a district
court has discretion to order a cy pres distribution. See ALI PRINCIPLES § 3.07 cmt. b
(explaining that cy pres awards are appropriate “only when direct distributions to class
members are not feasible—either because class members cannot be reasonably identified or
because distribution would involve such small amounts that, because of the administrative
costs involved, such distribution would not be economically viable”).
8
No. 10-20305
the district court should do so,16 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.17 A cy pres distribution puts
settlement funds to their next-best use by providing an indirect benefit to the
class. That option arises only if it is not possible to put those funds to their very
best use: benefitting the class members directly.
Because a district court’s authority to administer a class-action settlement
derives from Rule 23, the court cannot modify the bargained-for terms of the
settlement agreement.18 That is, while the settlement agreement must gain the
approval of the district judge,19 once approved its terms must be followed by the
court and the parties alike. The district judge must abide the provisions of the
settlement agreement, reading it to effectuate the goals of the litigation. This
is not a free exercise of cy pres, but a determination of how the settlement
agreement’s many provisions define the class’s property interests and allocate
16
See ALI PRINCIPLES § 3.07 cmt. b (“[A]ssuming that further distributions to the
previously identified class members would be economically viable, that approach is preferable
to cy pres distributions.”); cf. EDWIN S. NEWMAN, LAW OF PHILANTHROPY 27 (1955) (“Cy pres
is only a last resort, to be invoked where it is totally impossible for a trustee to realize the
objectives of the trust’s creator through reasonable interpretation of the trust agreement.”),
quoted in Danshera Cords, Charitable Contributions for Disaster Relief: Rationalizing Tax
Consequences and Victim Benefits, 57 CATH. U. L. REV. 427, 461 n.240 (2008).
17
See Wilson, 880 F.2d at 812–13 (noting that the class members could not assert an
equitable claim to the unclaimed settlement funds because all class members who came
forward had been paid the full amount of their liquidated back-pay damages); In re Pharm.
Indus. Average Wholesale Price Litig., 588 F.3d 24, 34–35 (1st Cir. 2009) (affirming a cy pres
distribution as part of a settlement agreement in an antitrust class action where the
settlement paid all class members treble damages). This limitation is an important component
of the decision principle in Wilson: a cy pres distribution of unclaimed settlement funds is
appropriate only when it is not feasible to distribute those funds to any party to the class
action who has a persuasive equitable claim to those funds. See infra note 21 and
accompanying text. A party whose liquidated-damages claim has been fully satisfied cannot
make a persuasive equitable claim to any residual settlement funds.
18
Evans v. Jeff D., 475 U.S. 717, 726–27 (1986).
19
See FED. R. CIV. P. 23(e).
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No. 10-20305
those interests once created.20 The terms of the settlement agreement are
always to be given controlling effect.21 Cy pres comes on stage only to rescue the
objectives of the settlement when the agreement fails to do so. Even then, the
court’s discretion remains tethered to the interest of the class, the entity that
generated the funds.
B.
It is apparent from its structure that the settlement contract between
Arkema and the class contemplated that each subclass would first draw upon
the sums allocated to it. The parties memorialized their settlement in two
documents: the Class Action Settlement Agreement (“the Agreement”) and the
Protocol for Distribution of Settlement Fund (“the Protocol”). As relevant here,
the Agreement created and defined the three subclasses and allocated a
designated portion of the total settlement proceeds to the three subclass funds.
Class members were eligible for payments from the subclass funds pursuant to
the procedures and processes set forth in the Protocol. The Agreement specifies
that each subclass fund shall be used to fund payments to the members of its
assigned subclass. Arkema points out that paragraph 27 of the Protocol directs
that any money left over in any subclass fund “shall be distributed pro rata to
all Claimants in that subclass.” Arkema argues that this ends the matter:
Abiding the contract, the district court had no authority to allocate funds not
drawn down by one subclass to the members of another subclass, even Subclass
20
The concurrence usefully recites important concerns now being voiced regarding the
use of cy pres by district courts managing class settlements. The concurrence’s focus is on the
problems attending the unfettered use of cy pres. When a court looks beyond or must resolve
uncertainty in the terms of the settlement agreement, complications will arise. But as long as
courts attend to the fact that they are allocating the class members’ property, there should be
little occasion to sail near those shoals.
21
Of course, the district court has inherent equitable authority to resolve any issues
that are not covered by the terms of the settlement agreement. See MANUAL FOR COMPLEX
LITIGATION, FOURTH § 21.66, at 334 (Federal Judicial Center 2004).
10
No. 10-20305
A, whose members were the most grievously injured and had not been fully
compensated.
Arkema’s argument is flawed at several junctures. To begin with, Arkema
concedes that paragraph 27’s directive could not have been followed here: the
leftover funds were allocated to Subclass B, and it is not economically viable to
distribute those funds pro rata to the 12,657 members of Subclass B. Arkema
accepts the precept that even an explicit directive of the settlement contract
need not be followed if it is not feasible to do so.
Even if the Protocol stopped here, and it did not, the contention that want
of feasibility freed the district court to donate the residual property interest of
the class to charity is mistaken. This is not a case where the settlement
agreement itself provides that residual funds shall be distributed via cy pres.22
Quite the opposite: the district court’s decision to distribute the unused funds via
cy pres finds no support in the text of the settlement documents. Indeed,
Arkema itself would appear to have a greater claim to the funds than a charity,
however worthwhile the charity, absent a contrary directive from the property-
interest-defining settlement agreement.23
But the Protocol is not so silent as the defendant would have it.
Paragraph 28 provides: “The District Court may make changes to the terms of
this protocol as necessary for the benefit of the Settlement Class Members.”24
22
See, e.g., Gates v. Rohm & Haas Co., No. 06-1743, 2011 WL 1103683, at *1 (E.D. Pa.
Mar. 24, 2011) (unpublished) (making a cy pres distribution where the settlement agreement
provided that the district court was to pay over any “excess undistributed Medical Monitoring
Settlement Class funds” to “a local Section 501(c)(3) charity for the benefit of” the village that
encompassed the class area).
23
See Wilson, 880 F.2d at 816 (holding that it is an abuse of discretion for a district
court to order a cy pres distribution when any party to or participant in a class
action—including the defendant and class counsel—has a valid equitable interest in the
unclaimed settlement funds).
24
The Agreement defines the term “Settlement Class Members” to include the members
of all three subclasses.
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No. 10-20305
This provision is but a limited grant of authority to the district court.
Importantly, the limitation imposed is that the district court must act for the
benefit of the class as a whole. Neither its authority nor its duty25 is cabined off
on a subclass-by-subclass basis. If it is not feasible to distribute the funds under
paragraph 27, paragraph 28 controls, and it authorizes the district court to
provide a benefit to the settlement-class members. “There is no indirect benefit
to the class from the defendant’s giving the money to someone else,”26 and
Arkema falls silent on the reality that it was feasible to allocate the funds to
Subclass A.
This is enough, but there is more in this Protocol. Paragraph 29 further
provides, “The Settlement Administrator may petition the District Court for
reallocation of available funds among the [subclasses] on a showing of good cause
if . . . he determines that considerations of equity and fairness require
reallocation.” About a year after medical monitoring began, the settlement
administrator did exactly that, seeking leave to disburse any unused funds to
other class members, “particularly those who are most seriously affected by
exposure to chemicals.” The district court denied this request, stating instead
that it would “decide later what to do with the remainder of the medical
monitoring fund.” When that later date arrived, the court made no attempt to
reconcile its decision to distribute the residue of the fund to third-party charities
with the settlement administrator’s prior request under paragraph 29.
The Protocol did more than merely empower the district court to allocate
medical-monitoring funds unused by members of Subclass B to members of other
subclasses—it required the court to do so for as long as further distributions
were feasible and equitable. That it was not feasible to distribute these funds
25
See In re Cendant Corp. Prides Litig., 233 F.3d 188, 194 (3d Cir. 2000) (“In a class
action settlement, a court retains special responsibility to see to the administration of justice.”).
26
Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 784 (7th Cir. 2004).
12
No. 10-20305
to members of Subclass B is not disputed. The feasibility of a further
distribution to members of Subclass A is likewise conceded. And equity strongly
favors an additional distribution to Subclass A. The members of Subclass B
suffered no injuries or illnesses; those in Subclass A suffered serious personal
injuries.27 Claimants in Subclass A have already received some measure of
compensation for their injuries, but it is far from full. The appellant here
endured cancer, nerve damage, and a heart transplant and received $6,500 for
his trouble. Subclass A’s damages claims were non-liquidated and included
claims for both actual and exemplary damages.
The very structure of Subclass B supports the entitlement of Subclass A.
As we have explained, Subclass B was created to address the fears of latent
disease harbored by persons who lived or worked within a defined proximity to
the plant but who were asymptomatic. Access to medical monitoring, coupled
with a back-end opt-out right to sue should injury later arrive, were the relief
afforded. Both Subclass A and Subclass B addressed injury to the person.
Members of the former had already incurred physical injury. Members of the
latter were asymptomatic persons with a risk that injury of the type
compensated in Subclass A might be later suffered. Addressing the risk of latent
injury by definition meant dividing settlement monies between the two
subclasses. The risk of Subclass B members was never realized. When
significant injuries did not manifest themselves among members of Subclass B,
the already light use of medical monitoring by its members declined even
further, leaving the funds now at issue unspent. By the agreement, these
monies were to provide a service to Subclass B members, not to compensate
them for a later-arriving disease. In that event, they could sue, not having
27
The members of Subclass C suffered economic injury: damage to and loss of the value
of property. These liquidated claims were fully compensated under the terms of settlement.
Accordingly, none contends that the claimants in Subclass C have a persuasive equitable claim
to the unused medical-monitoring funds. See supra note 16 and accompanying text.
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No. 10-20305
released their claims in the settlement. Members of Subclass A, by contrast,
were prohibited from later opting out of the agreement. Res judicata protection
against their claims was the most valuable consideration Arkema received in
exchange for agreeing to the settlement.
Read, as they must be, with our core precepts at hand, the relevant
provisions of the Protocol shape the property interest created by the Agreement
and thereby constrain the district court’s discretion in disposing of that property.
The Protocol is an affirmation that funds initially allocated to a particular
subclass are to be used, in the end, for the interests of the entire settlement
class. We hold that the settlement agreement did not authorize the district court
to make a charitable gift of the unused medical-monitoring funds and that the
district court erred when it rejected the settlement administrator’s request that
the funds be reallocated to the members of Subclass A.
Our decision lies comfortably with prior decisions of this Court and our
sister circuits,28 which have necessarily taken case-specific approaches to the
role of the federal district judge in the distribution of monies left unclaimed after
administration of a class settlement. As we turn to the fit of the present case
within the broader decisional line, we remind of the case’s dimension. Here we
treat a distinct category of such cases, in which funds have gone unused by a
particular subclass.29 Subclass B’s failure to fully draw down the medical-
28
E.g., Masters, 473 F.3d at 436 (holding that the district court abused its discretion by
ordering a cy pres distribution where neither side contended that “each class member’s recovery
would be so small as to make an individual distribution economically impracticable”).
29
Thus, this is not a case where it was not feasible to make further distributions to any
of the class members. See, e.g., In re Airline Ticket Comm’n Antitrust Litig., 268 F.3d 619, 621
(8th Cir. 2001); Powell, 119 F.3d at 706–07; see also Masters, supra note 15. Nor does this case
implicate the line of authority giving careful scrutiny to class settlement agreements in which
the parties agree to a cy pres distribution. See, e.g., In re Pet Food Prods. Liab. Litig., 629 F.3d
333, 363 (3d Cir. 2010) (Weis, J., concurring in part and dissenting in part); In re Pharm.
Indus. Average Wholesale Price Litig., 588 F.3d at 30–32, 34–36; Six (6) Mexican Workers v.
Az. Citrus Growers, 904 F.2d 1301, 1304 & 1307 (9th Cir. 1990).
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No. 10-20305
monitoring fund did not constitute an abandonment or relinquishment by the
class of its property interest in the settlement.30 The funds were unused by
Subclass B, not unclaimed by the class as a whole.31 Proceeding from the
premise that the settlement of damage claims in a class action both creates
contractual obligations and defines property, we have emphasized the terms of
the settlement agreement as approved by the district court. That agreement
preserved for the class something akin to a reversionary interest in funds
unused by a particular subclass. Where the terms of a settlement agreement are
sufficiently clear, or, more accurately, insufficient to overcome the presumption
that the settlement provides for further distribution to class members,32 there
is no occasion for charitable gifts, and cy pres must remain offstage.
C.
Arkema pushes back with three counter-arguments. None is sufficient to
carry the day. First, Arkema argues that paragraph 28 of the Protocol
authorizes the district court to make changes to the terms of the Protocol, not
30
Accord In re Holocaust Victims Assets Litig., 424 F.3d 158, 166–69 (2d Cir. 2005)
(affirming the district court’s decision to reallocate settlement funds so as to directly benefit
the neediest class members instead of making a cy pres distribution to charity).
31
Put differently, while the funds were allocated to Subclass B, they belonged to the
entire class. It follows that there is no unclaimed or abandoned by property available to be
claimed by the state or others via escheat or otherwise. See generally All Plaintiffs v. All
Defendants (In re Lease Oil Antitrust Litig.), 645 F.3d 329 (5th Cir. 2011). On some golf
courses there are signs reminding those who walk or jog the cart trails that a golf ball is not
lost until it stops rolling. This ball is still rolling.
32
See ALI PRINCIPLES § 3.07(b).
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No. 10-20305
the Agreement, and that it is the Agreement that fixes the amount of money to
be allocated to each subclass. It was the Agreement that made the initial
allocation of money among the three subclasses. But it is paragraph 27 of the
Protocol that controls the allocation of any monies remaining after the initial
distribution. In addition, Arkema’s argument turns a blind eye to the language
of paragraph 29, which expressly authorizes the district court, upon a request
from the settlement administrator, to reallocate funds one subclass to another.
Deciding to reallocate funds from the subclass with nuisance-exposure claims to
the subclass with serious personal-injury claims was not beyond the scope of the
authority that the Protocol conferred on the district court.
Next, Arkema argues that the members of Subclass A have already been
fully compensated because they were paid in full according to the terms of the
Agreement. Not so. The fact that the members of Subclass A have received the
payment authorized by the settlement agreement does not mean that they have
been fully compensated. As a general matter, “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 for those class members.”33 Moreover, the Agreement does not even
purport to provide full, individualized compensation. It authorized pro rata
distributions that were dictated by a formula that was designed to ensure,
within the limits of the fund, that each claimant obtained some relief. It valued
each injury in relative terms, not absolute terms.
Finally, Arkema argues that equity weighs in favor of a cy pres
distribution because distributing the unclaimed funds to members of Subclass
A would deprive Subclass B of its settlement benefits. This argument is a straw
man. All agree that additional distributions to the members of Subclass B were
33
Id. § 3.07 cmt. b.
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No. 10-20305
not economically viable. No proposal before the district court would have
allowed Subclass B to receive the full value allocated to it by the original
agreement. The choice was not between a distribution to Subclass A and a
distribution to Subclass B; the choice was between a distribution to Subclass A
and a distribution to charity. Although it is generally true that additional
“distributions to class members better approximate the goals of the substantive
laws than distributions to third parties that were not directly injured by the
defendant’s conduct,”34 the district court had no need for that principle. The
settlement agreement required the court to reallocate the funds among the
subclasses of the class that generated the settlement fund.
III.
The district court abused its discretion by ordering a cy pres distribution
instead of distributing the unused medical-monitoring funds to the members of
Subclass A. We reverse the district court’s cy pres order and remand with
instructions that the residual funds be distributed to the members of Subclass
A consistently with the terms of the settlement agreement.
REVERSED and REMANDED.
34
Id.
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No. 10-20305
EDITH H. JONES, Chief Judge, concurring:
I concur in Judge Higginbotham’s able opinion and in the conclusion that
the invocation of cy pres here was an abuse of discretion remediable, under these
particular facts, only by a pro rata distribution to subclass A. I write separately,
however, to suggest that if the defendant had not waived its right to request a
refund, it would have been entitled to the excess.
As Judge Higginbotham explains, the cy pres doctrine originated in the
field of trust law “to save testamentary charitable gifts that would otherwise
fail.” In re Airline Ticket Comm’n Antitrust Litig., 307 F.3d 679, 682 (8th Cir.
2002). It has been imported into the class action context to distribute unclaimed
funds “for a purpose as near as possible to the legitimate objectives underlying
the lawsuit, the interests of class members, and the interests of those similarly
situated.” Id. at 682-83. It is inherently dubious to apply a doctrine associated
with the voluntary distribution of a gift to the entirely unrelated context of a
class action settlement, which a defendant no doubt agrees to as the lesser of
various harms confronting it in litigation. See Martin H. Redish et al., Cy Pres
Relief & the Pathologies of the Modern Class Action: A Normative and Empirical
Analysis, 62 Fla. L. Rev. 617, 621 (2010). See also Mirfahisi v. Fleet Mortg.
Corp., 356 F.3d 781, 784 (7th Cir. 2004) (Posner, J., describing cy pres in this
connection as “badly misnamed.”).
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No. 10-20305
The opportunities for abuse have been repeatedly noted. See, e.g.,
Securities & Exchange Comm’n v. Bear, Stearns & Co., Inc., 626 F. Supp. 2d 402
(S.D.N.Y. 2009) (“While courts and the parties may act with the best intentions,
the specter of judges and outside entities dealing in the distribution and
solicitation of large sums of money creates an appearance of impropriety.”). See
In re Pharm. Indust. Average Wholesale Price Liti.., 588 F.3d 24 at 34 (1st Cir.
2009) (cy pres distributions are controversial); Adam Liptak, Doling Out Other
People’s Money, N.Y. Times Nov. 26, 2007, at A14 available at
http://www.nytimes.com/2007/11/26/washington/26bar.html (describing
particular distributions, “giving the money away to favorite charities with little
or no relation to the underlying litigation is inappropriate and borders on
distasteful”); Editorial, When Judges Get Generous, Wash. Post, Dec. 17, 2007,
at A20, available at http://www.washingtonpost.com/wp-dyn/content/article/
2007/12/16/AR2007121601433.html; George G. Krueger & Judd A. Serotta,
Money For Nothing, Legal Times, June 2, 2008; Sam Yospe, Note, Cy Pres
Distributions in Class Action Settlements, 2009 Colum. Bus. L. Rev. 1014, 1027-
41 (2009); Goutam U. Jois, The Cy Pres Problem and the Role of Damages in
Tort Law, 16 Va. J. Soc. Pol’y & L. 258, 259 (2008). Whatever the superficial
appeal of cy pres in the class action context may have been, the reality of the
practice has undermined it. It is time for courts to rethink the justifications of
the practice.
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No. 10-20305
The panel opinion holds that the Rules Enabling Act places an
“overarching limitation on class-action litigation” and demands “a narrow
construction of Rule 23.” Professor Redish has put the point more bluntly:
Use of cy pres simultaneously violates the constitutional dictates of
separation of powers by employing a Federal Rule of Civil Procedure
to alter the compensatory enforcement mechanism dictated by the
applicable substantive law being enforced in the class action
proceeding. It has somehow become common practice among many
courts, scholars, and members of the public to view the modern class
action as a free-standing device, designed to do justice and police
corporate evildoers. As nothing more than a Federal Rule of Civil
Procedure, however, the class action device may do no more than
enforce existing substantive law as promulgated either by Congress
or, in diversity suits, by applicable state statutory or common law.
Yet in no instance of which we are aware does the underlying
substantive law sought to be enforced in a federal class action direct
a violator to pay damages to an uninjured charity.
Redish et al., supra, at 623 (footnote omitted). Cy pres distributions arguably
violate the Rules Enabling Act by using a wholly procedural device – the class-
action mechanism as prescribed in Rule 23 – to transform substantive law “from
a compensatory remedial structure to the equivalent of a civil fine.” Id. They
present an Article III problem by transforming “the judicial process from a
bilateral private rights adjudicatory model into a trilateral process.” Id. at 641.
In addition, such distributions likely violate Article III’s standing requirements.
Courts should be troubled that a cy pres distribution to an outsider uninvolved
in the original litigation may confer standing to intervene in the subsequent
proceedings should the distribution somehow go awry.
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No. 10-20305
Whether cy pres distributions violate the Constitution or Rules Enabling
Act has not, to my knowledge, been fully litigated in any court,1 and these
questions are neither briefed nor presented for review here. Hence, I refrain
from a more rigorous analysis and suggest instead that district courts should
avoid the legal complications that assuredly arise when judges award surplus
settlement funds to charities and civic organizations.
The preferable alternative, illustrated partially in Wilson v. Southwest
Airlines, Inc., 880 F.2d 807 (5th Cir. 1989), is to return any excess funds to the
defendant.2 The class action settlement fund in Southwest Airlines retained a
balance of over $500,000 after all claimants had been reimbursed in full. Id. at
810. Claims were made against the balance by class counsel for additional
claims administration fees and by Southwest for a return of the excess. Id. The
district court rejected both claims and ordered a cy pres distribution to a local
charity. Shortly thereafter, Southwest and class counsel entered a settlement
that would divide the remaining funds between Southwest and the class counsel.
Id. at 811. This court reversed the district court’s judgment and approved the
settlement. The opinion noted that Southwest “clearly renounced its legal claim
to any residual funds” in the settlement agreement and therefore had no “legal
1
At least one court has concluded that “fluid recovery” judgments – which differ
materially from cy pres distributions – do not violate the Rules Enabling Act. See Schwab v.
Philip Morris USA, Inc., No. CV 04-1945, 2005 WL 3032556 (E.D.N.Y. Nov. 14, 2005).
2
This approach, of course, was not available in today’s case for reasons explained in the
panel opinion.
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No. 10-20305
right” to the balance. Id. at 812. Neither the plaintiffs nor counsel had a legal
right to the balance either. As a result, this court ordered that the fund should
be distributed to the party with the stronger equitable claim. Id. That party
was the defendant:
Southwest’s equitable claim is premised on the fact that all the
money in the fund originally belonged to it. Southwest turned over
the money for the specific and limited purpose of compensating the
class. It did so in the expectation that compensating the class would
exhaust the fund. The record of the fairness hearing reveals that
Southwest and class counsel both wrongly assumed that claims
alone would amount to $900,000 or more of the fund, exclusive of
expenses. Since Southwest turned over its money in the clear and
reasonable expectation that the money was required for the specific
purpose of compensating the class, its equitable claim to any money
remaining after the accomplishment of that purpose is compelling.
Id. at 813.
In the ordinary case, to the extent that something must be done with
unclaimed funds, the superior approach is to return leftover settlement funds to
the defendant. This corrects the parties’ mutual mistake as to the amount
required to satisfy class members’ claims. Other uses of the funds — a pro rata
distribution to other class members, an escheat to the government, a bonus to
class counsel, and a cy pres distribution — all result in charging the defendant
an amount greater than the harm it bargained to settle. Our adversarial system
should not effectuate transfers of funds from defendants beyond what they owe
to the parties in judgments or settlements.
22