What are Cy Pres Awards?

The legal doctrine of cy pres (from the French meaning “as near as possible”) originated in the context of charitable trusts, where courts interpreted the terms of a trust as closely as possible to the original objective of the testator when the objective was impossible, impracticable, or illegal to perform. Through the use of the cy pres doctrine, third-party nonprofit organizations may receive grants or distributions of unclaimed class action settlement funds, referred to as cy pres awards, when the nonprofit’s mission serves the interests of the plaintiff class. In fact, the California Supreme Court explicitly endorsed the use of cy pres awards in 1986. Although predominantly used in the area of antitrust and consumer protection, the principles cy pres apply equally to class actions based on civil rights and poverty laws.

When Are Cy Pres Awards Authorized?

In the class action context, courts generally authorize cy pres awards in three distinct circumstances. First, courts may authorize cy pres awards when recovery for class members is impossible or impracticable. For example, when the class is numerous and each class member has suffered only a small monetary loss, it is impracticable to pay all of the class members because simply administering the settlement would virtually consume the entire settlement fund.

Second, courts may authorize cy pres awards if the defendant’s conduct has made it difficult to identify class members. For example, when a defendant violates a law designed to protect the public at large, it may be difficult to ascertain the precise persons harmed. In such cases, instead of creating a windfall for the defendant, courts often grant the settlement funds to nonprofit organizations whose missions purportedly further the interests of the harmed class.

Finally, courts may authorize cy pres awards when unclaimed funds remain in the class action settlement or damage fund after all members have been paid. These unclaimed funds may result from class members providing out-of-date addresses, failing to make a claim, or neglecting to cash settlements checks. When residual funds remain in the fund, courts typically remit these remaining funds to non-profit organizations whose missions purportedly serve the plaintiff class. Simply put, cy pres awards are court-ordered contributions to nonprofit organizations comprising of the unallocated, unclaimed, or undeliverable funds in a class action judgment or settlement.

What are the Legal Foundations of Cy Pres Awards in California State Court?

The California Legislature explicitly endorsed the use of cy pres awards in class action litigation with the enactment of section 384 of the California Code of Civil Procedure:
It is the intent of the Legislature in enacting this section to ensure that the unpaid residuals in class action litigation are distributed, to the extent possible, in a manner designed either to further the purposes of the underlying causes of action, or to promote justice for all Californians.
CAL. CIV. PROC. § 384(a). In 2001 section 384 was amended to include specific types of organizations authorized to receive cy pres awards. In particular, the defendant is to pay any class action settlement residue with interest to:

nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.

CAL. CIV. PROC. § 384(b) (emphasis added). Thus, section 384(b) expands the cy pres doctrine by explicitly authorizing California courts to direct cy pres awards to nonprofit organization with child advocacy programs. This language makes clear that nonprofit organizations with child advocacy programs or that provide legal service to the indigent are appropriate recipients for any and all cy pres distributions for cases in state court, regardless of whether the organization’s mission serves the interests of the plaintiff class.

What are the Legal Foundations of Cy Pres Awards in California Federal Court?

Plaintiffs with California state law claims that are litigated in federal court under diversity jurisdiction may plausibly argue that section 384 is substantive, and thus is the rule of law that should be applied under the Erie doctrine. Even without section 384, however, there is favorable federal precedent for the use of cy pres awards in California federal class actions. In 1990 the Court of Appeals for the Ninth Circuit approved the use of the cy pres doctrine in a case involving a class of undocumented workers who successfully established violations of the Farm Labor Contractor Registration Act. In this case, the district court awarded $1.8 million in statutory damages to the class and authorized a cy pres award plan for any unclaimed funds. The district court also explicitly rejected the defendant’s contention that cy pres awards were not permitted in the Ninth Circuit by holding that “[f]ederal courts have broad discretionary powers in shaping equitable decrees for distributing unclaimed class action funds” and that “[m]ost class actions result in some unclaimed funds.” Although ultimately the Court of Appeals for the Ninth Circuit disagreed with the district court’s selection of the proper cy pres recipient, which it concluded was not the “next best” party for distribution, it explicitly authorized the use of cy pres awards and remanded the case back to district court for selection of another cy pres recipient. Thus, whether in California state or federal court, cy pres awards have been authorized under appropriate circumstances.

How Does a Nonprofit Organization Receive a Cy Pres Award?

Before a court approves a class action settlement, the court must typically find that the settlement is fair, adequate, and reasonable. Part of this settlement process includes determining if the settlement will include a cy pres award and which organizations will be the recipients of the award. Because the court and the attorneys involved may nominate particular nonprofit organizations for cy pres awards, it is important for these parties to have knowledge of the nonprofit organization, the community it serves, and the organization’s mission during the settlement process. Many nonprofit organizations have such information readily available on the organization’s website, thereby welcoming cy pres award nominations. In addition, some district courts publish notices soliciting grant applications from nonprofit organizations for cy pres awards. Nonprofit organizations seeking cy pres awards should therefore closely monitor these notices and apply for funds when appropriate.

Conclusion

California federal courts routinely authorize cy pres awards to nonprofit organizations in class action settlements when the organization serves the interests of the plaintiff class. Moreover, California state courts are expressly authorized to direct cy pres awards to nonprofit organizations with child advocacy and legal services programs regardless of whether the nonprofit directly serves the interests of the plaintiff class. In either case, a nonprofit organization seeking cy pres funds should clearly and readily convey the organization’s mission and the community it serves so that courts, as well as class action attorneys, are familiar with the organization and may nominate the organization for an award. In addition, the organization should monitor court published notices soliciting grant applications for cy pres funds and respond to these solicitations when appropriate.

By: Kevin J Mack

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