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Use Caution: Cy Pres Settlements

While we generally believe that in appropriate circumstances a settlement which provides only cy pres relief can be approved as fair, reasonable and adequate, there is no doubt that this mechanism is subject to abuse and can be used as tool to settle a case to the advantage of no one but the plaintiffs' attorneys.  Thus, the Ninth Circuit's opinion in In re Bluetooth Products Liability Litigation, No, 09-56683 (9 th Cir. Aug. 19, 2011) comes as no surprise.

In Bluetooth, the Court rejected a settlement which provided the class $100,000 in cy pres awards, zero dollars for economic injury, and $800,000 for class counsel.   The immediate signal of a problem, of course, is the disparity between the cy pres award and the attorneys' fees, or, in the words of the Court, the "gross disproportion."   Faced with this marker of possible unfairness, it was the duty of the trial court to conduct a "searching inquiry" into the fairness of the allocation of the total amount paid out by the defendant.  The Court of Appeals found that the analysis performed by the lower court was inadequate and vacated the final approval order.  

The Court of Appeals expressed its concern that the fee award was 83.2% of the total amount the defendants spent to settle the case.  In the absence of any explanation from the lower court as to why the disproportion was reasonable, the Court of Appeals held that it had no choice but to remand to the trial court to permit it to provide the necessary explanation. 

For similar reasons, the Court of Appeals vacated both the opinion awarding fees and the opinion approving the settlement.   The Court of Appeals again found that the trial court did not adequately examine the fee provision in the context of the settlement as a whole.

While the opinion in Bluetooth is directed at the failings of the trial court, it is the plaintiffs' lawyers who are responsible for the settlement and its coming apart.  Any settlement which provides more relief to the attorneys than the class as a whole is sure to raise both eyebrows and objections.  If Class Counsel enter into such a settlement it must be for very good reasons, reasons which make sense not only from the perspective of the attorneys but from the perspective of the class they purport to represent as well.  Most importantly, Class Counsel must clearly express those reasons to the trial court and make sure that the Court understands its obligation to enter a detailed written opinion along with the Final Order.

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