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Cy Pres Component of Proposed Class Settlement Derails Approval

14 Jan, 2014 By: John Waller, Blank Rome LLP, Jeffrey Richter


Your company gets sued for unfair competition, violations of consumer protection statutes, breach of warranty and personal injuries allegedly attributable to your consumer product. Rather than continue to contest those claims, you negotiate a sizeable settlement to extricate yourself from the class action. Everyone must be happy, right? Not if the terms of the settlement include a cy pres component that results in a substantial cy pres distribution – and that distribution is not broadly directed to benefit the class as a whole.

In denying approval of a proposed settlement of the In re Hydroxycut Marketing and Sales Practices litigation, the Ninth Circuit recently held that a $25 million dollar settlement with the class was not fair, reasonable and adequate because a disproportionately large portion of the settlement would be distributed pursuant to a cy pres provision that would benefit a small segment of the class – the personal injury claimants – rather than more broadly distributing the remaining portion of the settlement for the benefit of a spectrum of the class, including the far more numerous silent class members.

The Ninth Circuit did not take issue with the settlement’s substantial product component – the proposed settlement consisted of $10 million in cash and $10 million in product, plus $5 million for attorneys’ fees. Nor did the court find the amounts of the awards to individual claimants or the proposed award of attorneys’ fees to be unreasonable. Rather, distribution of the cy pres component solely to a small segment of the overall class caused the settlement to be rejected.

In the Ninth Circuit, cy pres distributions must be guided by: (1) the objectives of the statutes in issue in the litigation; and (2) the interests of the silent class members. A cy pres distribution that does not satisfy these criteria is not fair, reasonable and adequate.

In the Hydroxycut litigation, there were 550 personal injury claimants and approximately 48,000 other claimants. The amounts to be distributed to non-personal injury claimants total approximately $1.4 million in cash and product, leaving $18.6 million to be distributed under the cy pres provision. Pursuant to that cy pres provision, the remaining $18.6 million would likely be distributed solely to the personal injury claimants.

The court concluded that because the cy pres provision fails to take into account the interests of the non-personal injury claimants who comprise the vast majority of the class, the settlement is not fair, reasonable and adequate. The court observed that the non-personal injury claimants should receive more compensation under the settlement and that cy pres distributions should be presumptively employed only when the remaining amounts of a settlement are so small as to make individual distributions to the entire class economically unviable or unfair.

Although cy pres provisions often receive little scrutiny, this decision illustrates that when the amount of a cy pres distribution is significant, they have the potential to derail the entire settlement.

Jeffrey Richter and John Waller are partners at Los Angeles-based Finestone & Richter. They can be reached at (310) 575-0800, or at jrichter@frlawcorp.com and jwaller@frlawcorp.com.


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