Cy pres awards are funds given to charitable organizations in cases in which there is still money remaining in the settlement fund, even after all class members have been paid or the amount of the fund is too small to justify a distribution directly to class members.
Cy Pres Provisions in Settlement Agreements
The term “Cy pres” originates from the French expression “cy pres comme possible” meaning as near as possible. In class action settlement agreements, cy pres provisions are commonly used to address the issue of unclaimed funds that are not distributed to class members for a variety of reasons. The remaining funds are often used for creating cy pres awards to charitable organizations that have a connection to the class action litigation, rather than having those funds revert back to the defendant.
Guidelines for Using Cy Pres Awards
Both the American Law Institute (ALI) and the National Association of Consumer Advocates (NACA) have each issued guidelines on the appropriate use of cy pres awards in class action settlements. The two circumstances in which cy pres awards are appropriate according to the ALI guidelines are: (1) when funds are left over after all claims are satisfied or when distribution of funds to all class members is not feasible (for example, because recipients cannot be located); and (2) when the identified or administrative costs for distribution are too large and the interests of the recipients reasonably approximate the interests of the class members. (ALI, Principles of the Law of Aggregate Litig., Section 3.07 (2010).)
Conversely, the NACA guidelines provide for cy pres awards only for unclaimed portions of the settlement and state that unclaimed portions of the settlement should be used to either: (1) protect the interests of persons injured by illegal conduct and thus indirectly benefit absent class members; and (2) promote the purposes of the statutory prohibitions sought to be enforced in the underlying litigation. (NACA, Standards & Guidelines for Litig. & Settling Consumer Class Actions, Revised, 255 F.R.D. 215, 244 (2009).)
Certain states, including Tennessee, have adopted statutes or court rules at the state level codifying the principle that organizations which promote legal aid and access to justice are always an appropriate use for residual funds in class action cases.
Court Approval of Cy Pres Awards
A court has the authority to approve a cy pres award pursuant to Fed. R. Civ. P. 23(e). A court will approve a cy pres award if the court finds that the settlement, taken as a whole, is fair, reasonable and adequate. Courts will look at several factors to determine whether a cy pres award is appropriate, including: (1) the adequacy of the nexus between the alleged class injury and the cy pres recipient; (2) whether the award to the class is nondistributable; (3) the compensation to class members as compared to the cy pres award; and (4) whether counsel or the court faces criticism or a conflict of interest.
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