In a case strikingly similar to a case that had been before the Supreme Court last term and that involves the same defendant and the same well-traveled objector, a unanimous panel of the Third Circuit vacated and remanded a district court’s approval of a Rule 23(b)(2) class action settlement that included cy pres payments but no payments to class members.  Its decision addresses important questions arising from a controversial approach to class action settlements.

The reader may recall the case of Frank v. Gaos, in which the Supreme Court had granted certiorari to review a settlement that had a significant cy pres component but no money going to the class. We wrote about the case in our First Class Defense blog, and you can find that post here. The defendant in Frank v. Gaos was Google, and the case challenged Google’s use of “referral headers” in its search results that transmitted data about the user to third parties, allegedly in violation of the Stored Communications Act. Although the Court, in that case, had granted cert to review the role of cy pres in class action settlements, it never reached that issue, but instead remanded the case for the lower courts to address an issue of standing.

While the world awaited the Supreme Court’s ruling, the Third Circuit held in abeyance an appeal in another Google case that it has now decided. In In re: Google Inc. Cookie Placement Consumer Privacy Litigation, plaintiffs allege that Google used cookies that bypassed cookie blockers in some Safari and Internet Explorer browsers without notice to computer users, who likely believed the blockers were protecting their privacy. The parties reached a settlement that, at least based on review of the courts’ decisions, closely resembled the settlement reached in Frank v. Gaos. In the Cookie Placement settlement, Google “agreed to stop using the cookies for Safari browsers and to pay $5.5 million to cover class counsel’s fees and costs, incentive awards for the named class representatives, and cy pres distributions, without directly compensating any class members.” In Frank v. Gaos, Google also had agreed to change its practices, and to pay $8.5 million to be distributed in the same manner as the $5.5 million payment in Cookie Placement. Both settlements would direct the cy pres funds to six data privacy organizations required to use the funds for research and the promotion of browser privacy.

In Frank v. Gaos, plaintiffs sought certification of the settlement class under Rule 23(b)(3), prompting Justice Thomas in a short dissenting opinion to question whether a cy pres-only settlement could satisfy that subsection’s superiority requirement. In Cookie Placement, the parties sought certification under Rule 23(b)(2), and the superiority requirement, therefore, did not apply. Nevertheless, the objector challenged the fairness of the settlement and the propriety of class certification on other grounds.

With respect to fairness, the objector argued that “the settlement, whose main monetary component is a cy pres award, provides no marginal benefit to the class and therefore cannot satisfy [Rule 23(e)(2)].” The Third Circuit rejected the argument that cy pres-only settlements are per se unfair, a question of first impression for the court. Rather, the court cited earlier decisions in which it “reaffirmed that settlement approval should be a practical inquiry rooted in the particular case’s facts and procedural posture.” Unlike a (b)(3) class, the court pointed out, a (b)(2) class “does not involve individualized determinations of liability or damages, . . . or even require that individual class members be ascertainable . . . ” It does, however, require that the class be “cohesive.” The court concluded:

“[W]e see no reason why a cy pres-only (b)(2) settlement that satisfies Rule 23’s certification and fairness requirements could not “belong” to the class as a whole, and not to individual class members as monetary compensation.”

Nevertheless, the court was not satisfied that the district court had adequately reviewed the settlement for fairness. The first concern the court cited was the scope of the release. The settlement agreement included the release of all potential damages claims class members might have relating to the subject of the litigation. By seeking certification under (b)(2) instead of (b)(3), the court held, the parties “avoided the heightened certification and notice requirements that apply to the latter.”  The court went on:

“Yet having sidestepped these requirements, Google and class counsel nonetheless obtained–for themselves anyway–the precise benefits that a Rule 23(b)(3) class gives to the defendant and class counsel: namely, a broad class-wide release of claims for money damages for the defendant, and a percentage-of-fund calculation of attorneys’ fees for class counsel. The District Court’s failure to scrutinize this troubling aspect of the Settlement Agreement prevents us from reviewing its fairness, reasonableness, and adequacy.”

In what seems like an extraordinary delegation of overarching legal issues to a lower court, the Third Circuit questioned, and left it for the district court to determine on remand, “whether a defendant can ever obtain a class-wide release of claims for money damages in a Rule 23(b)(2) settlement, and if so, whether a release of that kind requires a heightened form of notice either under Rule 23(c)(2)(B) or due process tenets.”

The court’s second concern had to do with the selection of the cy pres recipients.  According to the court, Google had a connection to several of the proposed recipients, and one of the lawyers representing the class was a board member of another. Noting that it had “not previously addressed when a prior relationship between a cy pres recipient and one of the litigants in a class action undermines the proposed settlement’s fairness,” the court observed that the district court had conducted no fact finding of those relationships. It declared:

“We further hold that, if challenged by an objector, a district court must review the selected cy pres recipients to determine whether they have a significant prior affiliation with any party, counsel, or the court. A settlement should not be approved if such a prior affiliation ‘would raise substantial questions . . . whether the selection of the recipient was made on the merits.’ . . . The parties seeking settlement approval bear the burden of explaining to a court why the cy pres selection was fair . . . .”

Finally, the objector challenged certification of the settlement class, arguing “that a cy pres-only settlement in these circumstances confers no benefit on the class, which inherently shows that the class representative and counsel failed to represent the class fairly and adequately.” Because this challenge was intertwined with the challenge to the fairness of the settlement, the court left it to the district court to reconsider the propriety of class certification as it reviewed the fairness issue.

The Third Circuit’s decision covers a lot of ground, more than can be conveyed in a single blog post. The key takeaways are 1) be wary of class action settlements that result in money going to cy pres recipients but not to class members; 2) be even more wary of seeking certification for such settlement classes under (b)(2) instead of (b)(3), especially if the settlement releases class members’ potential claims for damages; 3) avoid selecting cy pres recipients that have pre-existing relationships with the parties or their counsel; and finally 4) never assume that a district court’s approval of a class action settlement, over objection, is the last word.