The cy pres doctrine allows a court to distribute a class action settlement fund to the "next best" class of beneficiaries when it is cost-prohibitive to distribute damages to members of the plaintiff class. The Ninth Circuit Court of Appeals last week rejected a class action settlement on the ground that the charities selected by the parties to receive funds advance causes unrelated to the issues in the lawsuit, thus failing to meet the standards of the cy pres doctrine.
In Nachshin v. AOL, plaintiffs claimed that AOL violated various federal and California statutes when it added footers containing promotional messages to emails sent by AOL members. The parties negotiated a settlement for a class of about 66 million AOL subscribers. AOL could have been liable for up to $2 million in unjust enrichment damages, representing its revenues from the footer advertising. But dividing those damages among the 66 million subscribers would result in only about 3 cents to each class member, which is less than the cost of distributing the funds.
In lieu of a distribution of damages, the parties agreed that AOL would make donations to several charities totalling $110,000. The charities included the Legal Aid Foundation of Los Angeles, the Federal Judicial Center Foundation, and the Boys and Girls Club chapters in Los Angeles and Santa Monica, California.
Two members of the class objected to the cy pres distribution plan, and the Ninth Circuit agreed that the designated beneficiaries did not seek to advance the objectives of the lawsuit. The Ninth Circuit warned against distributing funds to the parties' and the judge's favorite charities without regard to the interests of class members: "Some courts appear to have abandoned the 'next best use' principle implicit in the cy pres doctrine." Here, according to the court, the proposed beneficiaries do not have missions consistent with the objectives of the lawsuit, which is to protect users of the internet. Further, the charities mostly have a local focus and do not account for the broad geographic scope of the class members. On that basis, the court rejected the settlement.
The Ninth Circuit last week addressed the standards for certifying a plaintiff's class action in a securities fraud case. The Ninth Circuit joined the Third and Seventh Circuits in holding that a plaintiff seeking to invoke the fraud-on-the-market presumption need not prove at the class certification stage that the defendant's misrepresentation was material.
In Connecticut Retirement Plans v. Amgen, Inc., the plaintiff alleged that misstatements and failure to disclose by defendants illegally inflated the value of Amgen stock. Plaintiff sought to certify a class action by showing that questions common to class members -- purchasers of Amgen stock -- predominated over questions affecting only individual members, under Fed. R. Civ. Proc. 23(a). To show that the element of reliance was common to the class, plaintiff invoked the fraud-on-the-market presumption, which is the principle that the market price of a publicly-traded security reflects all public information and a buyer is presumed to have relied on the truthfulness of that information. The Ninth Circuit held that, to invoke the presumption, plaintiff must show that the stock was traded in an efficient market, and that the alleged misstatements were public, but plaintiff need not prove that the misstatements were material. Instead, to gain class certification, plaintiff must simply plausibly allege materiality. The Ninth Circuit rejected the view of the First, Second, and Fifth Circuits that materiality must be proven in order to certify a class action.