Amicus Curiae Brief — Theodore H. Frank, et al., Petitioners v. Paloma Gaos, Individually and on Behalf of All Others Similarly Situated, et al.

No. 17-961

================================================================

In The

Supreme Court of the United States

-----------------------------------------------------------------THEODORE H. FRANK and

MELISSA ANN HOLYOAK,

Petitioners,

v.

PALOMA GAOS, on behalf of herself and

all others similarly situated, et al.,

Respondents.

-----------------------------------------------------------------On Writ Of Certiorari To The

United States Court Of Appeals

For The Ninth Circuit

-----------------------------------------------------------------BRIEF OF MANHATTAN INSTITUTE FOR

POLICY RESEARCH AS AMICUS CURIAE

SUPPORTING PETITIONERS

-----------------------------------------------------------------C. THOMAS LUDDEN

Counsel of Record

KAREN A. SMYTH

LIPSON NEILSON P.C.

3910 Telegraph Road, Suite 200

Bloomfield Hills, Michigan 48302

(248) 593-5000

tludden@lipsonneilson.com

================================================================

COCKLE LEGAL BRIEFS (800) 225-6964

WWW.COCKLELEGALBRIEFS.COM

i

TABLE OF CONTENTS

Page

STATEMENT OF INTEREST .............................

1

SUMMARY OF ARGUMENT ..............................

2

INTRODUCTION ................................................

3

STATEMENT OF FACTS ....................................

4

ARGUMENT ........................................................

6

A.

B.

American state courts having jurisdiction

over charitable trusts are expressly authorized by state statutes to use the cy

pres remedy in a limited set of circumstances .......................................................

7

Federal courts are not authorized to use

the cy pres remedy in class action litigation unless that use is specifically authorized by the controlling substantive law ....

9

1. Federal courts have used their equitable powers to import the cy pres remedy into the administration of class

action litigation ................................... 10

2. The Rules Enabling Act prevents Rule

23 from being used to modify the remedies authorized by substantive law ..... 14

3. The use of cy pres in class action litigation substitutes charitable payments for the remedies available under

the substantive law ............................. 16

ii

TABLE OF CONTENTS – Continued

Page

C.

This Court should find that federal courts

may only use the cy pres remedy when the

substantive law allows the use of this remedy.............................................................. 21

CONCLUSION..................................................... 23

iii

TABLE OF AUTHORITIES

Page

CASES

Amchem Products, Inc. v. Windsor,

521 U.S. 591 (1997) ......................... 14, 16, 17, 20, 21

Broussard v. Meineke Disc. Muffler Shops, Inc.,

155 F.3d 332 (4th Cir. 1998) ....................................15

In re Baby Prod. Antitrust Litig.,

708 F.3d 163 (3d Cir. 2013) .....................................18

In re Deepwater Horizon,

732 F.3d 326 (5th Cir. 2013) ....................................19

In re GMC Engine Interchange Litig.,

594 F.2d 1106 (7th Cir. 1979) ..................................16

In re Google Referrer Header Privacy Litig.,

869 F.3d 737 (9th Cir. 2017) ........................ 5, 6, 7, 21

In re Pharm. Indus. Average Whole Price Litig.,

588 F.3d 24 (1st Cir. 2009) ......................................13

In re: Motor Fuel Temp. Sales Practices Litig.,

872 F.3d 1094 (10th Cir. 2017) ................................16

John v. Smith,

102 F. 218 (9th Cir. 1900) ........................................10

Klier v. Elf Atochem North-America, Inc.,

658 F.3d 468 (5th Cir. 2011) ....................................14

Lane v. Facebook, Inc.,

696 F.3d 811 (9th Cir. 2012) ....................................21

Loring v. Marsh,

15 F. Cas. 905 (D. Mass. 1865) ................................10

iv

TABLE OF AUTHORITIES – Continued

Page

Marek v. Lane,

571 U.S. 1003 (2013)..................................................3

Marshall v. National Football League,

787 F.3d 502 (8th Cir. 2015) ....................................16

Masters v. Wilhelmina Model Agency, Inc.,

473 F.3d 423 (2d Cir 2007) ......................................13

Miller v. Steinbach,

No. 66 CIV. 356, 1974 WL 350 (S.D.N.Y. Jan.

3, 1974) .............................................................. 11, 12

Mirfasihi v. Fleet Mortg. Corp.,

356 F.3d 781 (7th Cir. 2004) ......................................7

Nachshin v. AOL, LLC,

663 F.3d 1034 (9th Cir. 2011) ....................................7

Powell v. Georgia-Pacific Corp.,

119 F.3d 703 (8th Cir. 1997) ....................................13

Tyson Foods, Inc. v. Bouaphakeo,

577 U.S. ___, 136 S. Ct. 1036 (2016) ........... 14, 15, 21

Van Gemert v. Boeing Co.,

739 F.2d 730 (2d Cir. 1984) ......................... 12, 13, 18

Wachovia Bank & Trust Co. v. Buchanan,

346 F. Supp. 665 (1972) ..................................... 10, 11

CONSTITUTIONAL PROVISIONS

U.S. Const. amend. XIV ........................................ 10, 11

v

TABLE OF AUTHORITIES – Continued

Page

STATUTES

18 U.S.C. § 2702 ...................................................... 5, 20

18 U.S.C. § 2707(b) ......................................................20

18 U.S.C. § 2707(b)(3) .................................................20

18 U.S.C. § 2707(c) ......................................................20

28 U.S.C. § 1712 ..........................................................22

28 U.S.C. § 1712(b) ......................................................23

28 U.S.C. § 1712(c) ......................................................23

28 U.S.C. § 1712(e) ................................................ 22, 23

28 U.S.C. § 2041 ..........................................................12

28 U.S.C. § 2042 ..........................................................12

Rules Enabling Act, 28 U.S.C. § 2072 ................ passim

28 U.S.C. § 2072(b) ................................................ 14, 15

20 Pa. Cons. Stat. § 7740.3 (2016) ................................9

Cal. Prob. Code § 15409 (2016).....................................9

Mass. Gen. Laws ch. 214, § 10B ...................................9

Mich. Comp. Laws § 700.7405 ......................................8

Mich. Comp. Laws § 700.7413(1)..................................8

Mich. Comp. Laws § 700.7413(1)(c)..............................9

Mich. Comp. Laws § 700.7413(2)..................................9

N.Y. Est. Powers & Trusts § 8-1.1(c)(1) ........................9

vi

TABLE OF AUTHORITIES – Continued

Page

RULES AND REGULATIONS

Fed. R. App. P. 28(a)(4) ..................................................3

Fed. R. Civ. P. 8(a)(1) .....................................................3

Fed. R. Civ. P. 23 .................................................. passim

Fed. R. Civ. P. 23(b)(3) .................................................17

Fed. R. Civ. P. 23(e)................................................ 16, 19

Fed. R. Civ. P. 23(e)(1) .................................................19

Fed. R. Civ. P. 23(e)(2) ........................................... 19, 20

Fed. R. Civ. P. 23(e)(5) .................................................19

Fed. R. Civ. P. 23(h) .....................................................20

Sup. Ct. R. 14(1)(e) ........................................................3

OTHER AUTHORITIES

Edith Frisch, The Cy Pres Doctrine in the United

States (Mathew Bender 1950) ..................................8

Hamish Gray, The History and Development in

England of the Cy-Pres Principle in Charities,

33 B.U. L. Rev. 30 (1953)..........................................8

http://uniformlaws.org/LegislativeFactSheet.aspx?

title=Trust%20Code ..................................................8

Lester Brickman, Lawyer Barons: What Their

Contingency Fees Really Cost America (University of Cambridge Press 2011).............................1

vii

TABLE OF AUTHORITIES – Continued

Page

Martin Redish, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative

and Empirical Analysis, 62 Fla. L. Rev. 617

(2010) ................................................................. 14, 17

2 Newberg and Conte, Newberg on Class Actions

§ 10.15 (3d ed.) ........................................................13

4 Rubenstein, Newberg on Class Actions § 12:35

(5th ed.) ...................................................................22

Stewart R. Shepherd, Damage Distribution in

Class Actions: The Cy Pres Remedy, 39 U. Chi.

L. Rev. 448 (1972) .................................. 11, 17, 18, 20

Walter K. Olson, The Litigation Explosion: What

Happened When America Unleashed the Lawsuit (Truman Talley Books 1991) .............................1

1

STATEMENT OF INTEREST1

Amicus curiae Manhattan Institute for Policy Research was established in 1978 as a nonpartisan

public-policy research foundation developing ideas

that foster economic choice and individual responsibility. For more than 30 years, the Institute’s legal-policy

scholars have sought to develop and communicate

novel, sound ideas on how to improve the civil- and

criminal-justice systems.

Class action litigation has been a longstanding

focus of the Institute’s legal-policy research. Books

by former Institute senior fellow Walter Olson and

former Institute visiting scholar Lester Brickman, also

of Cardozo Law School, extensively chronicled the

problems with class-action practice. See generally

Walter K. Olson, The Litigation Explosion: What Happened When America Unleashed the Lawsuit (Truman

Talley Books 1991); and Lester Brickman, Lawyer Barons: What Their Contingency Fees Really Cost America

(University of Cambridge Press 2011). A series of

Manhattan Institute reports by Brickman, Richard A.

Epstein, and John H. Beisner offered theoretical and

empirical analyses that laid the intellectual groundwork for the Class Action Fairness Act of 2005, Pub. L.

No. 109-2, 119 Stat. 4-14.

1

Petitioners and Respondents have consented to the filing of

this brief. No counsel for a party authored this brief in whole or

in part, and no person or entity other than amicus or their counsel

contributed monetarily to the preparation or submission of this

brief.

2

In addition to the Manhattan Institute’s policy interest in the subject matter underlying this case, the

Institute’s legal scholars believe that enforcing clear

legislative mandates is central to the rule of law and

that class action cy pres awards, among other aspects

of modern class action practice, violate the Rules Enabling Act.

The Amicus is submitting this brief in support of

the Petitioners.

------------------------------------------------------------------

SUMMARY OF ARGUMENT

Federal courts have imported the cy pres remedy

from the supervision of charitable trust into the administration of class actions. Congress has only authorized the federal courts to use this power in one,

narrowly defined, type of class action settlement. Otherwise, the Rules Enabling Act, 28 U.S.C. § 2072, expressly prevents federal courts from using Federal

Rules of Civil Procedure 23 to “abridge, enlarge or

modify any substantive right” of the class members by

substituting the cy pres remedy for the remedy created

by the applicable substantive law. By approving a settlement that allows Respondent Google to discharge its

liability to all class members by making cy pres payments to charities instead of compensatory payments

to the class members, the courts below have effectively

modified the substantive legal rights of the class members. Therefore, this Court should reverse the judgment below and hold that federal courts cannot use the

3

cy pres remedy in any case in which they are not expressly authorized by the existing substantive law to

use this remedy.

------------------------------------------------------------------

INTRODUCTION

All federal courts have limited jurisdiction and

powers. Therefore, litigants must demonstrate that a

federal court has the jurisdiction to decide a case before the court will make a substantive decision. Sup.

Ct. R. 14(1)(e); Fed. R. App. P. 28(a)(4); Fed. R. Civ. P.

8(a)(1). The Petitioners and the other amici raise many

valid concerns about how the cy pres remedy is being

used in this and other class action litigation. Before

considering any of these objections, however, this

Court should first decide if federal courts are ever authorized to use the cy pres remedy in class action litigation. See Marek v. Lane, 571 U.S. 1003 (2013) (Chief

Justice concurring in denial of writ of petition for certiorari to review because the challenge to the Facebook

settlement “might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of [cy pres] remedies in class action

litigation, including when, if ever, such relief should

be considered. . . .”).

The Court should find that the answer to this

threshold question is effectively “never” because federal courts are prohibited from substituting a cy pres

remedy for the remedies established by the substantive law. Therefore, this Court should reverse the

4

judgment below and find that federal courts cannot

use the cy pres remedy to distribute the proceeds from

class action settlements or judgments unless the substantive law authorizes them to do so.

------------------------------------------------------------------

STATEMENT OF FACTS

Plaintiff-Respondent Pamela Gaos filed her original Complaint in the Northern District of California on

October 25, 2010. (Joint Appendix, p. 1). Her original

pleading attempted to state seven causes of action,

which were based upon the alleged violation of federal

statutes, California statutes and the California common law. (Id., p. 18). Ms. Gaos was granted leave to

amend her pleadings when Respondent Google, LLC

successfully moved to dismiss her original complaint

for failure to state a claim on which relief could be

granted. (Id., p. 22). In her Amended Complaint, Ms.

Gaos modified her claims and alleged a different set of

violations of statutory duties and common law torts.

(Id., p. 25). Google moved to dismiss once again for the

failure to state a claim on which relief could be

granted, and Ms. Gaos was permitted to file a Second

Amended Complaint. (Id., p. 31).

The lawsuit filed by Ms. Gaos was not the only

putative class action lawsuit alleging that Google had

violated the Stored Communications Act. On April 30,

2013, her lawsuit was consolidated with a second

lawsuit that had been filed by Gabriel Priyev against

Google. (Joint Appendix, p. 85). A Consolidated

5

Complaint was attached as Exhibit A to the Order of

Consolidation and became the “operative complaint.”

(Order, p. 4 of 56, ¶ 10). This Consolidated Complaint

contained the following causes of action:

Count I – Violation of the Stored Communications Act, 18 U.S.C. § 2702

Count II – Breach of Contract

Count III – Breach of Contract of Good Faith

and Fair Dealing

Count IV – Breach of Contract Implied in Law

Count V – Unjust Enrichment (In the Alternative)

In re Google Referrer Header Privacy Litigation, 869

F.3d 737, 739-740 (9th Cir. 2017). See also Order Granting Motion for Preliminary Approval of Class Certification. (Joint Appendix, p. 84).

After a mediation, the named parties reached a

settlement, which requires Google to pay a total of $8.5

million. 869 F.3d at 740. Although Google agreed to

provide additional information on its website, the settlement did not require Google to change any of its

practices. Id. Of this sum, $3.2 million was for attorney

fees, administration costs and incentive payments to

the named plaintiffs. Id. The remaining $5,300,000

was to be paid to six cy pres recipients. Id. None of the

allegedly injured persons would receive a penny, with

the exception of the three named plaintiffs, who receive

$5,000 each as class representatives. Id. at 741. In

6

return, Google would receive a full release of the claims

by all members of the class. Id. at 740.

The class in this case is estimated at 129 Million.

869 F.3d at 740. Therefore, the notice requirements

were unusual. Instead of providing notice directly to

each class member, “[n]otice was given to the class by

a website, a toll-free telephone number, paid banner

ads, and press articles.” Id. The settlement was approved by the federal district court, and the Ninth Circuit affirmed its decision. Id. at 739, 741.

------------------------------------------------------------------

ARGUMENT

The cy pres remedy has a long history of being

used to handle charitable gifts and trusts that have become impossible to administer in accordance with their

express terms. Some federal courts have concluded

that it is also an effective remedy for problems that

arise during class actions. But the Rules Enabling Act

prohibits the use of the federal rules to substitute the

cy pres remedy for the remedies authorized by statute

or the common law. Therefore, unless this remedy is

expressly authorized by the controlling substantive

law, this Court should hold that federal courts cannot

use the cy pres remedy in class action settlements or to

dispose of any unclaimed portion of class action judgments.

7

A. American state courts having jurisdiction

over charitable trusts are expressly authorized by state statutes to use the cy pres remedy in a limited set of circumstances.

When it affirmed the district court decision approving the use of cy pres payments in settlement of

this case, the Ninth Circuit explained the origins of

this remedy and its use in class actions as follows:

Cy pres, which takes its name from the Norman French expression cy pres comme possible (or “as near as possible”), is an equitable

doctrine that originated in trusts and estates

law as a way to effectuate the testator’s intent

in making charitable gifts. Nachshin v. AOL,

LLC, 663 F.3d 1034, 1038 (9th Cir. 2011). In

the class action settlement context, the cy pres

doctrine permits a court to distribute unclaimed or non-distributable portions of a

class action settlement fund to the “next best”

class of beneficiaries for the indirect benefit of

the class. Id.

869 F.3d at 741. The Seventh Circuit has explained

that “Th[e cy pres] doctrine is based on the idea that

the settlor would have preferred a modest alteration in

the terms of the trust to having the corpus revert to his

residuary legatees. So there is an indirect benefit to

the settlor.” Mirfasihi v. Fleet Mortg. Corp., 356 F.3d

781, 784 (7th Cir. 2004).

In England, the Chancellor had a supervisory

role over charitable trusts and could use his broad

equitable powers to prevent charitable trusts from

8

completely failing. Hamish Gray, The History and Development in England of the Cy-Pres Principle in Charities, 33 B.U. L. Rev. 30, 32 (1953); Edith Frisch, The

Cy Pres Doctrine in the United States, § 2.01 (Mathew

Bender 1950). Parliament also enacted the Statute of

Charitable Uses, which partially codified and reformed

the use of cy pres in the English Courts of Chancery.

Gray, 33 B.U. L. Rev. at 35. Many American states

were initially hesitant to adopt cy pres. Frisch, § 2.01.

Over time, however, most state courts having jurisdiction over charitable trusts were authorized to use the

cy pres remedy when the purpose of the trust has been

frustrated. Id., §§ 2.00 et seq.

One example is the Michigan Estates and Protected Individuals Code (“EPIC”),2 which governs charitable trusts. Mich. Comp. Laws § 700.7405. EPIC

expressly authorizes the Probate Court to use cy pres

“if a particular charitable purpose becomes unlawful,

impracticable, or impossible to achieve, no alternative

taker is named or provided for, and the court finds the

settlor had a general, rather than a specific, charitable

intent. . . .” Mich. Comp. Laws § 700.7413(1). Under

these circumstances, a Michigan Probate Court may

“modify or terminate the trust by directing that the

trust property be applied or distributed, in whole or in

part, in a manner consistent with the settlor’s general

2

These sections of EPIC related to the cy pres remedy are

based upon the Uniform Trust Code, which has been adopted by

32 states and the District of Columbia. http://uniformlaws.

org/LegislativeFactSheet.aspx?title=Trust%20Code (last visited

July 8, 2018).

9

charitable intent.” Mich. Comp. Laws § 700.7413(1)(c).

In addition, EPIC also allows the settlor to create a

trust that the Probate Court is not permitted to modify

using cy pres. Mich. Comp. Laws § 700.7413(2). Other

states have similar statutory authorization and limitations.3

In summary, the cy pres remedy is an equitable

remedy that was designed to handle the unique problems that arise when administering charitable gifts or

trusts that long outlive their settlors. This remedy may

only be used when specific conditions are met, and the

settlor has chosen not to prevent its use to modify the

express intent of the trust.

B. Federal courts are not authorized to use the

cy pres remedy in class action litigation unless that use is specifically authorized by

the controlling substantive law.

Unlike state courts having jurisdiction over charitable trusts, federal courts lack the statutory authorization to use the cy pres remedy, with one very narrow

exception discussed below. Instead, they are expressly

prohibited from using the federal rules to substitute

the cy pres remedy for the remedies created by the substantive law. But, in this and many other cases, that is

exactly what the federal courts are doing. Therefore,

this Court should find that federal courts are not

3

See, e.g., Cal. Prob. Code § 15409 (2016); Mass. Gen. Laws

ch. 214, § 10B; N.Y. Est. Powers & Trusts § 8-1.1(c)(1); and 20 Pa.

Cons. Stat. § 7740.3 (2016).

10

permitted to use the cy pres as a remedy in class action

litigation unless that remedy is expressly authorized

by controlling legal authority.

1. Federal courts have used their equitable

powers to import the cy pres remedy into

the administration of class action litigation.

Cy pres payments are now frequently used in the

administration of federal class actions. Before adopting the cy pres remedy for class actions, however, the

federal courts barely mentioned cy pres at all. A July 6,

2018 search of the Westlaw All Federal database identified 1458 cases in which the phrase “cy pres” appears.

Only 125 of these cases were decided before 1978. In

many of the 19th century cases, the phrase was mentioned, but was not the basis or the decision. See, e.g.,

Loring v. Marsh, 15 F. Cas. 905, 907, 909-914 (D. Mass.

1865) (counsel’s argument referenced cy pres, but

Court did not apply doctrine). In others, federal courts

discussed cy pres because an issue of state law had

arisen. See, e.g., John v. Smith, 102 F. 218, 221-224 (9th

Cir. 1900). In a substantially similar manner, federal

courts have occasionally used cy pres to determine how

to handle the assets of charitable trusts whose express

purposes were barred by the Fourteenth Amendment.

See, e.g., Wachovia Bank & Trust Co. v. Buchanan, 346

F. Supp. 665, 667-668, 671 (1972) (applying cy pres

after determining that it was unlawful for North

11

Carolina public officials4 to administer testamentary

trust to provide scholarships to the University of North

Carolina for “white boys and girls”).

The post-1978 explosion in the number of federal

cases using the phrase “cy pres” results from the remedy being used in class action lawsuits. The decision to

import the cy pres remedy into class actions is generally attributed to a 1972 law review comment, which

suggested that courts use this remedy to distribute

class action proceeds that were not collected by class

members. This comment recommended that the “court

may seek to apply their own version of cy pres by effectuating as closely as possible the intent of the legislature in providing the legal remedies on which the main

cause of action was based.” Stewart R. Shepherd, Damage Distribution in Class Actions: The Cy Pres Remedy,

39 U. Chi. L. Rev. 448, 452 (1972). The 1972 comment

does not identify any legal authority that would allow

federal courts to use this remedy.

Soon afterwards, federal courts began to evaluate

whether to use the cy pres remedy in class actions. One

of the first federal court decisions approving a settlement that applied the cy pres remedy was Miller v.

Steinbach, No. 66 CIV. 356, 1974 WL 350 (S.D.N.Y. Jan.

3, 1974). Miller was a shareholder’s derivative suit

that was certified as a class action. Id. at *1. The parties reached a settlement in which all of the net

4

There was a Fourteenth Amendment issue because almost

all the members of the administrative group that selected the

scholarship recipients were persons holding state elective or appointed public office. 346 F. Supp. at 667.

12

settlement proceeds, after paying approved costs and

fees, would be paid to the Trustee of the retirement

plan of the entity on whose behalf the stockholder’s derivative suit was being pursued. Id. at *2. In deciding

whether it could approve the settlement, Miller found

that:

As to any legal prohibition, while neither

counsel nor the Court has discovered precedent for the proposal – at least in a case such

as this where distribution to the class of plaintiffs was theoretically possible if not in a practical sense feasible – nor have we been made

aware of any precedent that would prohibit it.

Id. at *2. Having concluded that it was not prohibited

from doing so, Miller approved the settlement because

it was “fair and reasonable.” Id.

There are many subsequent federal court decisions considering whether the cy pres remedy should

be used. Like Miller, these cases provide no more than

minimal discussion of the authority that allows them

to award this relief. For example, in Van Gemert v. Boeing Co., 739 F.2d 730, 756-758 (2d Cir. 1984), the court

reviewed the potential use of cy pres in the distribution

of the unclaimed portion of a class action judgment.

Van Gemert held that two statutory provisions5 did not

control the distribution of the unclaimed funds. Id. at

735-736. Instead, the district court was found to have

“broad discretionary powers in shaping equitable decrees.” Id. at 737. Ultimately, Van Gemert affirmed the

5

28 U.S.C. §§ 2041-2042.

13

district court decision not to use cy pres, but instead to

return the unclaimed portion of the judgment to the

defendant, Boeing. Id. at 736-738.

In Powell v. Georgia-Pacific Corp., 119 F.3d 703,

706-707 (8th Cir. 1997), the circuit court affirmed the

district court decision to use cy pres to distribute unclaimed funds from a class action settlement. In reaching this decision, Powell held – without citing any

authority – that “the [district] court correctly turned to

traditional principles of equity to resolve the case.” Id.

at 706. It then relied upon a treatise6 to find that cy

pres remedy was one of the four ways that the district

court could have exercised its discretion to disburse

the uncollected funds. Id. Subsequent circuit court decisions have relied upon the prior decisions from other

circuits as the authority for finding that the cy pres

remedy may be used. See, e.g., In re Pharmaceutical Industry Average Whole Price Litigation, 588 F.3d 24, 3335 (1st Cir. 2009) (approving use of cy pres in class action settlement); and Masters v. Wilhelmina Model

Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007) (explaining when cy pres distributions may be used).

Therefore, the only federal courts that have considered the original authority for federal courts to use

the cy pres remedy have relied upon the general equitable authority of district courts to administer remedies.

6

2 Newberg and Conte, Newberg on Class Actions § 10.15 at

10-38, 10-39 (3d ed.).

14

2. The Rules Enabling Act prevents Rule 23

from being used to modify the remedies

authorized by substantive law.

The English Chancellor possessed broad equitable

powers. American state courts are expressly authorized to use the cy pres remedy as part of their supervisory authority over charitable trusts. Federal courts

not only lack the same express authorization to use

broad equitable remedies, but they are also prohibited

by the Rules Enabling Act from using procedural devices to modify the controlling substantive law.

Indeed, this Court has recognized that “Rule 23’s

requirements must be interpreted in keeping with Article III’s constraints, and with the Rules Enabling Act,

which instructs that rules of procedure ‘shall not

abridge, enlarge or modify any substantive right.’ 28

U.S.C. § 2072(b).” Amchem Products, Inc. v. Windsor,

521 U.S. 591, 613 (1997). “As nothing more than a Federal Rule of Civil Procedure, however, the class action

device [Rule 23] may do no more than enforce existing

substantive law as promulgated either by Congress or,

in diversity suits, by applicable state statutory or common law.” Martin Redish, Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and

Empirical Analysis, 62 Fla. L. Rev. 617, 623 (2010)

(quoted with approval in the concurring opinion of the

Honorable Edith H. Jones in Klier v. Elf Atochem

North-America, Inc., 658 F.3d 468, 481 (5th Cir. 2011)).

In Tyson Foods, Inc. v. Bouaphakeo, 577 U.S. ___,

136 S. Ct. 1036, 1046 (2016), the petitioners requested

15

that this Court “announce a broad rule against the use

in class actions of what the parties call representative

evidence.” This Court applied the Rules Enabling Act

to reject this argument, finding that:

In a case where representative evidence is relevant in proving a plaintiff ’s individual claim,

that evidence cannot be deemed improper

merely because the claim is brought on behalf

of a class. To so hold would ignore the Rules

Enabling Act’s pellucid instruction that use of

the class device cannot “abridge . . . any substantive right.” 28 U.S.C. § 2072(b).

136 S. Ct. at 1046. See also Broussard v. Meineke Disc.

Muffler Shops, Inc., 155 F.3d 332, 345 (4th Cir. 1998)

(concluding that “[i]t is axiomatic that the procedural

device of Rule 23 cannot be allowed to expand the substance of the claims of class members”). It follows that

the Rules Enabling Act also prevents federal courts

from (1) applying a remedy in a claim pursued as part

of a class action unless that remedy could be used by

an individual bringing the same claim and (2) using

Rule 23 to reduce the substantive rights of class members. Using a cy pres remedy to extinguish the claims

of absent class members – in this case, more than 100

million plaintiffs, with essentially no notice – necessarily reduces class members’ substantive rights, as

discussed in more detail below.

16

3. The use of cy pres in class action litigation substitutes charitable payments for

the remedies available under the substantive law.

This Court has held that the Rules Enabling Act

limits the ability of the federal courts to use the Rule

23 procedures to approve the settlement of a class action lawsuit. See Amchem, 521 U.S. at 628-629 (finding

that district court could not use Rule 23(e) settlement

approval to create “nationwide administrative claims

processing regime . . . [for] compensating victims of asbestos exposure” because of limitations of Rules Enabling Act).7 See also In re General Motors Corp. Engine

Interchange Litigation, 594 F.2d 1106, 1135-1136 (7th

Cir. 1979) (finding that district court’s approving settlement that dismissed claims of non-consenting class

members “contravene[d] the Rules Enabling Act . . . by

abridging the substantive rights of those who did not

accept the settlement offer”). This Court should now

hold that the Rules Enabling Act prevents the district

court’s approval of a settlement that substitutes the cy

pres remedy for the remedy existing under the substantive law for two reasons.

First, the substantive law includes the remedy

for its violation. All substantive law consists of two

7

Despite this decision, some circuit courts have concluded

that the Rules Enabling Act simply does not apply to the district

court’s approval of a settlement. See In re: Motor Fuel Temperature Sales Practices Litigation, 872 F.3d 1094, 1116 (10th Cir.

2017); and Marshall v. National Football League, 787 F.3d 502,

511 n.4 (8th Cir. 2015).

17

elements: prohibition and enforcement. Redish, supra,

62 Fla. L. Rev. at 644. By enacting a law, a legislature

chooses among different enforcement methods, such as

compensation, punitive damages, civil fines and criminal punishment. Id. at 645. When a district court approves a cy pres settlement, the court is substituting a

fine made payable to a charity for the substantive law’s

remedy, which is usually compensation paid to the injured persons. Id. at 645-646. In other words, the use

of cy pres modifies the substantive law because it punishes the defendant with a fine rather than compensates the allegedly injured persons.8

The proponents of cy pres do not dispute this. In

fact, they argue that using cy pres to punish a defendant is a feature, not a bug. After the 1966 revisions to

Rule 23, a class action judgment “binds all class members who have not acted to exclude themselves from

the suit.” Comment, 39 U. Chi. L. Rev. at 448.9 Despite

being bound by the judgment, many class members do

not take any action at all with respect to the class action lawsuits “even after a judgment or settlement in

their favor has been reached and do not attempt to collect their shares of the recovery.” Id. Because many

class members do not make a claim, a portion of the

8

This same principle applies if the use of cy pres replaces a

criminal penalty or changes the recipient of the fine from a governmental entity to a private charity.

9

See also Amchem, 521 U.S. at 614-15 (“Rule 23(b)(3) added

to the complex-litigation arsenal class actions for damages designed to secure judgments binding all class members save those

who affirmatively elected to be excluded.”).

18

sums set aside to pay the judgment or the settlement

is not claimed and collected.

If an individual plaintiff does not take steps to enforce that judgment, the plaintiff does not recover anything. Therefore, the defendant retains money that the

plaintiff has chosen not to collect, which was the ultimate result in Van Gemert. 739 F.2d at 736-738. The

1972 Comment characterized the defendant’s retaining the unclaimed funds as “unjust enrichment” and

argued that “distribution to the next-best class would

be preferable.” 39 U. Chi. L. Rev. at 459. Circuit courts

approving of cy pres distributions of unclaimed funds

use similar justifications. In re Baby Prod. Antitrust

Litig., 708 F.3d 163, 172 (3d Cir. 2013) (“Reversion to

the defendant risks undermining the deterrent effect

of class actions by rewarding defendants for the failure

of class members to collect their share of the settlement.”).

The same risk applies in any lawsuit where the

plaintiff does not enforce the judgment or cash the settlement check. But, it is only in lawsuits certified as

class actions under Rule 23 that federal courts use the

cy pres remedy to punish defendants. Therefore, a procedural device is being used to change the substantive

remedy enacted to deter persons from performing the

acts prohibited by that substantive law.

Second, class action settlements differ from individual settlements in two important ways. One, the

settlement negotiations are not conducted by all the

parties that will be bound by the outcome of the case.

19

Instead, they are only conducted by the named parties,

some of whom are charged with acting on behalf of all

class members. Therefore, all the parties are not expressly consenting to replace compensatory payments

with payments to charities. Two, district courts must

approve class action settlements before they become

binding upon the entire class and discharge the defendant’s liability to that class. Fed. R. Civ. P. 23(e). As

the Fifth Circuit has explained:

A class settlement is not a private agreement

between the parties. It is a creature of Rule

23, which authorizes its use to resolve the legal claims of a class “only with the court’s approval.” . . . In granting approval, the court

must, as always, adhere to the precepts of Article III and the Rules Enabling Act. While a

“welcome byproduct” of deciding cases or controversies on a class-wide basis, the goal of

global peace does not trump Article III or federal law. . . . Courts do not have the authority

to create a cause of action (and their corresponding subject-matter jurisdiction over it)

and then give peace with regard to that cause

of action.

In re Deepwater Horizon, 732 F.3d 326, 343 (5th Cir.

2013).

The district court is permitted to approve a class

action settlement only after giving “notice in a reasonable manner to all class members” and holding a hearing. Fed. R. Civ. P. 23(e)(1), (2) and (5). Therefore, the

federal district court is performing an adjudicative act

when it determines that a particular settlement is

20

“fair, reasonable and adequate” under Rule 23(e)(2).

Accordingly, if the district court substitutes a new remedy – cy pres – in whole or in part for the authorized

remedy, then the district court’s application of Rule

23(e) violates the Rules Enabling Act just as creating

a new remedial process violates this Act. Amchem, supra, 521 U.S. at 628-629.

This case presents a good example of both problems. First, the primary cause of action that Plaintiffs

alleged was that Google had violated the federal

Stored Communications Act, 28 U.S.C. § 2702. In this

statute, Congress outlawed specified conduct. Id. Congress also authorized – as part of the substantive law

that it was enacting – the following remedies for violations of this Act: (a) preliminary and injunctive relief,

(b) actual damages up to $1,000 per violation and (c)

reasonable attorney fees. 18 U.S.C. § 2707(b), (c). But

the settlement neither enjoins Google from any violation of this Act nor requires Google to pay any actual

damages to the persons harmed.10

Instead, as suggested by the Comment, the settlement substitutes the cy pres remedy for all of the remedies that Congress authorized. 39 U. Chi. L. Rev. at

452. In its decision affirming the district court approval of the cy pres distributions, the Ninth Circuit

found that cy pres-only settlements are “appropriate

where the settlement fund is ‘non-distributable’

10

The attorney fees were included in the settlement pursuant to the class action procedures under Rule 23(h), not 18 U.S.C.

§ 2707(b)(3). See District Court Order Approving Settlement, App.

52-58.

21

because ‘the proof of individual claims would be burdensome or distribution of damages costly.’ ” In re

Google Referrer Header Privacy Litigation, 869 F.3d at

741-742 (citing Lane v. Facebook, Inc., 696 F.3d 811,

819 (9th Cir. 2012)). It then found that the use of the

cy pres remedy is consistent with the requirements of

class certification because certification is proper when

“the recovery on an individual basis would be dwarfed

by the cost of litigating on an individual basis. . . .” Id.

at 743.

In other words, the Ninth Circuit implicitly held

that federal courts may use one federal rule (authorizing approval of class action settlements) to modify the

remedy created by Congress because a second federal

rule (authorizing class certification) makes it infeasible to apply the remedy created by Congress. This

Court should find that doing so violates the clear language of the Rules Enabling Act, as previously applied

by Amchem and Tyson.

C. This Court should find that federal courts

may only use the cy pres remedy when the

substantive law allows the use of this remedy.

The states have authorized the use of the cy pres

remedy for charitable trusts under limited circumstance because they concluded that its use was equitable under those circumstances. The proponents of

using the cy pres remedy in class actions raise legitimate concerns. So do the opponents of the use of cy pres

in class actions. The Rules Enabling Act prohibits the

22

federal courts from using the procedures under Rule

23 to resolve the competing concerns raised by these

parties to determine when the cy pres remedy can be

used in class action litigation.

There are, however, two situations where federal

courts are permitted to use cy pres in class actions.

First, a few states have also authorized the use of the

cy pres remedy in class actions pending in those courts.

See 4 Rubenstein, Newberg on Class Actions § 12:35

(5th ed.) (stating that “at least a dozen states” have a

statute authorizing the use of cy pres payments in class

actions). Depending upon the precise circumstances,

federal courts might be authorized to use cy pres in

class actions that apply one of these state’s substantive

laws.

Second, Congress has authorized the use of the cy

pres remedy in one limited circumstance in class action

litigation. The Class Action Fairness Act of 2005 governs settlements that involve the distribution of coupons to class members. 28 U.S.C. § 1712. It expressly

authorizes the federal courts to “require that a proposed settlement agreement provide for the distribution of a portion of the value of unclaimed coupons to 1

or more charitable or governmental organizations, as

agreed to by the parties.” 28 U.S.C. § 1712(e).

All legislation involves compromises, and the

Class Action Fairness Act of 2005 is no exception. One

of the concerns raised by Petitioners in this case, and

by other opponents of cy pres payments in class actions

in general, is that they can be used to inflate the

23

attorney fees that are recovered by class counsel. Petitioners’ Merits Brief, pp. 16, 22-23, 28-29. When Congress passed the Class Action Fairness Act, it decided

that “[t]he distribution and redemption of any proceeds under this subsection shall not be used to calculate attorneys’ fees under this section.” 28 U.S.C.

§ 1712(e).11 Under the federal Constitution and the

Rules Enabling Act, this is precisely how this type of

conflict between competing principles should be resolved. In the absence of such legislative action, however, the Rules Enabling Act prohibits the

interpretation of Rule 23 to allow federal courts to substitute cy pres charitable distributions in place of the

remedies that are authorized by the applicable substantive law.

------------------------------------------------------------------

CONCLUSION

Google is certainly free to donate its own money to

any of the charities designated as cy pres recipients.

But, federal courts are not generally authorized to extinguish the rights of private party litigants by substituting the cy pres remedy for the remedies that exist

under applicable statute or the common law. Therefore,

this Court should reverse the judgment below and hold

that federal courts cannot approve use of the cy pres

11

This Act also provides detailed instruction on how attorney

fees are to be calculated and awarded. 28 U.S.C. § 1712(b), (c).

24

remedy in class actions except when the federal courts

are expressly authorized to do so.

Respectfully submitted,

C. THOMAS LUDDEN

Counsel of Record

KAREN A. SMYTH

LIPSON NEILSON P.C.

3910 Telegraph Road, Suite 200

Bloomfield Hills, Michigan 48302

(248) 593-5000

tludden@lipsonneilson.com