# Amicus Curiae Brief — Frank v. Gaos, 138 S. Ct. 1697 (2018) (No. 17-961)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2018

## Text

No. 17-961

Iu The
Supreme Court of the Anited States

»
—

THEODORE H. FRANK and
MELISSA ANN HOLYOAK,

Petiti

Vv.

PALOMA GAOS, on behalf of herself and
all others similarly situated, et al.,

Respondents.

eo
-

On Writ Of Certiorari To The
United States Court Of Appeals
For The Ninth Circuit

LIPSON NEILSON P.C.

3910 Telegraph Road, Suite 200
Bloomfield Hills, Michigan 48302
(248) 593-5000
tludden@lipsonneilson.com

TABLE OF CONTENTS
Page
STATEMENT OF INTEREST .........................--- 1
SUMMARY OF ARGUMENT ........................000--+ 2
PII aaccccccncevesccscvcescoceccesccccccssecsesesees 3
STATEMENT OF FACTS ...............0cccceeecceeeeeeees 4
RSTRNT Se LA en a er US Se 6

A. American state courts having jurisdiction
over charitable trusts are expressly au-
thorized by state statutes to use the cy
pres remedy in a limited set of circum-
GSREIEED cnvecceccovecusecevessevesseseveneveseeceseavevsenseuee 7

B. Federal courts are not authorized to use
the cy pres remedy in class action litiga-
tion unless that use is specifically author-
ized by the controlling substantive law.... 9

1. Federal courts have used their equita-
ble powers to import the cy pres rem-
edy into the administration of class
action litigation ........................ceeeeeeee 10

2. The Rules Enabling Act prevents Rule
23 from being used to modify the rem-
edies authorized by substantive law ..... 14

3. The use of cy pres in class action liti-
gation substitutes charitable pay-
ments for the remedies available under
the substantive law ............................ 16

a

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 rem-

iii

TABLE OF AUTHORITIES
Page

CASES
Amchem Products, Inc. v. Windsor,

521 U.S. 591 (1907) ..........00000000000000 14, 16, 17, 20, 21
Broussard v. Meineke Disc. Muffler Shops, Inc.,

166 F.3d 332 (4th Cir, 1908).......ccccccccccsccsecseseeseeeeees 15
In re Baby Prod. Antitrust Litig.,

Fee ee Be Ge Ge BID croccscrecsecenccscccccssesncsecesess 18
In re Deepwater Horizon,

732 F.3d 326 (Gth Cir. 2013)................0::sssseeseeeesseees 19
In re GMC Engine Interchange Litig.,

594 F.2d 1106 (7th Cir. 1979).............cccccceceeceeeeeenees 16
In re Google Referrer Header Privacy Litig.,

869 F.3d 737 (9th Cir. 2017)............cc0cccceeeee 5, 6, 7, 21
In re Pharm. Indus. Average Whole Price Litig.,

Re ee ee te ee SR eiettctsccnscescicseresnsesscnececces 13
In re: Motor Fuel Temp. Sales Practices Litig.,

872 F.3d 1094 (10th Cir. 2017).............cccccecceeeeeeeeeees 16
John v. Smith,

Be ee ee GD Se ecsevsccesccenscnseecsecsacosceseneaness 10
Klier v. Elf Atochem North-America, Inc.,

658 F.3d 468 (6th Cir. 2011)..........ccccccccceceeeeeeeeeeeeees 14
Lane v. Facebook, Inc.,

606 F.3d 811 (Oth Cir, 2012).........cccccccccsccescesceeeseeees 21
Loring v. Marsh,

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

iv

TABLE OF AUTHORITIES — Continued

Page

Marek v. Lane,

| ere 3
Marshall v. National Football League,

ffl ee 16
Masters v. Wilhelmina Model Agency, Inc.,

re ey ry EE Be Pascarenccsscccccensoccocsceccccscssees 13
Miller v. Steinbach,

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

hr ITE itehtdetideiin iia insitas aha dtieriataisiunieenimncgniépernpmenene 11,12
Mirfasihi v. Fleet Mortg. Corp.,

SES F.3d TEL (7th Cle, BOOS)...cccccccccccccsccccescsccccescsssees 7
Nachshin v. AOL, LLC,

663 F.3d 1034 (Oth Cir. 2011)...........ccccccececccceeseeeereees 7
Powell v. Georgia-Pacific Corp.,

119 F.3d 703 (8th Cir. 1997)............ccccccccceeeeeeeeeeeeees 13
Tyson Foods, Inc. v. Bouaphakeo,

577 U.S. __, 186 S. Ct. 1036 (2016) ........... 14, 15, 21
Van Gemert v. Boeing Co.,

739 F.2d 730 (2d Cir. 1984) .0..............cccccceee 12, 13, 18
Wachovia Bank & Trust Co. v. Buchanan,

DES FW. BI, GED CR Ge ccccccccccccccccccccccccccecccccceces 10, 11

CONSTITUTIONAL PROVISIONS
ge Eee 10, 11

v

TABLE OF AUTHORITIES — Continued

Page
STATUTES
I I TITITTITET sisiciacicctaehiaaidabitiateideseninseniniataionieatiniahiadiald 5, 20
aia scsiniessinsitiiaterieetnisntnatieseanttintinbiaabel 20
I sacar inci hitteitntcietcghiinidanicaidaaiatiiain 20
IE ai cisinsihoscissisihciitiisniinantetnaiintntaintintininniiniadl 20
ETI asin cnirtsinseemsinsiciinninieiedeainunenniammdicetiil 22
nc iisensiciennanescieciiirtaininittinntateiciiinpinil 23
ee BD binecnsseeseninennbaintnintrimitenennniiiaien 23
is ccnenintasnindeminigsbattpuiatinnabinaiiiiaiaiil 22, 23
IIE sccnsicinnaciiensipentataniniuinnidaninanassiiinguiniontitd 12
NIT ss nnctceininiiiiineniatepinsinitnieimatnstienntamtiai 12
Rules Enabling Act, 28 U.S.C. § 2072 ................ passim
ee I iiniiticiiitetidniibinienesiiiienenencnnetsuetinn 14, 15
20 Pa. Cons. Stat. § 7740.3 (2016) .0.0........ccccccccceeeeeeeees )
Cal. Prob. Code § 15409 (2016)..........:cccccccceseeeeeeeeeeees 9
Mass. Gen. Laws ch. 214, § LOB .0.........0..cccccccceeeeeeeeeeees 9
Mich. Comp. Laws § 700.7405 .................scceeeeeeeeeeeeeeeee 8
Mich. Comp. Laws § 700.7413(1)...........cccccccceecceeeeeeeees 8
Mich. Comp. Laws § 700.74 1301 )(C).........ccccccccccceeeeeennee 9
Mich. Comp. Laws § 700.7413(2)...........ccccccccccceceeeeeeeees 9

N.Y. Est. Powers & Trusts § 8-1.1(6)(1).......ccccccccceeeeeees 9

vi

TABLE OF AUTHORITIES — Continued

Page

RULES AND REGULATIONS
be EEE nee anne aes 3
a I TTI ienceniicinetuccianntenisindmetngstnipeminiitianel 3
Ss MN Un Ul ctirictincenccecenetinidntententenesesenseseetiots passim
8 fk ene nan 17
Se ie St inritericnnericenerindinennnnsenntneicnsensesid 16, 19
I I eid ines cn cetsiceiinniniicicinheniiabidhadiaue 19
fs 4 Seno 19, 20
ES OT ORE 19
I arterial 20
8 EE 3
OTHER AUTHORITIES
Edith Frisch, The Cy Pres Doctrine in the United

States (Mathew Bender 1950) .......................0000cccc000 8
Hamish Gray, The History and Development in

England of the Cy-Pres Principle in Charities,

SD TS Bee BT i Goi iccctveccncncnscscccanecescasecsncscecees 8
http//uniformlaws.org/LegislativeFactSheet.aspx?

title=Trust%20Code ...............ccce00- i iciaeemmaseensl 8

Lester Brickman, Lawyer Barons: What Their
Contingency Fees Really Cost America (Uni-
versity of Cambridge Press 2011)...................6.cccc00 1

vii

TABLE OF AUTHORITIES — Continued

Page

Martin Redish, Cy Pres Relief and the Patholo-

gies of the Modern Class Action: A Normative

and Empirical Analysis, 62 Fla. L. Rev. 617
TIE iinictiensbsiniasitinsanpabiehniinnndbiniiaipmanmetetvienes 14,17

2 Newberg and Conte, Newberg on Class Actions
NE ene eee 13

4 Rubenstein, Newberg on Class Actions § 12:35
Int I deareesstsiicheninnseinanaebrenadiamatinnaiatidageaadiiiatigithiedeemneeees 22

Stewart R. Shepherd, Damage Distribution in
Class Actions: The Cy Pres Remedy, 39 U. Chi.
x ee 11, 17, 18, 20

Walter K. Olson, The Litigation Explosion: What
Happened When America Unleashed the Law-

suit (Truman Talley Books 1991) ..................cc000000 1

STATEMENT OF INTEREST'

Amicus curiae Manhattan Institute for Policy Re-
search was established in 1978 as a nonpartisan
public-policy research foundation developing ideas
that foster economic choice and individual responsibil-
ity. 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 Hap-
pened When America Unleashed the Lawsuit (Truman
Talley Books 1991); and Lester Brickman, Lawyer Bar-
ons: 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 ground-
work for the Class Action Fairness Act of 2005, Pub. L.
No. 109-2, 119 Stat. 4-14.

' 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 in-
terest 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 Ena-
bling Act.

The Amicus is submitting this brief in support of
the Petitioners.

.
A

SUMMARY OF ARGUMENT

Federal courts have imported the cy pres remedy
from the supervision of charitable trust into the ad-
ministration of class actions. Congress has only au-
thorized the federal courts to use this power in one,
narrowly defined, type of class action settlement. Oth-
erwise, the Rules Enabling Act, 28 U.S.C. § 2072, ex-
pressly 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 set-
tlement that allows Respondent Google to discharge its
liability to all class members by making cy pres pay-
ments to charities instead of compensatory payments
to the class members, the courts below have effectively
modified the substantive legal rights of the class mem-
bers. Therefore, this Court should reverse the judg-
ment below and hold that federal courts cannot use the

3

cy pres remedy in any case in which they are not ex-
pressly 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 be-
fore 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 au-
thorized to use the cy pres remedy in class action liti-
gation. See Marek v. Lane, 571 U.S. 1003 (2013) (Chief
Justice concurring in denial of writ of petition for cer-
tiorari to review because the challenge to the Facebook
settlement “might not have afforded the Court an op-
portunity to address more fundamental concerns sur-
rounding 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 fed-
eral courts are prohibited from substituting a cy pres
remedy for the remedies established by the substan-
tive 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
ciass action settlements or judgments unless the sub-
stantive law authorizes them to do so.

+

STATEMENT OF FACTS

Plaintiff-Respondent Pamela Gaos filed her origi-
nal 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 com-
mon law. (/d., 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. (/d., 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.
(Ud., 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. (/d., 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 Communica-
tions 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 Alter-
native)

In re Google Referrer Header Privacy Litigation, 869
F.3d 737, 739-740 (9th Cir. 2017). See also Order Grant-
ing Motion for Preliminary Approval of Class Certifi-
cation. (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 set-
tlement did not require Google to change any of its
practices. Jd. 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. Jd. 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, “|njotice was given to the class by
a website, a toll-free telephone number, paid banner
ads, and press articles.” Jd. The settlement was ap-
proved by the federal district court, and the Ninth Cir-
cuit affirmed its decision. Jd. at 739, 741.

,
A

ARGUMENT

The cy pres remedy has a long history of being
used to handle charitable gifts and trusts that have be-
come 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 judg-
ments.

7

A. American state courts having jurisdiction
over charitable trusts are expressly author-
ized by state statutes to use the cy pres rem-
edy in a limited set of circumstances.

When it affirmed the district court decision ap-
proving 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 Nor-

man French expression cy pres comme possi-
ble (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 un-
claimed 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 “Thle 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 ‘s 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 De-
velopment in England of the Cy-Pres Principle in Char-
ities, 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 jurisdic-
tion 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 Pro-
tected Individuals Code (*EPIC”),? which governs char-
itable 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 consisteu with the settlor’s general

* 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. h
org/LegislativeFactSheet.aspx?title=Trus* . ’0Code (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 limi-
tations.*

In summary, the cy pres remedy is an equitable
remedy that was designed to handle the unique prob-
lems 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 un-
less that use is specifically authorized by
the controlling substantive law.

Unlike state courts having jurisdiction over chari-
table trusts, federal courts lack the statutory authori-
zation 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 sub-
stantive 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

® See, e.g., Cal. Prob. Code § 15409 (2016); Mass. Gen. Laws
ch. 214, § 10B; N.Y. Est. Powers & Trusts § 8-1.1(cX 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 litiga-
tion.

Cy pres payments are now frequently used in the
administration of federal class actions. Before adopt-
ing 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 iden-
tified 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 men-
tioned, but was not the basis or the decision. See, e.z.,
Loring v. Marsh, 15 F. Cas. 905, 907,90 i4(D. Maas.
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 officials* 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 rem-
edy being used in class action lawsuits. The decision to
import the cy pres remedy into class actions is gener-
ally 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 effec-
tuating as closely as possible the intent of the legisla-
ture in providing the legal remedies on which the main
cause of action was based.” Stewart R. Shepherd, Dam.-
age 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 settle-
ment that applied the cy pres remedy was Miller v.
Steinbach, No. 66 CIV. 356, 1974 WL 350 (S.D.N_LY. Jan.
3, 1974). Miller was a shareholder's derivative suit
that was certified as a class action. Jd. at *1. The par-
ties reached a settlement in which all of the net

* 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 ap
pointed 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 de-
rivative suit was being pursued. /d. 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 prece-
dent for the proposal — at least in a case such
as this where distribution to the class of plain-

tiffs was theoretically possible if not in a prac-
tical 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.” Jd.

There are many subsequent federal court deci-
sions 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. Boe-
ing 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 provisions’ did not
control the distribution of the unclaimed funds. Jd. at
735-736. Instead, the district court was found to have
“broad discretionary powers in shaping equitable de-
crees.” Id. at 737. Ultimately, Van Gemert affirmed the

* 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. Jd. 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 un-
claimed funds from a class action settlement. In reach-
ing this decision, Powell held — without citing any
authority — that “the [district] court correctly turned to
traditional principles of equity to resolve the case.” Jd.
at 706. It then relied upon a treatise® 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. Jd. Subsequent circuit court de-
cisions 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 In-
dustry Average Whole Price Litigation, 588 F.3d 24, 33-
35 (1st Cir. 2009) (approving use of cy pres in class ac-
tion settlement); and Masters v. Wilhelmina Model
Agency, Inc., 473 F.3d 423, 436 (2d Cir. 2007) (explain-
ing when cy pres distributions may be used).

Therefore, the only federal courts that have con-
sidered the original authority for federal courts to use
the cy pres remedy have relied upon the general equi-
table authority of district courts to administer reme-
dies.

* 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 author-
ized to use the cy pres remedy as part of their supervi-
sory 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 de-
vices to modify the controlling substantive law.

Indeed, this Court has recognized that “Rule 23's
requirements must be interpreted in keeping with Ar-
ticle 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 Fed-
eral 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 com-
mon law.” Martin Redish, Cy Pres Relief and the Pa-
thologies 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 rel-
evant 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 sub-
stantive 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 sub-
stance of the claims of class members”). It follows that
the Rules Enabling Act also prevents federal courts
fron. (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 c.aim and (2) using
Rule 23 to reduce the substantive rights of class mem-
bers. 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 — neces-
sarily reduces class members’ substantive rights, as
discussed in more detail below.

16

3. The use of cy pres in class action litiga-
tion substitutes charitable payments for
the remedies available under the sub-
stantive 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 ac-
tion 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 as-
bestos exposure” because of limitations of Rules Ena-
bling Act).’ 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 set-
tlement that dismissed claims of non-consenting class
members “contravenel|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 sub-
stantive law for two reasons.

First, the substantive law includes the remedy
for ita violation. All substantive law consists of two

' 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 Tempera.
ture 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 crimi-
nal punishment. /d. at 645. When a district court ap-
proves 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 in-
jured persons. Jd. at 645-646. In other words, the use
of cy pres modifies the substantive law because it pun-
ishes the defendant with a fine rather than compen-
sates the allegedly injured persons."

The proponents of cy pres do not dispute this. In
fact, they argue that using cy pres to punish a defend-
ant is a feature, not a bug. After the 1966 revisions to
Rule 23, a class action judgment “binds all class mem-
bers who have not acted to exclude themselves from
the suit.” Comment, 39 U. Chi. L. Rev. at 448.° Despite
being bound by the judgment, many class members do
not take any action at all with respect to the class ac-
tion lawsuits “even after a judgment or settlement in
their favor has been reached and do not attempt to col-
lect their shares of the recovery.” Jd. Because many
class members do not make a claim, a portion of the

* This same principle applies if the use of cy pres replaces a
criminal penalty or changes the recipient of the fine from a gov-
ernmental entity to a private charity.

* See also Amchem, 521 U.S. at 614-15 (“Rule 23(b\3) added
to the complex-litigation arsenal class actions for damages de
signed 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 en-
force that judgment, the plaintiff does not recover any-
thing. Therefore, the defendant retains money that the
plaintiff has chosen not to collect, which was the ulti-
mate result in Van Gemert. 739 F.2d at 736-738. The
1972 Comment characterized the defendant’s retain-
ing 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 settle-
ment.”).

The same risk applies in any lawsuit where the
plaintiff does not enforce the judgment or cash the set-
tlement 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 pro-
cedural 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 indi-
vidual 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 ex-
pressly 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 de-
fendant’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 le-
gal claims of a class “only with the court’s ap-
proval.” ... In granting approval, the court
must, as always, adhere to the precepts of Ar-
ticle III and the Rules Enabling Act. While a
“welcome byproduct” of deciding cases or con-
troversies on a class-wide basis, the goal of
global peace does not trump Article III or fed-
eral law. . . . Courts do not have the authority
to create a cause of action (and their corre-
sponding 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 reason-
able manner to all class members” and holding a hear-
ing. Fed. R. Civ. P. 23(e1), (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 rem-
edy — 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, su-
pra, 521 US. at 628-629.

This case presents a good example of both prob-
lems. 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. Jd. Con-
gress also authorized — as part of the substantive law
that it was enacting — the following remedies for viola-
tions 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 viola-
tion of this Act nor requires Go.yle to pay any actual!
damages to the persons harmed."®

Instead, as suggested by the Comment, the settle-
ment substitutes the cy pres remedy for all of the rem-
edies that Congress authorized. 39 U. Chi. L. Rev. at
452. In its decision affirming the district court ap-
proval of the cy pres distributions, the Ninth Circuit
found that cy pres-only settlements are “appropriate
where the settlement fund is ‘non-distributable’

© The attorney fees were included in the settlement pursu-
ant to the class action procedures under Rule 23(h), not 18 U.S.C.
§ 2707(bX3). See District Court Order Approving Settlement, App.
52-58.

21

because ‘the proof of individual claims would be bur-
densome 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. . . .” Jd.
at 743.

In other words, the Ninth Circuit implicitly held
that federal courts may use one federal rule (authoriz-
ing approval of class action settlements) to modify the
remedy created by Congress because a second federal!
rule (authorizing class certification) makes it infeasi-
ble to apply the remedy created by Congress. This
Court should find that doing so violates the clear lan-
guage 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 circum-
stance because they concluded that its use was equita-
ble under those circumstances. The proponents of
using the cy pres remedy in class actions raise legiti-
mate 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 gov-
erns settlements that involve the distribution of cou-
pons to class members. 28 U.S.C. § 1712. It expressly
authorizes the federal courts to “require that a pro-
posed settlement agreement provide for the distribu-
tion of a portion of the value of unclaimed coupons to |
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. Peti-
tioners’ Merits Brief, pp. 16, 22-23, 28-29. When Con-
gress passed the Class Action Fairness Act, it decided
that “[t/he distribution and redemption of any pro-
ceeds under this subsection shall not be used to calcu-
late attorneys’ fees under this section.” 28 U.S.C.
§ 1712(e)."" Under the federal Constitution and the
Rules Enabling Act, this is precisely how this type of
conflict between competing principles should be re-
solved. In the absence of such legislative action, how-
ever, the Rules Enabling Act prohibits the
interpretation of Rule 23 to allow federal courts to sub-
stitute cy pres charitable distributions in place of the
remedies that are authorized by the applicable sub-
stantive 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 ex-
tinguish the rights of private party litigants by substi-
tuting 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

"' 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 PC.
3910 Telegraph Road, Suite 200
Bloomfield Hills, Michigan 48302
(248) 593-5000
tludden@lipsonneilson.com

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0805%3A42. Public record. Not legal advice.