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

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No. 17-961

IN THE

Supreme Court of the United States

THEODORE H. FRANK, ET AL.,

Petitioners,

Vv.

PALOMA GAOS, INDIVIDUALLY AND ON BEHALF OF

ALL OTHERS SIMILARLY SITUATED, ET AL.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE NINTH CIRCUIT

AMICUS CURIAE BRIEF FOR THE NATIONAL

CONSUMER LAW CENTER AnD U.S. PUBLIC

INTEREST RESEARCH GROUP EDUCATION

FUND, INC. IN SUPPORT OF RESPONDENTS

Stuart Rossman

Counsel of Record

National Consumer Law Center

7 Winthrop Square, Fourth Floor

Boston, MA 02110

P: (617) 542-8010

F: (617) 542-8028

srossman@nclc.org

Michael Landis

U.S. Public Interest Research

Group Education Fund, Inc.

1543 Wazee Street, Suite 400

Denver, Colorado 80202

P: (303) 573-5995

mlandis@pirg.org

Dated: September 5. 2018

DATEMAN & GLADE, (NC ORTON, MAMACH MEET TR

TABLE OF CONTENTS

TABLE OF AUTHORITIES. .0..000:c0cccccccsccsccccccescesesses iii

INTEREST OF AMICT CURTAE ..0.....00.00c00cc0cc00e00eee0es l

SUMMARY OF ARGUMENT. ............00ccccccccccccccsseeceeeee 2

fe! SERUM SS AO ON 3

A. Class Actions—Including Those

Involving Cy Pres Awards—

Often Are Superior to Alternative

Methods of Litigation for

Protecting the Rights of Low-

I sii cinicerietnenemenstnesoned 5

1. Often, the “Alternative” to

Class Treatment for Smal!

Consumer Claims Is No

Litigation at Alll................00000++++ 6

2 Class Treatment Is Also

Superior to Individual

Consumers Pursuing

Claims in Small-Claims

i iicesbibiniadasstnatbientassdeimnitabemeiicd fal

3. Class Actions Are Superior

to Punitive Damage

Awards in Small-Claims

Consumer Protection

Pi eanutacehnsdscnsniianacipanbinsiipibibimsiadenses 9

B. Cy Pres Distribution of Residual

Class Action Funds Best

Effectuates the Purposes of

Consumer Protection Statutes............ 10

1. Escheat Falls Short by

Failing to Serve the

Consumers Harmed by the

Consumer Statute

ES 1]

2. Reverting Funds to the

Defendant Frustrates

Rather Than Serves

Consumer Protection

ETE AE ene 12

ee ickiisinininticsencenssiietiuniistiinpimsinnnaiantintiieeininti

TABLE OF AUTHORITIES

CASES:

Amchem Prods. v. Windsor,

RE ee eee 4,6

Carnegie v. Household Int'l, Inc.,

376 F.3d 656 (7th Cir. 2004) ..............cccccceceeeeee 7

Carr v. Trans Union Corp.,

1995 U.S. Dist. LEXIS 567

Ree 5-6

/n re Motorsports Merch. Antitrust Litig.,

160 F. Supp. 2d 1392 (N.D. Ga. 2001)........... 12

In re Wells Fargo Secs. Litig.,

991 F. Supp. 1193 (N.D. Cal. 1998)............... 12

Market St. Ry. Co. v. Railroad Commission,

28 Cal.2d 363 (Cal. 1946) .0.........ccccceceeseeceeseees 11

Mirfasihi v. Fleet Mortgage Corp.,

356 F.3d 781 (7th Cir. 2004) 200000000 14

Olson, et al. v. Citibank, N.A.,

10-cv-2992, 2012 WL 1231787

rs Cy NG i i ccccncnssennentinseoenenninnss x

State of California v. Levi Strauss & Co.,

41 Cal. 3d 460 (Cal. 1086)................22............. 1]

Wilson v. Southwest Airlines, Inc.,

880 F.2d 807 (5th Cir. 1989)... 12

OTHER AUTHORITIES:

Am. Law. Inst., Principles of the Law of

Aggregate Litigation § 3.07 ....0.........06..0.. 12, 14

N. Averitt & R. Lande, Consumer Sovereignty:

A Unified Theory of Antitrust and

Consumer Protection Law, 65 Antitrust

Eadie FED CEI acnisnoneedatenteuvidaniiiambisivadnpacsnanbiniies 10

McCall, Sturdevant, Kaplan and Hillebrand,

Greater Representation for California

Consumers: Fluid Recovery, Consumer

Trust Funds, and Representative

Actions, 46 Hastings L.J. 797 (1995)............. 12

Nat'l Ass’n of Consumer Advocates, Standards

and Guidelines for Litigating and

Settling Consumer Class Actions, 299

AiR 0 8 4 ee 9,14

H. Newburg, 2 Newberg on Class Actions

§§ 10.13-10.26 (3d ed. 1992).............cccccccceceees 10

INTEREST OF AMICT CURIAE'

The National Consumer Law Center is a non-

profit research and advocacy organization that

focuses on the legal needs of low-income, financially

distressed, and elderly consumers. Founded at

Boston College Law School in 1969, NCLC is a

501(c)(3) and legal aid organization that employs

many attorneys and advocates with twenty or more

years of specialized consumer law expertise.

NCLC has been a leading source of legal and

public policy expertise om consumer issues for

Congress, state legislatures, agencies, courts,

consumer advocates, journalists, and social service

providers for nearly fifty years. NCLC is the author

of a twenty-volume Consumer Credit and Sales

Legal Practice Series. NCLC has been a recipient of

court-awarded cy pres funds as part of residual class

action funds and uses these awards to protect the

rights of economically vulnerable consumers through

education, publications, policy analysis, and

advocacy.

United States Public Interest Research Group

Education Fund, Inc. “U.S. PIRG Education Fund”)

is a 501(c)(3) independent, non-partisan organization

that works on behalf of consumers and the public

interest. Through research, public education,

outreach, and litigation, it serves as a counterweight

to the influence of powerful special interests that

' Pursuant to Rule 37.3, all parties have consented to

the filing of this brief. In accordance with Rule 37.6, counsel

affirms that no counsel for any party authored this brief in

whole or in part and that no person or entity other than amuic:

made a monetary contribution to fund the preparation and

submission of this bref.

threaten the public's health, safety, or well-being.

U.S. PIRG Education Fund regularly participates as

amicus curiae in cases that will have a substantial

impact on consumers and the public interest, such as

this one. U.S. PIRG Education Fund has been a

recipient of court-awarded cy pres funds as part of

residual class action funds, and it uses these awards

to protect the interests of the public and consumers

through research, policy analysis, education, and

advocacy.

SUMMARY OF ARGUMENT

Amici submit this brief to provide their

perspective on the importance of class actions and

the cy pres doctrine for the effective enforcement of

consumer protection statutes, and their importance

to low-income consumers, in particular.

In our society, consumers engage in far more

economic transactions than previously and do so

with nationwide or regional companies using

standardized forms, sales methods, and contracts of

adhesion. To combat abuses in these practices and

others, class actions continue to be essential.

The cy pres remedy serves an important role

in consumer protection class actions. When direct

distribution of all or part of a monetary recovery to

class members is infeasible, the cy pres doctrine

provides courts with an indispensable framework for

distributing these funds in a way that benefits

absent class members and consumers as a whole

while also effectively serving the disgorgement and

deterrence goals of consumer protection statutes. To

prevent possible abuse, comprehensive and effective

guidelines have been emplaced—chief among them

the American Law Institute’s Principles of the Law

of Aggregate Litigation—to govern the use of cy pres

awards, thereby allowing them to prove a workable

and advantageous distribution option for over a half-

century.

In deciding this case, the Court should be

mindful of the implications for low-income

consumers of unduly hampering class actions, which

constitute the most effective—and very often the

sole—means of vindicating their rights as enshrined

in consumer protection statutes. And the Court

should be wary of unduly circumscribing the use of

cy pres distribution because it is the next-best use of

the funds recovered from such lawsuits, when direct

distribution to class members is infeasible.

ARGUMENT

Class actions remain an_ indispensable

mechanism for the effective enforcement of consumer

protection statutes, and are of particular import for

safeguarding the rights of low-income consumers.

When the funds recovered from such lawsuits cannot

be directly distributed to class members, the cy pres

doctrine, in turn, provides courts with a framework

for distributing them in a way that benefits absent

class members and consumers as a whole while also

serving the goals of the consumer protection statutes

underlying the litigation.

In assessing the value of a given class action

lawsuit, Petitioners focus almost exclusively on one

criterion: monetary relief awarded directly to class

members. They open their brief by asserting that

they are challenging a settlement that “pays the

class no money but instead directs millions to class

counsel and funnels the remainder to third parties.”

Pet’'rs’ Br. 1. They argue that a class action cannot

be a worthwhile—let alone the superior—method of

litigation unless monetary benefits will inure

directly to class members. /d. 15; see also id. 52-54.

Accordingly, rather than permit a next-best use of

funds, they argue that if a court were to find that

direct distribution to class members is infeasible,

class certification is improper. /d. 10-11.

If restitution were class actions’ sole purpose,

Petitioners’ arguments might be availing. But it is

not. On the contrary, Petitioners ignore the “policy

at the very core of the class action mechanism,”

which is to “overcome the problem that small

recoveries do not provide the incentive for any

individual to bring a solo action prosecuting his or

her rights.” Amchem Prods. v. Windsor, 521 US.

591, 617 (1997) (internal quotations and citations

omitted). “A class action solves this problem by

aggregating the relatively paltry potential recoveries

into something worth someone's (usually an

attorney's) labor.” /d.

In other words, Petitioners’ approach would

prohibit class action lawsuits in precisely those cases

where they have been deemed essential: cases

involving very small claims for individuals that, in

the aggregate, involve substantial sums that will

otherwise remain in the hands of the wrongdoers.

Class actions— including those that involve cy pres

awards—are thus the superior method of litigation

for the enforcement of consumer protection statutes

involving small individual damages. See Part A,

infra.

Petitioners’ myopic focus on _ individual

recovery also overlooks—or perhaps’ willfully

ignores-the other well-established policy purposes

of consumer protection statutes that often form the

basis of these suits: enhancing the fundamental

fairness of the marketplace, deterring illegal

conduct, and disgorging ill-gotten gains. When direct

distribution to class members is_ infeasible,

distributing cy pres awards to organizations working

in the field of consumer protection indirectly benefits

class members and better effectuates these purposes

than do other options for the distribution of residual

funds. See Part B, infra.

In short, prohibiting class actions simply

because direct distribution is infeasible would

disserve the very purposes of consumer protection

statutes upon which these suits often are premised.

Class actions are critical in labor, civil rights,

and many other contexts, but consumer claims

provide perhaps the quintessential example of large-

scale illegal profit-seeking behavior by companies

that nevertheless does not financially harm any

individual enough to induce litigation in the absence

of the class action device. As one federal court put it,

“[cjlass actions are often the most suitable method

for resolving suits to enforce compliance with

consumer protection laws because the awards in an

individual case are usually too small to encourage

the lone consumer to file suit.” Carr v. Trans Union

Corp., 1995 U.S. Dist. LEXIS 567 (E.D. Pa. 1995)

(class certified based on ailegation of misleading

debt collection notices). See also Amchem Prods., 521

U.S. at 617 (discussing “negative value” suits).

Compounding the necessity of class actions to

enforce many violations of these acts is the fact that

low-income consumers, who are disproportionately

their victims, are less able to bring suits on their

own behalves. Class action lawsuits are thus vital

tools for protecting the interests of these consumers.

And indeed, they are the superior method of

litigation in many cases.

When individual awards for consumer

protection violations are not only so small that they

do not provide an incentive for individual action, but

are so small that they would be swallowed by the

costs of distributing them—in other words, in those

circumstances in which cy pres recovery may be

triggered—the need for class actions to protect

consumers’ rights only is heightened.

1. Often, the “Alternative” to Class

Treatment for Small Consumer Claims

Is No Enforcement at All.

In theory, one benefit of the class procedure is

its efficiency: adjudication of a properly constituted

class action saves the resources of courts and parties

by permitting an issue affecting mumerous

individuals to be litigated at once. In reality, a

consumer class action rarely is filed to supplant

numerous individual lawsuits. Rather, class actions

are often the only economically viable way to provide

legal representation for clients—particularly

economically disadvantaged clients—with relatively

small claims. As Judge Posner succinctly, and

colorfully, put it:

The realistic alternative to a class

action is not 17 million individual suits,

but zero individual suits, as only a

lunatic or a fanatic sues for $30. But a

class action has to be unwieldy indeed

before it can be pronounced an inferior

alternative—no matter how massive

the fraud or other wrongdoing that will

go unpunished if class treatment is

denied—to no litigation at all.

Carnegie v. Household Int’, Inc., 376 ¥ .3d 656, 661

(7th Cir. 2004).

Indeed, for many consumers, entry into court

itself proves an insurmountable barrier to

vindication of their rights. For members of the

armed service, for example, the realities of

deployments, transfers out of the state where the

courts have jurisdiction, and restrictions on their

time often render the doors of small-claims courts

(where these suits would likely be filed) effectively

closed to them. And many low-income individuals

cannot afford to forgo a day's wages to recover a

lesser sum taken from them.

A class action—including one involving the

prospect of a cy pres award because settlement funds

cannot otherwise be economically distributed—is

therefore the only realistic alternative, and it will

nearly always be superior to no litigation at all.

Consumer class actions for violations of the

Servicemember’s Civil Relief Act (SCRA), for

example, have proved an important tool for enforcing

the economic rights of military servicemembers. See,

e.g., Olson, et al. v. Citibank, N_A., 10-cv-2992, 2012

WL 1231787 (D. Minn. Apr. 12, 2012) (preliminarily

approving settlement agreement for monetary and

injunctive relief in a class action alleging illegal

mandatory forbearance on servicemember student

loans under the SCRA). More broadly, without the

legal restraint imposed by a lawsuit, a defendant

that has acquired a sizeable windfall wrongly by

illegally obtaining small sums of money from a large

group of people will continue doing business in the

future as in the past.

2. Class Treatment Is Also Superior to

in Small-Claims Court.

Even if some individual claims are filed in

small-claims court—which will often be without the

assistance of counsel—companies are apt to simply

treat these small individual judgments as a cost of

doing business. Companies may well continue to

engage in the same illegal conduct with their other

customers because there is no economic incentive to

do otherwise.

On the other hand, class-wide judgment

disgorges these unlawful gains, eliminating the

profit-motive for Uhe misconduct. Moreover, even the

mere possibility of class-wide judgment can deter

defendants from transgressing legal boundaries,

before their doing so can harm consumers.

3. Class Actions Are Superior to Punitive

Damage Awards in Small-Claims

Consumer Protection Cases.

If small compensation class actions are

discouraged, the only realistic alternative for

achieving the deterrence goals of consumer

protection statutes will be to seek large punitive

damages awards on behalf of a few consumers who,

while litigating relatively small individual claims,

can prove willful, widespread misconduct by

defendants. Nat'l Ass’n of Consumer Advocates,

Standards and Guidelines for Litigating and Settling

Consumer Class Actions, 299 F.R.D. 160, 167 (3d ed.

2014).

This alternative is second-rate. First, the

heightened “willful” standard is a more difficult and

costly one to prove. More important, it frequently

fails to capture injuries businesses cause through

recklessness or negligence. Finally, even in those

cases where punitive damages successfully extract

large payments from defendants, using class actions

to distribute cy pres awards is a better societal

outcome. By distributing funds to appropriate

charitable or public service organizations serving

consumers in ways that are closely related to the

underlying claims of the case, cy pres awards go one

step further than punitive damages awards. They

help to fund efforts to prevent the same harms from

being perpetrated on future, similarly situated

consumers, instead of providing relief merely to the

few consumers who prevailed in their individual

punitive damages claims.

B. Cy Pres Distribution of Residual Class Action

Funds Best Effectuates the Purposes of

Consumer Protection Statutes.

Consumer protection laws are meant to ensure

that the choices given to consumers in the

marketplace are unimpaired by fraud or withholding

of material information, and that the power

differential between consumers and commercial

enterprises is equalized. See N. Averitt & R. Lande,

Consumer Sovereignty: A Unified Theory of

Antitrust and Consumer Protection Law, 65

Antitrust L.J. 713 (1997). They seek to improve the

functioning of the marketplace by making it

unprofitable to operate dishonestly. /d And, of

course, they seek to compensate consumers for the

wrongs inflicted upon them.

Making all class members whole is the optimal

outcome of any class action. Period. This case,

however, concerns circumstances in which

distribution to class members would not be possible.

The three third-party options usually considered are:

(1) escheat to the state, (2) reversion to the

defendant, and (3) cy pres distribution. See H.

Newberg, 2 Newberg on Class Actions §§ 10.13-10.25

(3d ed. 1992).

In consumer protection class actions, the

underlying statutes’ aims of promoting fundamental

fairness in the marketplace, deterrence of fraud, and

disgorgement of illegally obtained profits must be

weighted heavily in making this determination. Cy

pres awards, when the doctrine is applied as

directed, are that next-best option. They benefit

absent class members and consumers as a whole

while also fully effectuating consumer protection

statutes’ deterrence and disgorgement goals.

3. Escheat Falls Short by Failing to Serve

the Consumers Harmed by the

Consumer Statute Violation.

The escheat option (i.e., transfer of abandoned

property to the state) generally fails to serve

consumer protection statutes’ goals to the fullest

extent possible. Escheat can be broken into two

categories: general and earmarked.

General escheat has been appropriately

deemed “the least focused compensation to the

class.” State of California v. Levi Strauss & Co., 41

Cal.3d 460, 475 (Cal. 1986). This option holds little

promise of benefiting absent class members or those

similarly situated, as the funds may be used for

virtually any governmental purpose, with no

attempt to realize the objectives of the underlying

substantive law. /d Moreover, it is lacking in

deterrent power because it does nothing to support

the efforts of those working to prevent similar

conduct.

Earmarked escheat refers to an award of the

funds toward a specific government agency in a

position to assist citizens similar to the injured class.

If used properly, this option can benefit consumers

greatly and satisfy the deterrence and disgorgement

goals with low administrative costs. It has been

looked on favorably, but has rarely been applied.

See, e.g., Market St. Ry. Co. v. Railroad Commission,

28 Cal.2d 363 (Cal. 1946). The reluctance of courts to

rely upon earmarked escheats stems from concerns

that the funds will be used for agency purposes

unrelated to the subject of the lawsuit and,

therefore, not benefit class members or members of

the public similar to them at all. See McCall,

Sturdevant, Kaplan and Hillebrand, Greater

Representation for California Consumers: Fluid

Recovery, Consumer Trust Funds, and

Representative Actions, 46 Hastings L.J. 797, 809

(1995).

2. Reverting Funds to the Defendant

Frustrates Rather Than Serves

Consumer Protection Goals.

Reversion of residual funds to the defendant

is, of course, rarely an appropriate option, and

Petitioners do not propose it—at least not directly.

Reversion is inappropriate because it neither

compensates class members nor satisfies consumer

protection goals. Rather it allows the defendant, the

alleged wrongdoer, to keep the fruits of its

wrongdoing. See /n re Motorsports Merch. Antitrust

Litig., 160 F. Supp. 2d 1392, 1394 (N.D. Ga. 2001).

See also In re Wells Fargo Secs. Litig., 991 F. Supp.

1193, 1196 (N.D. Cal. 1998); Am. Law. Inst.,

Principles of the Law of Aggregate Litigation § 3.07

cmt. B (2010) (rejecting reversion because it would

“undermine the deterrence function of class

actions”). Reversion is only appropriate in limited

cases where the defendant acted in good faith, and/or

when punitive damages are disallowed pursuant to

statute. See, e.g., Wilson v. Southwest Airlines, Inc.,

880 F.2d 807 (5th Cir. 1989) (an example of

appropriate reversion in a Title VII action).

Curtailment of class action certification along

the lines Petitioners propose would not be reverting

funds to defendants but rather never requiring

defendants to hand over their ill-gotten gains in the

first place. This is because the likely consequence of

discouraging these actions, as discussed in I[.A.1,

supra, is to discourage the only realistic form of

litigation for challenging this misconduct when it

inflicts injuries to individuals too small to rationalize

non-collective action.

3. Cy Pres Distribution Often Best

Effectuates Purposes of Consumer

Protection Statutes.

The final option is cy pres distribution, the

primary purpose of which is to serve as a deterrent

to would-be wrongdoers and to enable the effective

enforcement of the policies underlying the cause of

action. It does so by helping to fund organizations

that work to prevent the same wrongs from being

perpetrated on future consumers, and redressing

those wrongs when they do, inevitably, recur.

Petitioners discount—nay vilify—this option.

Rather than permit funds to be distributed to

entities serving the relevant interests of class

members, they argue that if a court were to find that

distribution to class members is infeasible, then no

class should be certified in the first instance. Pet’rs’

Br. 10-11. But, as discussed throughout this brief,

restitution is not the sole aim of class actions or

consumer protection statutes, and cy pres awards

can help realize and amplify the various other

benefits that consumer protection class actions

achieve.

By providing a mechanism through which to

furnish an indirect benefit to non-claiming class

members, as well as deter misconduct and disgorge

wrongful gains, cy pres distribution often provides

the ideal solution for distribution of residual funds.

See Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781,

784 (7th Cir. 2004) (noting that the cy pres doctrine

is utilized to prevent defendants “from walking away

from the litigation scot-free because of the

infeasibility of distributing the proceeds of the

settlement . . . to the class members”).

Moreover, to prevent possible abuse,

appropriate guidelines have been put in place to

govern the use of cy pres awards, allowing these

awards to prove a workable and advantageous

distribution option for over a half-century. Appellate

courts overwhelmingly have adopted the American

Law Institute’s Principles of the Law of Aggregate

Litigation, supra § 3.07,2 which provides guidelines

on the limited circumstances where cy pres

distribution is appropriate, including standards

regarding appropriate recipients, and neither

Congress nor the Rules Advisory Committee have

found reason to diverge from these well-functioning

principles. See Class Resp’ts’ Br. 9-11, 31-35. In

consumer protection class actions, in particular,

finding a worthy cy pres recipient—namely, one who

will promote the interests of the class of consumers

and the purposes of the statutory prohibitions

underlying the litigation—is made easier by the

array of reputable organizations working in the

consumer protection sphere.

2 NCLC participated in the drafting of—and adheres

to—the National Association of Consumer Advocates (NACA)

Standards and (Guidelines for Litigating and Settling

Consumer Class Actions, supra. Guideline 7 of these guidelines

closely follows § 3.07 of the American Law Institute's Principles

of the Law of Aggregate Litigation.

For all of these reasons, allowing residual

funds to be distributed via cy pres awards fulfills

these funds’ next-best use, when direct distribution

is not possible. ome -_

The National Consumer Law Center, on

behalf of the low-income consumers who are its

clients, and U.S. PIRG Education Fund urge the

Court to be mindful of the effects its decision in this

case will have on enforcement of consumer

protection statutes, and the consequent impact on

the low-income consumers who are too often the

victims of transgressions of these laws.

Respectfully submitted,

VA Auart Reobsman