When class actions are resolved via settlement, money often remains in the settlement fund even after initial distributions to class members have been made because some class members either cannot be located or decline to file a claim. Courts sometimes dispose of these unclaimed funds by making “cy pres distributions”. The cy pres doctrine takes its name from the French expression, cy pres comme possible, which means "as near as possible." In the class-action context, a cy pres distribution is designed to be a way for a court to put any unclaimed settlement funds to their next best use for the indirect, prospective benefit of the class.

Two recent United States Circuit Court of Appeals cases, one from the Fifth Circuit, Klier v Elf Atochem North America, Inc., 658 F. 3d 468 (2011) (“Klier”) and the other from the Ninth Circuit, Nachshin v AOL, LLC 2011 U.S. App. LEXIS 23244 (“Nachshin”), suggest that federal courts are increasingly scrutinizing cy pres distributions to ensure that the interests of the class and litigation are served. In both Klier and Nachshin, the distributions approved by the district court were rejected or altered on appeal resulting in delays in final settlement distributions.

In Klier, a class action settlement resolved claims of persons allegedly injured by the toxic emissions of an industrial plant near Bryan, Texas. The Settlement Agreement created three settlement subclasses and allocated to each subclass a portion of the $41.4 million settlement. The agreement allocated $23.34 million to Subclass A, which included all persons who lived or worked near the plant between 1973 and 1995 and had contracted any form of cancer, endured a pregnancy that ended in stillbirth, or suffered from any of several enumerated birth defects. The settlement agreement allocated approximately $6.46 million to Subclass B whose members were not required to demonstrate physical injury. If its members met proximity-to-plant and exposure standards, they could either recover a small compensation sum or elect to participate in a medical-monitoring program, which was funded by $2 million of the proceeds allocated to this subclass. The remaining $4.46 million funded payments to the more than 12,000 subclass members who elected not to participate in the program. Subclass C distributed funds to class members who had suffered a diminution in property value. The Settlement Agreement provided: "The Settlement Administrator may petition the district court for reallocation of available funds among the [subclasses] on a showing of good cause if . . . he determines that considerations of equity and fairness require reallocation."

When the monitoring program was finished, $830,000 remained unused for Subclass B. The Settlement Administrator sought leave to disburse any unused funds to members of Subclass A, those who were most seriously affected by exposure to chemicals. The district court denied the Settlement Administrator's request to distribute the unused medical-monitoring funds to Subclass A and, instead, under the doctrine of cy pres ordered that the money be given to three charities suggested by the defendant and one selected by the court.

The Court of Appeals ruled that the district court erred in making the cy pres distributions noting that each class member has a constitutionally recognized property right in the claim or cause of action that the class action resolves. The Court stated:

Because the settlement funds are the property of the class, a cy pres distribution to a third party of unclaimed settlement funds is permissible “only when it is not feasible to make further distributions to class members." Where it is still logistically feasible and economically viable to make additional pro rata distributions to class members, the district court should do so, except where an additional distribution would provide a windfall to class members with liquidated-damages claims that were 100 percent satisfied by the initial distribution. A cy pres distribution puts settlement funds to their next-best use by providing an indirect benefit to the class. That option arises only if it is not possible to put those funds to their very best use: benefitting the class members directly.

Id. at 474.

Here, the parties agreed that it was not administratively feasible to distribute the $830,000 remaining from Subclass B to that Subclass because the administrative costs of distribution exceeded that amount. On the other hand, the parties conceded that it was still logistically and economically feasible to make distributions to Subclass A. The Klier court ruled that the district court’s decision to distribute funds via cy pres finds no support in the text of the settlement documents. In this case, the Settlement Agreement governs and the trial court was bound to distribute to Subclass A because class members have a property right in such funds and the making of the additional distributions would not provide a windfall to class members with liquidated damages that were 100% satisfied by the initial distribution.

In Nachshin, the plaintiffs brought a class action lawsuit against AOL on behalf of a putative class consisting of more than 66 million paid AOL subscribers. Plaintiffs alleged that AOL wrongfully inserted footers containing promotional messages into e-mails sent by AOL subscribers. The settlement sought certification of a settlement class consisting of "all current AOL members," or about 66 million subscribers. The settlement, in addition to requiring AOL to take corrective action enabling AOL members to remove the email footers, also addressed Plaintiffs' claims for monetary damages. All parties agreed monetary damages were small and difficult to ascertain. The maximum recovery at trial would have been the unjust enrichment AOL received as a result of its footer advertisement sales, or about $2 million. Divided among the more than 66 million AOL subscribers, each member of the class would receive only about 3 cents. The cost to distribute these payments would far exceed the maximum potential recovery.

The parties agreed that AOL would make a series of charitable donations. Because the 66 million plaintiffs were geographically and demographically diverse, the parties claimed they could not identify any charitable organization that would benefit the class or be specifically germane to the issues in the case. At the parties' request, their mediator suggested and the parties agreed that AOL would donate $25,000 to two charitable beneficiaries, the Los Angeles area branches of The Legal Aid Fund and the Boys and Girls Clubs, and the Federal Judicial Center Foundation. The district court approved the settlement over the objection of a class member who argued that the charitable award does not meet the standard for cy pres, because the charities selected by the parties do not relate to the issue in the case and are not geographically diverse.

The Ninth Circuit ruled that the cy pres distribution must be “tethered to the nature of the lawsuit and the interests of the silent class members”. Id at 23244. The appellate court found that proposed awards failed to (1) address the objectives of the underlying statutes, (2) target the plaintiff class, or (3) provide reasonable certainty that any member will be benefitted. Plaintiffs in this case brought claims against AOL for breach of electronic communications privacy, unjust enrichment, and breach of contract, among others, relating to AOL's provision of commercial e-mail services. Yet, none of the cy pres donations--$25,000 each to the Legal Aid Foundation of Los Angeles, the Boys and Girls Clubs of Santa Monica and Los Angeles, and the Federal Judicial Center Foundation--have anything to do with the objectives of the underlying statutes on which Plaintiffs base their claims.

The Nashshin court also found that the cy pres distribution failed to target the plaintiff class because it did not account for the broad geographic distribution of the class. Although the class includes more than 66 million AOL subscribers throughout the United States, two-thirds of the donations were to be made to local charities in Los Angeles, California. Even among the small percentage of plaintiffs located in Los Angeles, there was also no indication that any would benefit from donations to the Boys and Girls Clubs of Los Angeles and Santa Monica or Los Angeles Legal Aid. The proposed donation to the Federal Judicial Center Foundation, although conceivably benefitting a national organization, had no relation to the objectives of the underlying statutes, and it was not clear how this organization would benefit the plaintiff class. Because the district court applied the incorrect legal standard in approving the proposed cy pres distribution, the Ninth Circuit found that it abused its discretion. The Court suggested: “the parties should not have trouble selecting beneficiaries from any number of non-profit organizations that work to protect internet users from fraud, predation, and other forms of online malfeasance.” Id.

When negotiating and crafting class settlement agreements the principles set forth in Nachshin and Klier should be kept in mind. Cy pres distributions that are either not permitted by the terms of the settlement agreement or are not tethered to the claims asserted by the class members may be scrutinized and by objectors and the court when during the settlement approval process. Regardless of the parties’ good intentions and the worthiness of the charitable causes, cy pres distributions may be rejected if the directives of these opinions are ignored.

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For years, defendants have attempted to skirt their liabilities in class action suits by attempting to settle the individual claims of the named plaintiffs and then argue that the named plaintiffs’ claims are moot as they no longer have a personal stake in the case’s outcome. The California Supreme Court long ago determined that this practice, known as “picking off” the class representatives, does not defeat a class action. La Sala v. American Sav. & Loan Ass’n., 5 Cal.3d 864 (1971).

Recently, the Ninth Circuit came to the same conclusion in Pitts v. Terrible Herbst, Inc., 633 F.3d 1081 (9th Cir. 2011). In that case, the Ninth Circuit held that regardless of whether the defendant attempts to pick-off the named representatives before or after a motion for class certification has been filed and/or ruled upon, the principles of Rule 23 preclude allowing such an offer to moot the claim. Id. at 1090-1091.

A rule allowing a class action to become moot “simply because the defendant has sought to ‘buy off’ the individual private claims of the named plaintiffs” before the named plaintiffs have a chance to file a motion for class certification would thus contravene Rule 23’s core concern: the aggregation of similar, small, but otherwise doomed claims. [citations omitted] …

It would effectively ensure that claims are too economically insignificant to be brought on their own would never have their day in court.

Id. at 1091.

This line of reasoning has been adopted in multiple circuits, and has prevented defendants from being able to pick off the named plaintiffs by simply offering to settle their individual claims. See Lucero v. Bureau of Collection Recovery, Inc., 639 F.3d 1239, 1249-50 (10th Cir. 2011); Sandoz v. Cingular Wireless LLC, 553 F.3d 913, 920-21 (5th Cir. 2008); Weiss v. Regal Collections, 385 F.3d 337, 348 (3d Cir. 2004).

However, in a surprising and seemingly contradictory opinion, the Seventh Circuit decided that a defendant can “pick off” the class representative simply by issuing a settlement offer for the full relief of the plaintiff’s claims before a certification motion is filed. Damasco v. Clearwire Corp., 662 F.3d 891 (2001); 2011 U.S. App. LEXIS 23093. The court even recognizes that this ruling presents a “buy-off problem,” noting that a defendant may not moot a case by making an offer after a plaintiff moves to certify a class, because “‘[o]therwise the defendant could delay the action indefinitely by paying off each class representative in sucesssion.’” Id. at *8. However, prior to certification, a defendant can moot an action under Article III simply by offering a full-value settlement of the individual claim thereby removing the plaintiff’s personal stake.

The Court’s solution to the “buy-off problem” it recognized? “Class action plaintiffs can move to certify the class at the same time they file their complaint.” Id. at *11. And if the class action plaintiffs don’t have the discovery necessary to support a motion for class certification? “[T]hen they can also ask the district court to delay its ruling to provide time for additional discovery or investigation.” Id.

It seems that the Seventh Circuit’s decision in Damasco directly contradicts the purpose of Rule 23 and class actions in general: it creates a multiplicity of small individual suits for damages as every time a named representative is picked-off, a new class will have to be filed and “undercut[s] the viability of the class action procedure, and frustrate[s] the objectives of this procedural mechanism for aggregating small claims[.]” Weiss v. Regal Collections, 385 F.3d 337, 347 (3d Cir. 2004). At the very least, the Seventh Circuit is about to see an influx in papers being filed in the initial filings of class action complaints as class representatives in the Seventh Circuit are now forced to file a complaint, a motion for class certification, and in most cases, a motion to delay the ruling on the motion for class certification.

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Liability of manufacturers for injuries caused by their products has been shaped in the last few years by a number of US Supreme Court decisions. The decisions in Riegel v.Medtronic, Inc in 2008, Wyeth v. Levine in 2009 and Pliva Inc., et al v. Mensing in 2011 have defined the landscape of medical device and pharmaceutical litigation. The beginning of 2012 has brought yet another decision shaping manufacturer liability with the California Supreme Court’s decision in O’Neil v. Crane Co. on January 12, 2012.

The California Supreme Court unanimously declined to extend strict liability to manufacturers when injuries occur from other products used in conjunction with the manufacturer’s product. The Court held that a manufacturer cannot be held liable in strict liability or negligence for harm caused by another manufacturer’s product unless that manufacturer’s product was a substantial cause of the harm or that manufacturer participated substantially in the harmful combined use of the products, regardless of how foreseeable that harm was.

How did the Court get to that decision?

The defendant manufacturers in Crane made valves and pumps that were used in Navy warships. Subsequent to being manufactured and sold, insulation, gaskets and packing material containing asbestos were added to the pumps and valves. The claim was a wrongful death claim caused by asbestos released from those products made by other manufacturers and added to the pumps and valves post sale. Although the asbestos which caused the injury was not released from the products made by the defendant manufacturers, the plaintiffs argued that they should nonetheless be held strictly liable because 1) their products were defective to the extent that they included and were used in conjunction with asbestos containing parts and 2) they failed to warn about the health risks associated with inhaling asbestos released from those other parts that were used in conjunction with theirs.

The Court concluded that the defendant manufacturers were not liable because 1) any design defect in their products were not the cause of the injuries and 2) manufactures do not have a duty to warn about other manufacturers products.

The Court revisited a number of past California and non-California decisions in reaching their ultimate decision in Crane.

The initial rule on manufacturer liability was laid out in Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, which provided that strict product liability applies to harm caused by deficiencies in one’s own product. Vandermark v. Ford Motor Co. (1964) 61 Cal.2d 256 then extended that rule to apply to retailers of defective products. The basic premise of both decisions was that the manufacturing or distribution of the product was done by the particular entity in which strict product liability applied to.

With regard to strict liability when it is a failure to warn claim, Johnson v. American Standard, Inc. (2008) 43 Cal.4th 56 held that manufacturers are strictly liable for failing to warn of dangers known by the scientific community at the time their product was manufactured or distributed. Garman v. Magic Chef, Inc. (1981) 117 Cal.App.3d 634 further explains that manufacturers are not liable for failing to warn of injuries that someone may suffer as a result of using their product in conjunction with another product that may be unsafe.

Finally, Taylor v. Elliott Turbomachinery Co., Inc. (2009) 171 Cal.App.4th 564, addressed the same question, and similar facts, the Court was addressing in Crane. There, the Court of Appeals determined that the pump and valve manufacturers were not liable because 1) California law restricts the duty to warn to entities in the chain of distribution, 2) there is no duty to warn about the dangers of someone else’s product unless your product causes or creates the danger and 3) under the component parts doctrine, a component parts manufacturer is not liable for injuries caused by a finished product unless that component part was defective and caused harm.

The Court further discussed non – California authority that was instructive. The Washington Supreme Court decisions in Simonetta v. Viad Corp. (2008) 165 Wn.2d 341 and Braaten v. Saberhagen Holdings (2008) 165 Wn.2d 373 which both adhered to the notion that the duty to warn extends only to the entities within the chain of distribution of the defective product. The 6th circuit echoed this notion in Lindstrom v. A-C Product Liability Trust (6th Cir. 2005) 424 F.3d 488 by holding that manufacturers cannot be held responsible for products attached or connected to their products post –manufacture. And, they discussed an appellate court in Maryland concluded that Ford Motors has no duty to warn about products it did not put into the chain of commerce. Ford Motor v. Wood (1998) 119 Md.App. 1, 33.

Once the Court had gone through the list of authority holding that manufacturers are not liable for injuries caused by other manufacturer’s products, it then distinguished the Crane case from cases which had held manufacturer’s liable in that setting.

In Deleon v. Commercial Manufacturing and Supply Co. (1938) 148 Cal.App. 3d 336, the plaintiff was injured while she was cleaning the defendant’s shaker bin and her arm got tangled in a line shaft above the bin. Although the injury was caused by the line shaft, the appellate court held that the proximity of the bin to the line shaft could have created an excessive preventable danger. The Court here explains that in that case, the defendant had customized the bin for that location and had seen the line shaft and as such a duty existed on the part of the defendant.

In Tellez-Cordova v. Campbell Hausfeld/Scott Fetzger Co. (2004) 129 Cal.App.4th 577, the Court of Appeals held a power tool manufacturer liable when a user suffered lung disease from breathing toxic substances released from metals he cut and sanded and from abrasive discs used on the power tool. The California Supreme Court distinguished this case from Crane by explaining that 1) the power tools in that case could only be used in a potentially dangerous manner because their sole purpose was to grind metals which would release the toxic dust whereas the valves and pumps in the Crane case could be used without the release of asbestos and 2) it was the action of the tools themselves that caused the toxic dust to be released whereas in Crane nothing about the valves and pumps caused the release of asbestos. In other words the defendant’s tools were intended to be used with another product for the very activity that was causing the harm.

In the end, not surprisingly, the Court concluded that manufacturers cannot be held liable in strict liability for harm caused by another manufacturer’s product unless that manufacturer is directly responsible for the harm because:

1) Their product was substantially responsible for the harm or

2) The manufacturer participated substantially to create the harmful combined use of the products.

Whether a manufacturer knows that its products can be used in conjunction with other products that may cause harm is not enough. The court reaffirmed that foreseeability of harm is insufficient for imposing strict liability on a manufacturer. They also went on to conclude that foresee ability alone is not sufficient to impose a duty on the manufacturer and hold them liable under a negligence theory.

The Court further explained that to impose liability to manufacturers in this setting would not be effective since manufacturers cannot force other manufacturers to make their products safer and it would undermine consumer safety as users are inundated with excessive warnings.

Going forward, there is no doubt that decisions will be issued illustrating what it means to be “substantially responsible” for the harm or to “substantially participate” to create the harmful combined use. And although the Court has provided these exceptions for when manufacturers can be held liable for injuries caused by other manufacturer’s products, only time will tell how those exceptions will be shaped by our courts.

If you have questions or comments about this article, we would value the opportunity to hear from you. For information on other topics in consumer advocacy and to learn more about Khorrami Pollard & Abir, please visit our website or subscribe to our Consumer Advocate Legal Update blog.