Best practices for distributing cy pres funds.

Why standards matter

Snyder found that enforceable standards for distributing cy pres funds were still limited and controversial, and that counsel and courts were left to their own preferences, with results that "vary widely from case to case." p. 1

When funds are used badly, he wrote, three problems follow: members of the class receive no benefit from the lawsuit; the principles class actions rest on (restitution, disgorgement and prevention) are ignored; and questionable disbursements become arguments for eliminating or severely limiting class actions. His remedy was for "generally accepted best practices" to be "established and adopted as rules of court." p. 1

The two overarching practices

Drawing on distributions made for courts and state Attorneys General, Snyder concluded that two practices do the most to protect cy pres settlements p. 17:

1. A legal framework for the distribution of cy pres funds, set up in the settlement and the court's orders.
2. A transparent grant-making process that assures benefit to the class.

Rather than asking courts to apply a fixed list of criteria, he urged states and federal courts to adopt these process-driven practices as rules of court. p. 17

Part 1: A legal framework for the distribution

Cy pres comes into play when a direct distribution to the people harmed is impractical, for example when unclaimed funds are too small to justify a second notice to the class. Counsel can then pursue an indirect distribution to organizations "with a close nexus to the purpose of the underlying litigation." p. 9 Snyder's framework builds that possibility into the case from the start:

1. Preliminary approval. Ask the court to approve a settlement that contemplates a cy pres distribution, so a second noticed proceeding is not needed later. p. 9
2. Notice. Describe the proposed cy pres distribution plan in the settlement notice. p. 9
3. Fairness hearing. The court can weigh the plan as part of the settlement as a whole, including whether it has "a sufficient nexus to the purpose of the underlying litigation" and how recipients will be held accountable. pp. 9–10
4. An order and an administrator. Counsel moves for an order approving distribution on a cy pres basis and appointing a cy pres grants administrator. p. 10
5. Counsel keeps the decisions. Counsel retains all grant-making decisions, subject to court approval, and contracts with a qualified, independent administrator to run the process. p. 10
6. Public notice. The administrator proposes grant criteria and a Request for Proposals for counsel's approval, then disseminates them broadly and publicly. p. 10
7. Report and recommendation. The administrator reviews applications and submits a Cy Pres Grants Report and Recommendation. p. 10
8. Court approval of recipients, supported by declarations describing the grant-making process. p. 10
9. Grant agreements, payments and reports. The administrator executes agreements with approved recipients, schedules installment payments and progress reports, and reports annually and at completion. p. 11

Part 2: Grant-making that assures benefit to the class

Protect the fund

• Avoid taxes. Hold the fund in an interest-bearing, tax-exempt account, and draft the cy pres terms to support the exemption. p. 12
• Avoid pressure from potential recipients. "Counsel and courts should not initially indicate to a particular organization or agency that they will receive cy pres funds." A favored organization should be told that funds will be granted through an open, competitive process, and that it may apply. p. 12
• Cap grantee overhead. Limit grantees' indirect costs in the court order; Snyder recommended no more than 6 percent. p. 12
• Separate grant-making from accounting. Hold the funds with a class action settlement firm, and release grantee checks on the direction of counsel or the administrator. p. 12

Assure benefit to the class

• Next best use. Define clear goals so the benefit to the class is "as close as possible to the harm incurred," and put the criteria in the court-approved settlement. p. 13
• A real nexus. Large national organizations rarely design new projects for a class; grants that fund their ongoing programs give the class only "the most diluted benefit." In those cases, "[t]he nexus exists in name only." p. 13
• Strategic, not charitable. Favor projects that would not otherwise happen, and include a non-supplant clause so a grant does not simply replace other funding. p. 13
• Grant-making expertise. Attorneys and judges are experts in the law, not grant-makers or experts in nutrition, clean air, banking or pharmaceutical manufacturing. p. 14
• Criteria that describe outcomes. "Reduce emissions and improve air quality" invites a range of strong proposals; prescribing one method narrows them. A competitive process finds the best strategy. p. 14
• Accountability and transparency. Tie payments to benchmarks and timelines, make grants on a "not to exceed" basis, and do not pay out funds a project did not spend. Refer every call and request from applicants to the administrator, which provides "a wall between counsel and the grant making process." p. 14

“It is paramount that cy pres recipients understand that cy pres funds are indeed restricted funds, intimately tied to a particular purpose.”

Harry M. Snyder p. 7

Part 3: Pitfalls courts have flagged

Snyder grouped the objections raised against cy pres distributions into three kinds: the class is not served; class counsel's or the defendant's interests are served above the class's; and conflicts of interest or the appearance of impropriety arise when attorneys or judges choose recipients. p. 15 The cases he discussed:

Unrelated recipients: Nachshin v. AOL (9th Cir. 2011)

The Ninth Circuit rejected a distribution made to "geographically isolated and substantively unrelated charities," reaffirming that cy pres must be guided by the objectives of the underlying statutes and the interests of the silent class members. pp. 3–4

Perceived favoritism: In re Google Buzz User Privacy Litigation (N.D. Cal.)

An objector argued that most proposed recipients already received support from the defendant. After the grants administrator re-reviewed its proposal, the court awarded the objector a grant itself. pp. 5–6

Insider control: Lane v. Facebook

Most of a $9.5 million settlement created a new foundation with a Facebook employee on its board and broad discretion over recipients. Denying review in Marek v. Lane (2013), Chief Justice Roberts noted the "fundamental concerns" surrounding cy pres. pp. 15–16

Skipped distributions: Oetting v. Green Jacobson (8th Cir. 2015)

The Eighth Circuit held that cy pres is permissible only when further distributions to class members are not feasible, based primarily on whether the amounts are too small to distribute individually. p. 16

Since 2015

The Supreme Court took up a cy pres-only settlement in Frank v. Gaos (2019) but decided it on standing grounds, and the 2018 amendments to Federal Rule of Civil Procedure 23(e) set out the factors courts weigh in approving a settlement. Neither settled the questions Snyder's framework answers. Nexus, independence and accountability remain what objectors press and what courts ask about.

How we apply it

In the Tech Cy Pres Fund, that meant a competitive process we ran at arm's length, funding decisions by the California Department of Justice, a 6 percent cap on grantee overhead, non-supplant rules for public agencies, and final reports from every grantee. Our ten-step process puts the same practices to work in every engagement.