Krueger and Serotta on Cy Pres Class Distributions

Editorial in the Wall Street Journal — Our Class-Action System Is Unconstitutional, by George Krueger and Judd Serotta (both of Blank Rome).  The editorial criticizes the cy pres method of distribution of class proceeds.  Here’s an excerpt:

In our view, this as-near-as-possible remedy in classactions is defective. The Constitution provides for the resolution of”cases” and “controversies” between aggrieved parties. Courts areempowered to resolve those specific disputes, and not to transfer acorporate defendant’s assets to an outside organization that has notappeared before the court. The Constitution does not give courts theauthority to satisfy notions of “deterrence” by giving institutionslike legal aid societies or universities windfalls when those entitiesare not even parties to the lawsuit.

The best solution would be to give the remainder ofthe uncollected funds back to the defendant; to those class members whohave already collected their initial portion; or even to thegovernment, thereby at least allowing society to benefit in some way,while still serving as a deterrent. Another solution would be to comeup with a less arbitrary — and more objective and disinterested –mechanism for finding an appropriate beneficiary organization thatshares the plaintiffs’ common interests.

We also recommend a new wave of class-action reform,following up on certain successful elements of the Class ActionFairness Act of 2005. In our view, class-action attorneys should becompensated only based on the reward actually recovered by classmembers, as opposed to the total claimed “value” of the settlement. Theclaimed value is often calculated by including monies paid to thesethird parties who benefit from the settlement even though they did notparticipate in the litigation and are thus not even aggrieved.

BGS