Wednesday, August 6, 2008

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 class actions is defective. The Constitution provides for the resolution of "cases" and "controversies" between aggrieved parties. Courts are empowered to resolve those specific disputes, and not to transfer a corporate defendant's assets to an outside organization that has not appeared before the court. The Constitution does not give courts the authority to satisfy notions of "deterrence" by giving institutions like legal aid societies or universities windfalls when those entities are not even parties to the lawsuit.

The best solution would be to give the remainder of the uncollected funds back to the defendant; to those class members who have already collected their initial portion; or even to the government, thereby at least allowing society to benefit in some way, while still serving as a deterrent. Another solution would be to come up with a less arbitrary -- and more objective and disinterested -- mechanism for finding an appropriate beneficiary organization that shares the plaintiffs' common interests.

We also recommend a new wave of class-action reform, following up on certain successful elements of the Class Action Fairness Act of 2005. In our view, class-action attorneys should be compensated only based on the reward actually recovered by class members, as opposed to the total claimed "value" of the settlement. The claimed value is often calculated by including monies paid to these third parties who benefit from the settlement even though they did not participate in the litigation and are thus not even aggrieved.


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