Monday, November 26, 2007

Liptak on Cy Pres

Adam Liptak as a column in today's New York Times about the use of cy pres distributions in class action settlements.   A cy pres distribution ordinarily occurs when the settlement funds have not been exhausted by payments to claimants and are redistributed to charities.  Sometimes these charities are related, sometimes not related, to the subject of the underlying litigation.  I think of cy pres as being a feature of consumer class actions only, but Liptak cites to a drug settlement that included cy pres distributions. He writes:

The Illinois Institute of Technology got $5 million from a settlement in a case involving a diabetes drug in Illinois, as did a Chicago hospital. A Hasidic Jewish group, Lubavitch Chabad of Illinois, picked up $2 million from the drug settlement.

As Sam Issacharoff (NYU) states in the article, the power to distribute such substantial funds has the potential to corrupt judges.  I wrote about these types of settlements in the consumer context in 2003 (the article is called Fundamental Principles for Class Action Governance, 37 Ind. L. Rev. 65 (2003)).  There I argue that the best medicine for the types of problems created by cy pres distributions is transparency.  I also note there another phenomenon, which is that defendants sometimes place restrictions on the types of organizations that can receive cy pres funds, excluding those that are likely to pursue more of the same type of consumer protective litigation.  The question of cy pres distributions raises a more fundamental question that plagues mass tort, consumer and all collective litigation: is the goal to deter wrongoing  (in which case all we ought to care about is that defendants pay out an optimal amount) or to compensate individuals wronged (in which case we should be deeply offended by the use of mechanisms such as cy pres distributions)?   Even if one thinks the answer is a little bit of both, there remains the difficult question of how that balance ought to be struck.


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