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Cheaters should never prosper — why cy-près settlements achieve social justice

Trials & Tribulations
|Written By Margaret L. Waddell
Cheaters should never prosper — why cy-près settlements achieve social justice

Class actions serve the important social purposes of deterring the wrongful conduct of big business, and ensuring that when the “little guy” is harmed, the wrongdoer does not profit. In many class proceedings, the focus is on this latter concept — preventing the unjust enrichment of the defendant — and compensating the injured class members is secondary because on an individual basis the claims are not viable.

  In some situations, it is impossible or impracticable to disburse to the class all or some of the damages payable by a defendant in a class action. In some cases, the costs of identifying class members and administering the fund would exceed the amount to be disbursed. In other cases it is not possible to ascertain with particularity who was damaged by the wrongful conduct (for example, in the case of environmental pollution).  In situations such as those, the defendant will not be permitted to keep the damages, thereby profiting from its wrongful conduct. Instead, the class action provides a unique flexibility for the court to direct that the damages be disbursed in a way that directly benefits only some of the class, or that indirectly benefits of all class members, or that it be used for the general benefit of society. Payment of the judgment or settlement may be directed to be paid to the “next best thing” other than an injured class member — what is commonly referred to as a cy-près payment.

“Cy près comme possible” or, “as near as possible” is a term derived from old Norman French. The cy-près doctrine originated in the law of charitable trusts and wills.  It provides that when the original charitable objective of the settlor or the testator becomes impossible, impracticable, or illegal to perform, then the court may amend the terms of the charitable trust to keep it from failing; but it must keep the amendments as close as possible to the original intention of the settlor or testator.

In more recent years, the cy-près concept has been imported into the context of class actions. With a nod to the importance of behaviour modification as one of the primary objectives of class action legislation, the cy-près doctrine has been invoked and modified to fit the modern conundrum of what to do with the money to be paid by the wrongdoer when compensating the injured party is not reasonably achievable. The fact that not all injured class members can be identified — or for that matter, the fact that no class members suffered a loss or can be identified — will not hinder the court from making a damages award or from directing disgorgement of a wrongdoer’s ill-gotten profits. The cheater will not be allowed to prosper.

In the Ontario Law Reform Commission’s "Report on Class Actions" (1982), the Commission recommended that cy-près distributions should “confer a benefit that approaches ‘as nearly as possible’” some form of recompense for injured class members. It recommended two approaches, either a “benefit” distribution, or a “price reduction” distribution. Both types of cy-près distribution have since been approved in Canada.

A benefit distribution should result in the members of the class receiving an indirect benefit that is, ideally, closely related to the issue about which the action complained. So, for example, in a pharmaceutical case, the payment might be made to an organization that supports research into curing the underlying ailment that the drug was supposed to treat. A price reduction distribution might require a manufacturer who was involved in a price fixing conspiracy to reduce the cost of its product to consumers for a period of time. Both provide an indirect benefit to the class members, and the wrongdoer pays damages or is deprived of the profits to which it was not entitled. In this way, justice is achieved and behaviour modification is encouraged.

In the recent settlement approval decision in Markson v. MBNA Canada Bank Justice Horkins concluded that a cy-près distribution was appropriate to provide indirect compensation to members of the class whose credit card accounts had been closed. Given the quantum to be paid to each individual class member, the costs of attempting to identify and locate these individuals would have swamped the benefit that they would have received. Instead, a payment was directed to the Law Foundation of Ontario’s Access to Justice Fund. In approving this indirect recipient, the judge noted that the case was a consumer protection case, and the fund met that objective:

The Ontario Law Foundation’s Access to Justice Fund is a suitable recipient of the cy près distribution. Counsel propose the Justice Fund as the cy près recipient because it directly achieves one of the overarching goals of the Class Proceedings Act. Specifically, it aids in providing public access to justice throughout Canada. The Justice Fund is the only national source of grants with an access to justice mandate, and it provides funding to projects that are national, regional or local in scope. The five themes for the current grants from the Fund are: linguistic and rural access to justice, aboriginal access to justice, self help, family violence, and consumer rights. Since this action is a consumer rights action at its heart, the choice of the Access to Justice Fund is appropriate.

However, Justice Horkins warned that in many cases where settlement approval is sought, the proposed cy-près distribution does not meet the “as near as possible” objective, and simply choosing someone’s charity of choice does not meet the objectives of either the Act or the doctrine:

When counsel propose a cy près distribution as a term to settle a class action, they often identify a charity that has no connection to the issues in the litigation and no ability to improve access to justice. In my view this should be avoided. The recipient of the cy près distribution should either be directly connected to the issues in the class action (as in Serhan v. Johnson & Johnson) or like the Law Foundation, able to use the money to further the goals of the Class Proceedings Act.

In the United States, settlement approval decisions have occassionally been attacked and set aside as a result of the approving court’s failure to apply the correct legal standards govering cy-près distributions, and were found to be abusing their discretion. There, the courts have admonished that the cy-près distribution should take into account the nature of the plaintiff’s lawsuit, the objectives of the underlying statute, as well as the interests of the absentee class members, including their geographical location. A random charitable donation, particularly to a local charity unrelated to the issues in the litigation (e.g. a local food bank) when the class is geographically disparate, does not fit that bill.  As the USCA 9th Circuit warned in Nachsin v. AOL LLC:

When selection of cy-près beneficiaries is not tethered to the nature of the lawsuit and the interests of the silent class members, the selection process may answer to the whims and self interests of the parties, their counsel, or the court. Moreover, the specter of judges and outside entities dealing in the distribution and solicitation of settlement money may create the appearance of impropriety.

Hence, while a cy-près distribution does achieve an important societal objective, it is important to maintain a nexus to the class and the litigation when choosing the indirect beneficiaries of the settlement. This is key to maintaining the appearance of objectivity and fairness, and to providing a real, if indirect benefit to the class. There must be some likelihood that the class will benefit from the distribution.


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