Court says no way to cy pres: "Gift" stricken from class action settlement

Courts are questioning whether the trust doctrine of cy pres may be used in class action litigation to permit the distribution of unclaimed settlement funds to charities. While proponents argue that cy pres distributions punish corporate wrongdoing, deter future misconduct and deny “windfalls” to settling defendants, there is mounting concern that the process can erode public confidence in the bar and the judiciary. Of equal concern, leading scholars — and courts — believe that the process is simply unconstitutional.

A recent decision from the U.S. District Court in New Mexico is a case in point. In In re Thornburg Mortgage, Inc. Securities Litigation, 2012 U.S. Dist. LEXIS 107934 (July 24, 2012), the court struck a cy pres provision in an agreed class action settlement that would have made a local charity the primary beneficiary of a class settlement, while excluding some class members from participating in the settlement at all.

In re Thornburg Mortgage, Inc. Securities Litigation is the latest in a series of thoughtful cases addressing the flaws with cy pres awards, and striking them on its own motion. Settling defendants should not hesitate to challenge cy pres distributions and insist that residual settlement funds be returned at the close of the claims period. 

Cy Pres, Other Jurisdictions