In a previous blog post we had discussed the origin of cy-près distributions and their benefits. In sum, cy-près distributions help to enforce one of the public policy rationales behind class actions: behaviour modification by holding wrongdoers accountable for their actions. Where it is no longer economically feasible to distribute an award to individual class members, cy-près distributions provide a solution in supporting charitable groups that could indirectly help in the area harmed by the defendant.
Where cy-près distributions are beneficial
One of the common circumstances by which cy-près distributions arise is where money remains in a settlement fund even after all the class members have been paid.
In settlement distribution, it would be unfair if legitimate class members were to come forward only for their claim to be unpayable due to a lack of available funds. Even if it means there will be funds leftover, it is better for the award to be distributed in a manner that leaves some small amount at the end. This also takes into consideration the need to pay administrative costs, such as tax filing, which are paid out of the settlement fund. The goal of a well administered distribution is to bring the leftover amount as close to zero as possible without leaving any class members out.
A similar principle to the above applies when a settlement fund is too small to justify a distribution directly to class members. For example, where the class action was intended to stop a defendant’s illegal behaviour, but the amount each class member would receive would make sending cheques even costlier than the award each class member might receive. The payment may number in the millions of dollars, but so too does the class size.
However, this should not be treated as encouragement for class counsel to avoid the rigour and responsibility that accompanies settlement administration by filing weakened cases with undefinably large class sizes or to settle quickly for their own benefit.
Where cy-près distributions should be avoided
In Sorenson v. easyhome Ltd, (“Sorenson”)1, Perell J. provided guidance on when cy-près distributions may be inappropriate. He found that however well meaning, “[t]o maintain the integrity of the class action regime, the indirect benefits of the class action should be exclusively for the class members.” The benefits should not be for class counsel, defense counsel, the defendant or even a judge to favour charities they may have an association with.
In Sorenson, Perell J. agreed that cy-près distributions should not be approved if compensation to individual class members is practicable. Alternatively, when the expense of individual distribution becomes prohibitive, cy-près distributions become appropriate. In following this, he approved the settlement such that any funds remaining following distribution could be donated cy-près. This came with the stipulation that the cy-près recipient could have no direct connection with any party in the action, to keep the focus on class members as the intended beneficiaries. (A similar incident arose in Warner v. Google LLC, (“Warner”) when the representative plaintiff became insistent the cy-près distribution go to his organization of choice.2 A more thorough overview was discussed here).
More recently, Morgan J. further commented on problematic cy-près distributions in Emond v. Google LLC, (“Emond”).3 Emond was a case that settled for $1 million against the “massive multi-jurisdictional enterprise” that is Google, and is the parallel Ontario action to the previously mentioned Warner action in BC. The action was filed on behalf of all Android cell phone users but was found to be too indeterminable a class after expert reports were exchanged. The $1 million Google offered would likely have been more than it would have had to pay at trial.
The administrative cost of distributing $1 million between every Android user would mean more money would be spent sending the award than the amount each individual could possibly receive, therefore a cy-près distribution was determined to be the best course of action. However, as Morgan J. noted, a settlement agreement which gives nothing to any class member but instead only to an organization that is encouraged but not required to fund research in some way related to the area of interest is merely an “illusion of compensation”.
Often when this occurs, class counsel attempt to justify the use of cy-près by pointing to its deterrent/behaviour modification function. Morgan J. pointed out that $1 million was merely a “nuisance” settlement for an enterprise as large as Google. Although class counsel did not file an obviously frivolous case, it was clear at the outset that the ability to identify individual claimants was a significant challenge.
Despite these concerns, Morgan J. approved the settlement so that the parties would not be sent back to the drawing board, given that the $1 million was more than one could expect to extract from the defendant in the circumstances. The Court also decided to reduce class counsel’s contingency fee in order to deter the filing of risky claims intended to extract settlements of nuisance value to defendants but with the potential of awarding significant legal fees to class counsel.
So where does that leave cy-près distributions? As the saying about babies and bathwater goes, it would be inadvisable to prevent the granting of cy-près distributions despite their potential for misuse. Cy-près distributions are still an effective means of ensuring settlement funds are fully used to their best possible extent. As recently as July 2020, the Ontario Class Proceedings Act was updated through Bill 161, Smarter and Stronger Justice Act, to expand where cy-près distributions may be ordered. Aggregate damage awards can be distributed in part or as a whole on a cy-près basis, so long as the principles raised before are followed. The recipient can either be a registered charity or non-profit organization that can directly or indirectly benefit the class members, or Legal Aid Ontario in any other case.
While it is possible that there may be unscrupulous parties which seek to take advantage of cy-près distributions for their own benefit as opposed to that of the class, it is important to be aware of and work towards preventing such settlements, and protect the benefits of cy-près distributions from dilution.
1 Sorenson v. easyhome Ltd., 2013 ONSC 4017, https://www.canlii.org/en/on/onsc/doc/2013/2013onsc4017/2013onsc4017.html
2 Warner v. Google LLC, 2020 BCSC 1108
3 Emond v. Google LLC, 2021 ONSC 302, https://www.canlii.org/en/on/onsc/doc/2021/2021onsc302/2021onsc302.html