Cy pres in Class Action Lawsuits: Alive and Well?

Last Friday an Illinois court resurrected a previously overturned $10.1 billion tobacco verdict, sending the case back to Madison County, Ill., for a possible retrial. According to Yahoo! News carrying the AP story:

In 2003, now-retired Madison County Circuit Judge Nicholas Byron found that Philip Morris misled customers about “light” and “low tar” cigarettes and broke state law by marketing them as safer, ending a trial that both sides at the time said was the nation’s first over a lawsuit accusing a tobacco company of consumer fraud.

What is not mentioned in the news article is the curious way by which Judge Byron’s court decided to distribute the damages. Since identifying class members was effectively impossible, the court invoked a legal doctrine known as “cy pres comme possible,” roughly meaning “as near as possible.” Under this doctrine, the remaining $5.3 billion—after setting aside 30% for the state coffers and 25% for plaintiff attorneys—should be distributed as close as possible (that is, cy pres) to the interests of the class. Naturally, “close” in these scenarios is a judgment call.

As legal scholar Charles Keckler writes in “Cy Pres and its Predators,” one of 12 chapters in my Independent Institute book, The Pursuit of Justice:

When an area of the law involves enormous judicial discretion over an ever-increasing amount of money, the conditions are created for remarkable—and sometimes unseemly—attempts by attorneys to influence that discretion.

Attempts indeed. After soliciting the opinions of attorneys on both sides, Judge Byron pre-announced how the remaining $5.3 billion would be distributed: 91 percent to the state’s legal profession—including the Illinois Bar Foundation, the state’s 11 law schools, legal aid, and the state judiciary—and nine percent to domestic violence programs and the American Cancer Society.

The Illinois case is not alone. In the chapter, Mr Keckler reports that a number of recent cy pres distributions have followed the same path to “law-related entities such as law schools, pro bono advocacy organizations, and the like.”

The Illinois Supreme Court overturned the case in 2005, but a 2008 ruling by the U.S. Supreme Court has breathed new life into the plaintiffs’ cause. And so the rumors of cy pres‘s death may have been grossly exaggerated.

If you’re curious, cy pres derives from law on charitable trusts, as this succinct treatment explains. For the video inclined, here is a critique of cy pres by Northwestern law professor Martin Redish.

Two closing thoughts:

1. In California, the legislature mandates cy pres on unclaimed class action funds and also requires the funds (net of Sacramento’s share) go to child advocacy programs and legal aid (statute here). Unsurprisingly, the same statute exempts cy pres when the defendant is a public entity or public employee. In short, California’s state courts cannot opt out of cy pres and must distribute funds to the legislature’s favored groups instead of their own.

2. Many tobacco cases are based on the harms imposed by second-hand smoke, or “externalities” in the language of traditional welfare economics . But the externality argument has been almost entirely refuted, as Fred Singer recounts in his recent Independent Institute column. To the extent that the externality is there, it’s known to be small. According to MIT economist Jon Gruber:

The only call for intervention in the [traditional economic] model is related to the externalities that smokers impose on others. … But such externalities are in fact fairly small by most measures. … As a result, the traditional economic model would suggest that the “optimal” tax on cigarettes may be below even its 1995 level.