The Next Best Thing - Or Not

One of the most controversial issues in class action litigation is the use of the cy pres doctrine to create an agreed-upon remedy when settlement proceeds cannot, for some reason, be distributed to the plaintiffs class. In such cases, when recovered funds are not fully dispersed to the members of a class - and some or all the money goes unclaimed - it can be paid to a third-party beneficiary, in an attempt to provide the class with a benefit cy pres comme possible ("as close as possible") to what a classwide distribution would have achieved. Providing such a result - while simultaneously avoiding complications and potentially prohibitive administrative costs - makes cy pres an attractive tool for courts and parties seeking to resolve class disputes.

But as recent cases illustrate, cy pres has become a doctrine with a split personality. It is both a trust doctrine and a class action tool, a creature of both common law and statute, a feature of both federal and state law. As a legal and practical reality, there is rarely a clear "next best thing" - and as recent cases from the Ninth Circuit teach, the crucial issue in applying cy pres in the class action context is: How close is close enough?

Origins of Cy Pres

Although it has become important in civil class actions, the roots of this time-honored doctrine are in trust law. Cy pres came into being to solve a perennial problem: what to do when some outside force frustrates the purpose of a trust. When this occurs, the courts historically have allowed the trust administrator to seek a use for the funds that fits the trustor's intent as closely as possible. Rather than let the trust fail, cy pres allows a shift to the next best solution. (See Pennsylvania v. Coxe, 4 U.S. 170, 203 (1800) ("Although a charity cannot take place according to the letter, yet it ought to be performed cy-pres, and the substance preserved.") (citing 17th-century English precedent).)

In class actions, a similar situation arises when complete compensation of all class members is either impossible, or prohibitively costly and complicated. The theoretically presumed outcome following resolution of a class action is full payment to each class member according to the terms of the applicable settlement or judgment. As a practical matter, however, full distribution of funds to the class may not be feasible - for example, claims may not be submitted properly, or even at all, by every class member.

After as much of a classwide fund as possible has been distributed to the class, there can be a sizable "residue" that must be disposed of. Before the courts adopted the cy pres doctrine to fill the gap, the choices for solving this residue dilemma were generally two-fold: Either the unpaid residue would revert to the defendant, or escheat to the state.

But cy pres, in the hands of creative lawyers and judges, provided a third option. One of the earliest examples of this approach involved allegations of overcharging for streetcar services in San Francisco. In 1946 the court determined that the railway had...