Class Action Attorney

November 22, 2011

Class Action Settlements: Ninth Circuit nixes settlement in AOL privacy suit

The United States Court of Appeals overturned a class action settlement in Nachshin v. AOL, LLC, a class action lawsuit alleging that AOL's email ads violated the Electronic Communications Privacy Act and other laws.

The class action settlement did not provide any recovery to class members

First, the appellate court noted that the settlement would not provide any monetary distribution to class members:

The Settlement also addressed Plaintiffs' claims for monetary damages. All parties agreed monetary damages were small and difficult to ascertain. The maximum recovery at trial would have been the unjust enrichment AOL received as a result of its footer advertisement sales, or about $2 million. Divided among the more than 66 million AOL subscribers, each member of the class would receive only about 3 cents. The cost to distribute these payments would far exceed the maximum potential recovery.

The cy pres award did not relate to the class action claims

In lieu of a monetary distribution, the class settlement called for a cy pres award to certain charities, and a fee award to the class action lawyers.  The appellate court took issue with the charities selected to receive the cy pres award:

In lieu of a cost-prohibitive distribution to the plaintiff class and at Judge Tevrizian's suggestion, the parties agreed that AOL would make a series of charitable donations. Because the 66,069,441 plaintiffs were geographically and demographically diverse, the parties claimed they could not identify any charitable organization that would benefit the class or be specifically germane to the issues in the case. At the parties' request, Judge Tevrizian suggested and the parties agreed that AOL would donate $25,000 to three charitable beneficiaries: (1) the Legal Aid Foundation of Los Angeles, (2) the Federal Judicial Center Foundation, and (3) the Boys and Girls Club of America (shared between the chapters in Los Angeles and Santa Monica).

In addition and at the suggestion of Judge Tevrizian, the parties agreed to compensate the named class representatives (for bringing the action) by awarding $35,000 to four charities of the class representatives' choice (rather than providing direct financial compensation). The Settlement provides that AOL will donate $8,750 to a charity designated by each named representative. These designated charities include the (1) New Roads School of Santa Monica, designated by Ms. Fairchild and Mr. Nachshin; (2) Oklahoma Indian Legal Services, designated by Mr. Geers; and (3) the Friars Foundation, designated by Mr. Gerard. Each entity is a non-profit organization with tax deductible status under 26 U.S.C. § 501(c)(3).

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The cy pres distribution in this case fails to meet any of the guiding standards in Six Mexican Workers. The proposed awards fail to (1) address the objectives of the underlying statutes, (2) target the plaintiff class, or (3) provide reasonable certainty that any member will be benefitted. Plaintiffs in this case brought claims against AOL for breach of electronic communications privacy, unjust enrichment, and breach of contract, among others, relating to AOL's provision of commercial e-mail services. Yet none of the cy pres donations—$25,000 each to the Legal Aid Foundation of Los Angeles, the Boys and Girls Clubs of Santa Monica and Los Angeles, and the Federal Judicial Center Foundation—have anything to do with the objectives of the underlying statutes on which Plaintiffs base their claims.

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The cy pres distribution also fails to target the plaintiff class, because it does not account for the broad geographic distribution of the class. See In re Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679, 683 (8th Cir. 2002) (reversing a district court's cy presdistribution because it "failed to consider the full geographic scope of the case"); Houck on Behalf of U.S. v. Folding Carton Admin. Comm., 881 F.2d 494, 502 (7th Cir. 1989) (remanding a proposed cy pres award in a nationwide class action so the district court could consider "a broader nationwide use of its cy pres discretion"). Although the class includes more than 66 million AOL subscribers throughout the United States, two-thirds of the donations will be made to local charities in Los Angeles, California. Even among the small percentage of plaintiffs located in Los Angeles, there is also no indication that any would benefit from donations to the Boys and Girls Clubs of Los Angeles and Santa Monica or Los Angeles Legal Aid. The proposed donation to the Federal Judicial Center Foundation at least conceivably benefits a national organization, but this organization has no apparent relation to the objectives of the underlying statutes, and it is not clear how this organization would benefit the plaintiff class. We therefore conclude that the district court applied the incorrect legal standard in approving the proposed cy pres distribution and, therefore, abused its discretion.

We are not persuaded by AOL's argument that courts must defer to the parties' freely-negotiated settlement, or AOL's reliance on the statement from Rodriguez that judicial review "must be limited to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned." Rodriguez, 563 F.3d at 965 (internal quotation marks and citation omitted). This argument conflates two separate inquiries relating to class settlements: (1) whether the class settlement, "taken as a whole, is fair, reasonable, and adequate to all concerned," id.; and (2) whether the distribution of the approved class settlement complies with our standards governing cy pres awards. McKinney does not argue that the Settlement fails to adequately compensate Plaintiffs' injuries; instead, he argues that the (presumptively adequate) Settlement fails to comport with our established standards for cy pres distribution in Six Mexican Workers. A proposed cy pres distribution must meet these standards regardless of whether the award was fashioned by the settling parties or the trial court.

We are also not persuaded by the parties' claims that the size and geographic diversity of the plaintiff class make it "impossible" to select an adequate charity. It is clear that all members of the class share two things in common: (1) they use the internet, and (2) their claims against AOL arise from a purportedly unlawful advertising campaign that exploited users' outgoing email messages. The parties should not have trouble selecting beneficiaries from any number of non-profit organizations that work to protect internet users from fraud, predation, and other forms of online malfeasance. If a suitable cy pres beneficiary cannot be located, the district court should consider escheating the funds to the United States Treasury. See Six Mexican Workers, 904 F.2d at 1309.

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