By Frank Cruz-Alvarez, a Partner in the Miami, FL office of Shook, Hardy & Bacon L.L.P., with Melissa Madsen, Of Counsel to Shook, Hardy & Bacon L.L.P. in its Miami, FL office. Mr. Cruz-Alvarez is the WLF Legal Pulse’s Featured Expert Contributor on Civil Justice/Class Actions.

“The vista view of this case is not pretty.”  The United States Court of Appeals for the Third Circuit did not mince words when it vacated and remanded to the District Court a proposed class settlement between Google, Inc. and class members in an invasion of privacy action.  In re: Google Inc. Cookie Placement Consumer Privacy Litigation, No. 17-1480 (3d Cir. Aug. 6, 2019).

Although the Third Circuit concluded that it could not give the District Court’s order approving the settlement meaningful review based on a lack of findings, its message was clear:  the settlement terms are “troubling” and raise a “red flag,” and the District Court failed to give the Settlement Agreement “the ‘scrupulous’ examination required of a court acting as a fiduciary for absent class members.”

This invasion of privacy class action, based on the California Constitution and state law, arose from a Stanford graduate student’s 2012 allegation that Google was using “cookies” to skirt the privacy settings of internet users and track users’ information.  As the Third Circuit described the alleged offense: “an internet behemoth with unprecedented tools for monitoring private conduct told millions of Americans it would not track their personal browser history, and then it did so anyway to profit from the data.”

Under the terms of the parties’ Settlement Agreement, class members received nothing, but agreed to a broad release of all potential claims for money damages against Google.  In turn, Google agreed to pay a couple million dollars to class counsel and make a cy pres donation to certain organizations to which it was already donating money.

In remanding, the Third Circuit discussed the two features of the Settlement Agreement that it found most troubling: (1) the Settlement Agreement’s broad release of claims for money damages, and (2) the Settlement Agreement’s designation of cy pres recipients.

The Broad Release of Claims for Money Damages Raises a Red Flag

The release of money damages as part of a class settlement is not unheard of when a class is properly certified under Rule 23(b)(3).  That said, certification of a class under Rule 23(b)(3) is difficult, a concept class counsel in this case fully acknowledged.  Indeed, with that in mind, the parties sought to certify an injunction class under Rule 23(b)(2) instead of the more “difficult” damages class under Rule 23(b)(3).  In doing so, Goggle and class counsel bypassed the “heightened certification and notice requirements” of a Rule 23(b)(3) class, but reaped the benefits: “namely, a broad class-wide release of claims for money damages for the defendant, and a percentage-of-fund calculation of attorneys’ fees for class counsel.”

The district court’s failure to fully examine this feature of the Settlement Agreement prevented the Third Circuit from reviewing the fairness, reasonableness, and adequacy of the Settlement Agreement.  Moreover, in remanding the case, the Third Circuit posed the following question to be answered by the district court: “Whether a defendant can ever obtain a class-wide release of claims for money damages in a Rule 23(b)(2) settlement, and if so, whether a release of that kind requires a heightened form of notice either under Rule 23(c)(2)(B) or due process tenets.”

Practitioners and litigants should keep watch for an answer to the Third Circuit’s question as it may bear on the type of class certification counsel seeks.  In the meantime, however, counsel looking to certify a class and counsel defending possible class action lawsuits, should always be mindful of the type of class certification sought, with particular attention paid to the type of damages at issue.  Always scrutinize whether the proper type of class is up for certification.  Moreover, as an extra cautionary measure in ensuring a settlement is pushed through, try to avoid seeking approval for class certification and settlement at the same time as there is a heightened duty of examination when certification and settlement are sought simultaneously.

Troubling Selection of Cy Pres Recipients

As a general matter, the Third Circuit concluded that cy pres settlements under Rule 23(b)(2) are not unfair per se and may even be proper in some instances.  Nonetheless, the Court noted the skepticism of such settlements (as stated by other federal courts and academia) in part because they prompt class counsel to put their own interests before that of their clients.  That said, the Third Circuit found no issue with the district court’s approval of the Settlement Agreement’s cy pres structure in this case.  The Third Circuit, however, questioned the selection of the specific cy pres recipients as they had pre-existing relationships with class counsel or Google.  On remand, the Third Circuit directed the district court, whose treatment of this issue was insufficient, to (1) consider whether the cy pres recipients have significant prior affiliations with Google, class counsel, or the Court, and if so, (2) determine whether the selection process failed to satisfy Rule 23(e)(2) by raising substantial questions whether the recipients were chosen on the merits.

Litigants seeking approval of a cy pres structured settlement agreement should be wise about choosing their recipients.  At the outset, do your homework—is there a significant prior affiliation with any party, counsel, or the court?  If the answer is yes, and substantial questions may arise as to whether the recipient was chosen on the merits, consider a new recipient, or be ready to answer questions.  As the Third Circuit stated, the parties seeking settlement approval must be prepared to explain why the cy pres recipient was fair.  And if a court suspects a conflict, the settlement should be subject to increased scrutiny.  As a helpful tip, try to involve class members