Antitrust Cy Pres Distributions by States Attorneys General

Transcription

1 Antitrust Cy Pres Distributions by States Attorneys General I. INTRODUCTION Daniel Stujenske Role of the States Attorneys General Profs. Lott and Tierney April 23, 2007 In the last several years, commentators have begun turning attention to the role of states attorneys general in distributing settlement funds of large antitrust actions to charities. Federal legislation gave attorney generals the power to bring these actions to recover for the individual injuries to consumers of their state. These cases often result in large recoveries, either from a judgment or a settlement. However, it is often difficult to track down individual injured consumers, and even where this may be possible, the costs of notifying consumers, validating claims, and distributing funds directly to consumers may be larger than the recovery itself. The cy pres doctrine was borrowed from the law of trusts to allow these funds to be distributed in an alternative way, while still having the purpose of compensating consumers. Often, these funds are distributed to charities for programs which are aimed at helping individuals belonging to the group of injured consumers. Attorney generals enjoy wide discretion in fashioning these remedies and in choosing to which charities to distribute the funds. While this system tends to work well, it often ignores the rights of the injured consumers. Funds are given to charities with little or no connection to the consumers, or funds are distributed to particular charities for political reasons. Sometimes, the state appropriates the funds from these settlements for its own use. The solution to this problem, this paper will argue, is for the attorney general to develop a prospective set of procedures which will be used in deciding how to distribute the recoveries from antitrust cases. This procedure will both ensure that funds are used properly, and provide a tool for attorneys general to defend themselves against unfounded criticism. This paper seeks to draw together two different strands in the scholarship. The first strand is more developed and focuses on the legal requirements of cy pres distributions. The second strand is nascent, and instead turns attention to the procedures employed by attorney general offices in making cy pres distributions. Both of these aspects are necessary. An attorney general s decisions must be guided by the law, but decisions must be made within a process, and often the results of a process are determined by the process itself. This paper seeks to propose a process for ensuring that an attorney general s office makes decisions which are guided by the law and not by political or other considerations. In addition, this paper draws upon the legal doctrines in play in order to make some substantive policy recommendations. Both the procedural aspects and the underlying substantive considerations are thus addressed. Accordingly, Part II of this paper details the attorney general s powers as parens patriae to represent the residents of a state, and to represent the state itself. This will help flesh out the ethical responsibilities of the attorney general and her office. Part III focuses on the cy pres doctrine, tracing its history through the law of trusts, to its current flourishing in the context of class actions and similar cases. Part IV argues that in cases brought under federal antitrust laws, state attorneys general have special duties to the injured class, and do not merely act for the 1

2 benefit of the state. Part V outlines the current procedure of offices of attorneys generals in managing cy pres distributions. Part VI raises some concerns with the current system, and identifies some reasons why attorneys general may be tempted to deviate from the legal requirements of cy pres in certain circumstances. Part VII outlines a proposal for attorneys general to create a prospective and objective process for making cy pres decisions, in order to insulate the decision-making process from outside influences. II. ATTORNEY GENERAL PARENS PATRIAE ANTITRUST ACTIONS Many of the largest cy pres funds requiring distribution arise out of judgments or settlements in cases brought under the power of states attorneys general to represent consumers of their state as parens patriae. The doctrine of parens patriae exists at common law in all states. 1 In most states, the common law vests this power in the attorney general. In some others, the attorney general has been given this power by statute. Most recently, federal legislation expanded attorney general powers as parens patriae in the antitrust realm, making acute the problems of large, unclaimed recovery funds. A suit brought on behalf of consumers under parens patriae powers vindicates a state s quasi-sovereign interests. 2 This can be contrasted with a state s sovereign and proprietary interests. [T]he state has a sovereign interest in seeing that its laws are obeyed and enforced. 3 A state may bring an action for violation of its laws. Alternately, in vindicating its proprietary interests, a state may sue for damages it has suffered to its own property in the same way as any other civil plaintiff. A state has a quasi-sovereign interest in the health, safety, and welfare of its citizens as well as in the environment. 4 An antitrust suit might be brought to vindicate any of these three categories of interests. A state may bring a suit seeking injunctive relief for violation of its antitrust laws vindicating its sovereign interests in seeing the law obeyed. A state may bring an action for proprietary damages, alleging that certain prohibited anticompetitive actions have resulted in direct financial harm to the state or a state body. 5 Finally, a state may bring actions on behalf of injured consumers, as parens patriae. Although parens patriae is ultimately a doctrine which addresses the issue of a state s standing, application of this doctrine also raises other legal questions. Who has the authority within a state to direct litigation? When an attorney general brings a parens patriae action, who are her clients? These questions are acute when considering cy pres distributions, as the former question translates into one about who should have discretion over cy pres funds, and the latter question translates into one about whose interests the attorney general must prioritize. An examination of the law of parens patriae may provide some guidance. 1 Richard P. Ieyoub and Theodore Eisenberg, State Attorney General Actions, The Tobacco Litigation, and the Doctrine of Parens Patriae, 74 Tul. L. Rev. 1859, 1863 (2000). 2 Id. 3 Id. at Id. 5 For example, a conspiracy to fix prices in paper may result in state agencies overpaying for office supplies. 2

3 A. PARENS PATRIAE AT COMMON LAW At English common law, the King had certain powers and prerogatives as father of the country or parens patriae. Specifically, the King was guardian of children and incompetent persons. 6 Additionally, the King was guardian of all charitable interests. After the American Revolution, the King s powers belonged to the governments of the states. However, when the term was adopted in the United States, it appears to have taken on a broader meaning. 7 The original prerogatives remained, but the term parens patriae also encompassed the power of the states to sue to protect their sovereign and quasi-sovereign interests. 8 Although the historic prerogatives will still have some bearing on the Attorney General s role in antitrust cases, 9 more fundamental issues are addressed by the broader and more recent concept of parens patriae. For it is this doctrine which opens the doors of the courthouse to states and gives them standing to prosecute antitrust actions on behalf of their citizens. B. THE STATE S POWER AS PARENS PATRIAE TO VINDICATE QUASI-SOVEREIGN INTERESTS The Supreme Court originally developed the law defining quasi-sovereign interests in cases dealing with the Court s original jurisdiction over suits between states or between a state and a citizen of another state. 10 Initially these suits would be over clearly sovereign interests like borders and raised no question about a state s standing. 11 In 1900, the Supreme Court first recognized that a parens patriae action could be brought to vindicate a quasi-sovereign interest. 12 In Louisiana v. Texas 13 the Court addressed the issue of whether Louisiana had standing to try to enjoin a de facto embargo by Texas, resulting in harm to Louisiana s economy. Although the Court ultimately decided that original jurisdiction was inappropriate, it recognized that Louisiana s interest as parens patriae. The Court noted, Its gravamen is not a special and peculiar injury such as would sustain an action by a private person, but the state of Louisiana presents herself in the attitude of parens patrioe, trustee, guardian, or representative of all her citizens. 14 The Court went on to find: Inasmuch as the vindication of the freedom of interstate commerce is not committed to the state of Louisiana, and that state is not engaged in such commerce, the cause of action must be regarded, not as involving any infringement of the powers of the state of Louisiana, or any special injury to her 6 Susan Beth Farmer, More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought by States Attorneys General, 68 Fordham L. Rev. 361, 362 n. 5 (1999). 7 Michael Malina and Michael D. Blechman, Parens Patriae Suits for Treble Damages under the Antitrust Laws, 65 Nw. L. Rev. 193, 196 (1970). 8 Id. 9 For example, the Attorney General retains parens patriae supervision over charities, which has some consequences when considering cy pres distributions to these organizations. 10 Malina and Blechman at Id. at Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 602 (1982) U.S. 1 (1900). 14 Id. at 19. 3

4 property, but as asserting that the state is entitled to seek relief in this way because the matters complained of affect her citizens at large. 15 Justice Harlan, in a concurrence, disagreed that a state has standing except to pursue sovereign or proprietary interests. 16 A series of cases followed, establishing the state s power to go to court to protect the health of its citizens by abating public nuisances. 17 Further cases established the state s power to protect the land and air within its borders, even absent any interest in citizens health. However, at first the Court refused to permit jurisdiction where the state was bringing a case to protect its citizens economic interests. 18 In Oklahoma v. Atchison, Topeka, and Santa Fe Railway Co., Justice Harlan, writing for the court, found that the state interest in the action alleging illegally high railroad charges was only nominal. The Court held that: We are of opinion that the words in the Constitution conferring original jurisdiction on this court in a suit in which a state shall be a party are not to be interpreted as conferring such jurisdiction in every cause in which the state elects to make itself strictly a party plaintiff of record, and seeks not to protect its own property, but only to vindicate the wrongs of some of its people, or to enforce it own laws or public policy against wrongdoers generally. 19 Of course, strictly speaking, this case did not decide the issue of standing, since it was decided on the Constitutional clause establishing original jurisdiction. However, the holding that a state s interest in enjoining a trade restraint implicitly rested on the finding that the state either had no quasi-sovereign interests, or that such an interest was insufficient in this case. Notably, the Supreme Court itself in 1982, while examining the history of quasi-sovereign interests, did not include the Atchison case in its analysis. In 1945, the Supreme Court found that a state has the standing to sue for an injunction under the federal antitrust laws on behalf of its citizens. 20 Although the exact holding of Georgia v. Pennsylvania Railroad has been disputed 21 the Supreme Court s gloss of the landmark case is that the case stands for the proposition that when injury due to anticompetitive practices is sufficiently widespread that states have standing to sue for injunctive relief as parens patriae. 22 However, in Hawaii v. Standard Oil Co., 23 the court held that the Clayton Act did not permit a state to recover treble damages when suing as parens patriae. 15 Id. 16 Id. at See Snapp & Son v. Puerto Rico, 458 U.S. at 603 (1982) (listing cases). 18 Oklahoma v. Atchison, Topeka & Santa Fe Railway Co., 220 U.S. 277 (1911). 19 Id. at Georgia v. Pennsylvania Railroad, 324 U.S. 439 (1945). 21 See Malina & Blechman at See Snapp & Son v. Puerto Rico at U.S. 251 (1972). 4

5 C. THE HART-SCOTT-RODINO ACT The landscape was changed in 1976 when Congress passed the Hart-Scott-Rodino Antitrust Improvements Act (HSRA). 24 The HSRA amended the Clayton Act to allow states attorneys general to bring antitrust actions for monetary relief on behalf of residents in their state: Any attorney general of a State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States having jurisdiction of the defendant, to secure monetary relief as provided in this section for injury sustained by such natural persons to their property by reason of any violation of the Sherman Act. 15 USC Additionally, HSRA explicitly provided for the state to recover treble damages in such an action. 26 HSRA also provided for notice to the residents whose claims would be adjudicated, and for an opt-out mechanism by these residents. 27 Because of the procedural parallels, HSRA often is said to have given the states attorneys general the power to bring class actions on behalf of consumers harmed by antitrust violations. A notable difference however, is that HSRA provides for proof of damages in the aggregate: [D]amages may be proved and assessed in the aggregate by statistical or sampling methods, by the computation of illegal overcharges, or by such other reasonable system of estimating aggregate damages as the court in its discretion may permit without the necessity of separately proving the individual claim of, or amount of damage to, persons on whose behalf the suit was brought. 28 Normally, damages in class actions must be proven individually, but [i]n authorizing estimation of damages, Congress recognized that there was no reasonable alternative to ensure that such cases could be pursued, while also maintaining judicial efficiency. 29 Indeed, Congress s goal in passing HSRA was to encourage suits to be brought for redress of antitrust violations which cause damages that are too small and widespread to be brought by any individual consumer, and that class actions faced difficult procedural hurdles. The legislative history of the Act demonstrates that Congress sought to achieve three goals: (1) compensation of victims of antitrust violations; (2) disgorgement of profits by the offenders; and (3) deterrence of future anticompetitive actions. 30 States attorneys general were thought to be well suited to fill the void. In part, this was due to the state s traditional role in protecting the health and welfare of its residents. 31 Additionally, attorneys general were thought to be accountable to their populations, due to the fact that the vast majority of these offices are filled 24 Pub. L. No Id. at Id. 27 Id. 28 Id. 29 Farmer at 382 (internal citations omitted). 30 Id. at See H.R. Rep. No , at 5. 5

6 through popular election. 32 Finally, and most importantly for purposes of this paper, enforcement of antitrust laws at the state level had the advantage of being able to provide compensation to consumers. 33 In order for this advantage to be realized, courts and attorneys general soon realized that a system was needed to distribute part or all of the class recovery in these cases. III. CY PRES Cy pres has been variously described as a legal doctrine and a method of distribution. 34 Originally developed in the common law of trusts, it is now used not only by state attorneys general, but by private class action plaintiff in antitrust, mass tort, environmental, and civil rights class actions. It is perhaps most common, for reasons to be explored more fully below, in antitrust actions brought by states attorneys general as parens patriae, representing a class of consumers from their state. Before turning to the decision making process within an attorney general s office, it is important to understand the outer bounds of the options available when considering a cy pres distribution. The legal rules, in addition to providing hard limits on attorney general discretion, also embody certain principles which attorneys general should consider when fashioning remedies. A. HISTORY The term cy pres is derived from the Norman French cy pres comme possible. Literally, this translates to as close as possible. The doctrine was first employed in the United States as a tool for construing charitable bequests. American courts turned to the English doctrine of cy pres to deal with the problems that arise when the wishes of testators are either impossible to determine or fulfill. 35 For example, a testator may leave funds to an organization which no longer exists, may phrase her gift indefinitely (e.g., I leave all of my assets to charity. ), or may name a trustee for her charitable gift who predeceases her. In such situations, a court invokes the cy pres doctrine to try to save the gift, by putting it to a use that is similar, or as close as possible to the testator s wishes. 1. Cy Pres in the Law of Trusts Lost in many recent discussions of the history of the cy pres doctrine is an important subtlety, the brief exploration of which may lead to a fuller understanding of the possible roles of the Attorney General in distributing cy pres funds. English law recognized two categories of cy pres: judicial and prerogative. The prerogative power rested originally in the king, who had 32 See Id. 33 See Farmer at See e.g., Huelin, Robert, Building a Better Mousetrap: Cy Pres Distribution Mechanisms for the 21 st Century, National State Attorneys General Program at Columbia Law School, Attorney General Library at 1, available at: Miyakawa, Hiromitsu, Promotion of Antitrust and the Public Interest Through Use of Cy Pres Distribution. The American Antitrust Institute (2003), available at: 35 A Revaluation of Cy Pres 49 Yale L. J. 303, 303 (1939). 6

7 jurisdiction over charities through his position as parens patriae. This power was then gradually taken over by the king s council, and then by the chancellor. 36 The chancellor, as a judicial officer, also exercised the judicial power. 37 Judicial cy pres more resembles cy pres as currently applied in the law of trusts. Its function was to ensure that the intent of the donor was approximated. Prerogative cy pres was a discretionary power of the crown often used to block gifts to outlawed religious groups, or other gifts deemed to be against public policy. Often these prohibited gifts would be deemed to fall to the king. 40 Over time, the distinction in England between the two strands of cy pres became a mere formalism, without any substantial difference in application or result. 41 However, the law in the United States was heavily influenced by concerns about the abuses which had occurred under uses of prerogative cy pres. Many courts refused to apply prerogative cy pres, voiding any gifts which fell under its traditional ambit. This resulted in minor formalistic failures of a bequest having large practical consequences. 2. Cy Pres in Class Actions The underlying concept of cy pres putting funds to their next best use has become increasingly common in other contexts. Courts have adopted this doctrine from the law of trusts, and turned it into a method to solve a recurring problem in large class actions. In many actions, especially those where each individual class member s recovery is small, there are leftover funds from the judgment or settlement. These leftover funds are the result of class members who cannot be identified or located, or who simply fail to claim their portion of the recovery. 42 Courts have used the philosophy behind the cy pres doctrine as a guiding principle, by putting the funds to their next best use. Sometimes, a court will order that funds not be paid to class members because the costs associated with distribution are larger than the recovery. 43 This will be the case where each class member s claim (or the recovery of each member of a subset of the class) is very small. If a court so orders, this will result in a cy pres distribution for the entire recovery, not merely the excess after claims are paid out. This paper will use the term traditional cy pres to refer to the doctrine as applied to the first category when funds from a class action judgment or settlement are leftover after class members have had the chance to file individual claims. The term expansive cy pres will be used to refer to the second category where the court determines (or parties agree, with the 36 Id. at Id. at Id. at There is some evidence that the original purpose of applying judicial cy pres was not to effectuate the intent of the donor. In the 15 th century, charitable gifts were seen as a way for the deceased to pave his way to heaven. Under this mindset, the primary goal of cy pres was not to closely match the testator s intent but to ensure his salvation, and therefore every effort was made to ensure that the gift was still put to charitable use. Id. at Id. at When a gift was bequeathed to charity generally with no trustees named, it would be distributed under prerogative cy pres. When a trustee was named, but the trustee failed to distribute all of the funds (possibly due to the trustee s death), the gift would be distributed under judicial cy pres. Over time, in England, both of these would be applied by the courts in the same way. 42 Farmer at 393; See also Kevin M. Forde, What Can a Court Do with Leftover Class Action Funds? Almost Anything!, 35 No. 3 Judges J. 19, 19 (1996). 43 Forde at 19. 7

8 court s approval) that class members will not receive any individual compensation, and the entire fund is to be distributed cy pres. As early as 1946, a California court used the fluid recovery doctrine 44 in this expansive way in a class action. Market Street Railway Co. v. Railroad Commission dealt with bus fare overcharges, and the court, finding that passengers would not claim their small refunds, ordered the remainder of the damages to be used to improve the railway system The Growth of Expansive Cy Pres in Parens Patriae Antitrust Cases The past twenty-five years has seen the growth of the use of expansive cy pres in antitrust cases brought by attorneys general on behalf of consumers. This use tends to cause more controversy than traditional cy pres. Under traditional cy pres, before any funds are put to an alternate use, all injured plaintiffs have had the opportunity to opt-out of the class action all together, opt-out of the settlement (if the case did not go to final judgment), or file a claim for individual compensation. In expansive cy pres, this last option is foreclosed. Indeed, no effort is made even to try to directly compensate individual members of the class. At the same time, the settlement binds the class members those who did not opt-out of the case or settlement and precludes any individual recovery. i. A First Step: New York v. Dairylea Cooperative, Inc. The first use of expansive cy pres in an antitrust parens patriae case brought under HSRA was in In New York v. Dairylea Cooperative, Inc. 47 the New York Attorney General represented approximately 4.4 million New Yorkers in an antitrust action alleging a price fixing conspiracy. 48 The defendants settled for a total of $6.1 million, which the court estimated would result in individual compensation of $1.50 per household or $0.50 per person, before deducting costs. Additionally, the court found that 36 50% of the affected population had changed between the beginning and end of the conspiracy. Finally, the court found that it would have cost $2.5 million to distribute the funds. The Attorney General proposed printing $0.25 coupons on milk cartons, redeemable on any brand of milk. The court rejected this proposal, citing inter alia the effect of the coupons on the market. The court further decided that allowing consumers to make individual claims was too difficult and costly. Ultimately, the court chose that the entire settlement fund be distributed to schools in the affected area, to be used on nutrition programs and other nutrition related purposes. ii. Jumping in with Both Feet: the Sneaker Cases The first multistate antitrust parens patriae case brought under HSRA was also another major step in the use of expansive cy pres in cases brought by states attorneys general on behalf of their consumers. In 1994, the fifty states and the District of Columbia alleged that Keds, a 44 Fluid recovery is the name often used in the class action context for cy pres (and similar) distributions. 45 Market Street Railway Co. v. Railroad Commission, 171 P.2d 875 (Cal. 1946). 46 Farmer at New York v. Dairylea Cooperative, Inc., 547 F. Supp. 306 (S.D.N.Y. 1982). 48 Farmer at

9 sneaker manufacturer, had engaged in price-fixing. 49 A settlement was reached for $7.2 million, with $5.7 million to be distributed to charities. Each state would receive a share of the settlement proportional to its population, and each would determine which charities would receive their share of the funds. State could choose from a list of five agencies or choose any other charities which benefited women between fifteen and forty-four years old. 50 The court approved the settlement, noting that the states alleged overcharges of approximately $1.00 per pair of shoes sold. 51 The court further noted that the costs of distribution would swallow up the benefits. The next year, a similar claim was brought against Reebok and Rockport. 52 Again the defendants settled with all fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The settlement provided for the entire fund of $9.5 million, after deducting fees and expenses, to be distributed cy pres. Each state could take their proportional share of the settlement in cash or shoes, to be distributed to public, non-profit or charitable organizations, for use for athletic facilities, equipment or services. 53 The court found that the costs of distribution would be inefficient: experts estimated that it would cost $2.47 to process each of 1.3 million claims worth about $4. The district court also found a large risk of fraudulent claims, and approved the settlement. The Second Circuit affirmed on appeal. iii. The Other Shoe Drops: Nine West More recently, the states, along with the FTC, brought suit against Nine West, a women s shoes and accessories retailer, alleging vertical price fixing. 54 The settlement agreement provided for $30.5 million to be distributed to consumers. 55 Because of difficulties in identifying class members and the high distribution costs compared to the individual claims, the funds were distributed cy pres. Each state could choose to distribute the money to the state directly, a subdivision of the state, or a non-profit or other charitable organization. The money was to be used for women s health, educational, vocational, or safety programs. 56 The actual distributions in the Nine West case raised some controversy, but more importantly raise fundamental legal questions about the role and duties of the states attorneys general in distributing cy pres funds, as first identified by Robert Huelin. The three distributions Huelin identified frame some of the issues, which will be examined below. South Carolina s Attorney General Charles Condon, while campaigning for his party s gubernatorial nomination, traveled the state and conspicuously distributed grants from the fund to anti-abortion crisis pregnancy centers. In Wisconsin, under Attorney General James Doyle, the largest grant was given to the Wisconsin Alliance for Boys and Girls Clubs. With Attorney General Richard Blumenthal s support, Connecticut disbursed the money to the state s 49 New York v. Keds Corp., 1994 WL at *1 (S.D.N.Y. Mar. 21, 1994). 50 Id. at *1. 51 Id.; Farmer at New York v. Reebok Int l Ltd., 903 F. Supp. 532 (S.D.N.Y. 1995). 53 Id. at 532; Farmer at Huelin at Florida v. Nine West Group Settlement Agreement, No 00-CV-1707, 8-9 (S.D.N.Y. March 6, 2000) available at 56 Huelin at 1. 9

10 Department of Public Health, to be used to provide breast and cervical cancer treatment services. 57 B. CURRENT STATE OF LAW There is some confusion over what constitutes cy pres distributions. Some commentators use cy pres to refer to all methods of distribution other than direct, individual compensation to each class member. 58 Other commentators use the term to refer exclusively to disbursements to charity from unclaimed funds (or the whole fund in expansive cy pres cases). Adding to the confusion is the proclivity of some courts and commentators to use fluid recovery for different legal concepts. Some courts use the term to refer to a legal device for proving damages in a class action in the aggregate, rather than proving damages to individual class members, along with the use of unclaimed funds to indirectly benefit class members. Other courts use the term exclusively to refer to the method of spending unclaimed funds. Federal courts 59 have generally disapproved of fluid recovery when such a term is used to refer to a method of proving damages in the aggregate, holding that such a method is unauthorized by the Federal Rules of Civil Procedure and violates the constitutional requirements of due process. 60 On the other hand, courts have approved the use of fluid recovery merely as a method of distributing unclaimed class funds, or even for distributing an entire recovery when individual compensation is unmanageable. 61 Even in those jurisdictions where courts have been reluctant to approve cy pres distribution after a judgment, cy pres has been approved in the settlement context. 62 Courts tend to be less intrusive in cases brought by states attorneys general than in cases brought by private class counsel. 63 Courts, probably reasonably, trust attorneys general more than private counsel. The former are elected public officials whose actions are more or less transparent, while the latter have no such transparency and who may be motivated by private pecuniary gain. Antitrust actions, particularly multistate antitrust actions are often complicated, time-consuming cases, and the judge is often more than willing to clear his docket by approving a cy pres distribution and letting the attorney general sort out the minutae of where the money goes Id. at See e.g., Forde at 19, Miyakawa at Because multistate antitrust cases are the focus of this paper, this paper will focus on the law of cy pres in federal courts. 60 Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973). Of course, HSRA has specifically permitted this method of proving damages in actions brought by states attorneys general under the Clayton Act. 61 Re: Agent Orange Product Liability Litigation, 818 F.2d 179 (2d Cir. 1987); See also Wilson v. Southwest Airlines, Inc., 880 F.2d 807 (5 th Cir. 1989), Re: Folding Carton Antitrust Litigation, 744 F.2d 1252 (7 th Cir. 1984), Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9 th Cir. 1990), and Nelson v Greater Gadsden Housing Authority, 802 F.2d 405 (11 th Cir. 1986). 62 Forde at In addition to reduced judicial oversight, cases brought by attorneys general tend to result in broader settlement agreements, due to a variety of factors. See Huelin at See generally Huelin at 4. 10

11 C. METHODS OF CY PRES DISTRIBUTION After determining that cy pres distribution (with the broadest meaning of any distribution other than a direct one) is appropriate at all, it is necessary to decide what method of indirect distribution to use. 65 In addition to charitable distribution, courts have considered a variety of techniques for distributing unused class action recoveries. Among these are: escheat to the state, reversion to defendant, additional disbursement to claiming class members, and future price reductions. Only the last of these is a reasonable alternative to charitable distribution when distributing an entire recovery, but the legal and practical consequences of each of these alternatives informed the decision making process of the court and the attorney general in determining a distribution plan. 1. Escheat Generally, funds which are deposited in the United States Treasury to satisfy a judgment and remain unclaimed for five years escheat to the federal government. 66 Courts have approved funds to escheat to the government in certain circumstances, 67 and the court in Six Mexican Workers found that such distribution is proper when it serves the deterrence and enforcement goals of the substantive federal statute under which the action is brought or where a charitable distribution is inappropriate and reversion of the funds to the defendant is contrary to the goals of the statute. 68 Under 28 U.S.C. 2042, late claimants may still be paid, even after title to the money has passed, so this is not a permanent forfeiture. 2. Reversion to Defendant As noted in section III.C.1 above, reversion to the defendant is appropriate where it does not run contrary to the goals of the substantive statute sued under. 69 In Van Gemert v Boeing Co. 70 the court held that it was within the discretion of the district court to approve reversion to defendants of excess funds in a breach of contract action where defendants had acted free of bad faith and in reliance on legal advice. 71 The order which was affirmed also provided that claims would be paid in perpetuity and that notice of the unclaimed funds would be published for ten years. 65 Again, some commentators would consider these plans to be alternatives to cy pres distribution rather than methods of cy pres distribution, but the distinction for present purposes is merely semantic. The essential question addressed by this section is whether funds should be distributed to charities or used in some other way U.S.C See Van Gemert v Boeing Co. 739 F.2d 730 (2d Cir. 1984), Re: Folding Carton Antitrust Litigation 744 F.2d 1252 (7 th Cir. 1984), Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9 th Cir. 1990), Tim A. Thomas, Permissible methods of distributing unclaimed damages in federal class action AMERICAN LAW REPORTS, 107 A.L.R. Fed See Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9 th Cir. 1990). 69 See id F.2d 730 (2d Cir. 1984). 71 See Thomas at 9a. 11

12 3. Additional Disbursement to Class Members The additional disbursement of unclaimed funds to class members who have already claimed their recovery is impermissible when the fund is the result of a judgment. 72 However, an additional disbursement is permitted when specifically provided for in a settlement agreement Future Price Reductions An option considered specifically in antitrust actions is the distribution of the recovery through a reduction in the future price of the good or service which is the subject of the action. This option was considered and rejected by the court in Dairylea 74 a case brought by the New York Attorney General under HSRA. In that case, the settlement provided for a distribution of $750,000 through cents-off coupons, to be printed on Dairylea s products and to be redeemable for Dairylea milk and milk products. 75 The court held that such a plan would give Dairylea a significant competitive advantage in the future, as its milk would be cheaper than its competitors. As I read it, the plan which plaintiff and Dairylea propose converts a compensatory legal settlement into a marketing program. 76 Additionally, the court noted that the plan made no efforts to ensure that the compensated consumers were those injured in the past. 77 These are the general criticisms of coupons or other future price reduction plans: that the plan turns the defendant company s wrongdoing into a future benefit by granting the company a competitive advantage, and that the plan doesn t compensate the injured consumers. However, these shortcomings are not insurmountable. Indeed, the court in Dairylea did not condemn coupon plans completely, noting, I decline to approve such a settlement where it appears possible to develop an appropriately compensatory couponing program which does not disadvantage Dairylea's competitors at every turn. 78 The court even went so far as to say that if the proposed plan was the only workable alternative that it may be approved, but that a more detailed record must be developed to demonstrate that to be the case. 79 A similar program was approved in an action alleging that a grocery store chain and ten grocery store manufacturers conspired to reduce the number of discount coupons available to consumers. 80 The defendants agreed to a settlement of $4.2 million in coupons. In that case, the coupons could be used in any grocery store and could be redeemed for any products. 81 Additionally, the conspiracy was alleged to have existed between 1995 and 1997, and the 72 See Thomas at 2 ( Distribution of unclaimed damages to previously claiming class members has been disapproved, but it has been held that where a class action has been resolved by settlement, unclaimed funds may be distributed to class members who have already made damage claims if the parties' settlement agreement provides for this disposition. ) 73 See Van Gemert F. Supp. 306 (S.D.N.Y. 1982). 75 Dairylea at Id. 77 Id. ( Further, this plan seems unfair to those actually injured for it makes no effort to specifically reimburse those who were allegedly overcharged in the past but in effect is a payout to future milk drinkers in general. ) 78 Id. 79 Id. at n2 ( It may eventually appear that the here-proposed general approach to the instant settlement, poor though I view it, is the only practical alternative, but on this record that is not apparent. ) 80 In re Western New York Coupon Litig., No. 97 CV-0707 A(M), Final Judgment, at 5-8 (W.D.N.Y. Mar. 18, 1997); See also Farmer at Farmer at

13 settlement was in 1997, so there was not the same problem of a large time lapse as in Dairylea. 82 The propriety of coupon settlements, or other price reduction settlements, is thus dependent on the context of the case, and on the creativity of counsel Alternative Distributions in State Attorney General Antitrust Actions. Of these alternatives, the last gets the most consideration in the antitrust context. Certainly, it is the only logical alternative when an entire recovery fund is to be distributed cy pres. Even where only unclaimed funds are to be distributed in an action under HSRA, reversion and escheat are inappropriate. The statutory purposes of HSRA are compensation for victims and disgorgement of profits by offenders. 84 Reversion fails to meet both of these purposes, and escheat fails to compensate victims. Under the test of Six Mexican Workers, these distributions are therefore inappropriate. Attorneys general and courts have the discretion to fashion a remedy including extra payments to claiming class members or future price reductions, and must weigh these alternatives against charitable distribution when determining the next best use of funds. IV. THE SCOPE OF THE ATTORNEY GENERAL S DUTIES IN DISTRIBUTING CY PRES FUNDS AS PARENS PATRIAE Robert Huelin argues that [t]he attorney general represents the people of the state as a whole in her anti-trust actions, not solely the injured class of consumers. 85 This is undoubtedly true, as is made clear by Louisiana v. Texas and Georgia v. Pennsylvania Railroad. 86 The attorney general as parens patriae may sue under the antitrust laws on behalf of the state as a whole, for injuries suffered apart from the injuries to any individuals. However, this is also beside the point. When bringing a claim for treble damages under the Hart-Scott-Rodino Act, the attorney general is acting on behalf of the injured consumers, distinctly from his representation of the state as a whole in the claims for injunctive relief. HSRA provides: Any attorney general of a State may bring a civil action as parens patriae on behalf of natural persons residing in such State, to secure monetary relief as provided in this section for injury sustained by such natural persons to their property 87 The Act provides explicitly that the claim for money damages is brought on behalf of the injured persons to secure relief for those persons. The attorney general could not bring such a claim at common law. Apart from the plain meaning of the statutory language, it is clear from the overall structure of the Act and from its legislative history that any recovery was for the benefit of the injured consumers. The Act establishes a parallel procedure to the standard class actions of Rule 23 of the Federal Rules of Civil Procedure. The Act provides that the resolution of the attorney 82 Id. at For example, coupons usable on a variety of products may be a workable solution in the grocery context, where the products and stores are fairly interchangeable, and where purchases are frequent and small. However, they may be impossible in other contexts such as automobiles, where someone who has overpaid for a car may not be making another purchase for some time. New, creative solutions to the problems of price reduction settlements would be needed in these cases. Of course, it is precisely the situation where purchases are frequent and small that cy pres distributions are needed in the first place. 84 See supra II.C. 85 Id. at See supra II.B. 87 Pub. L. No

14 general s action will be res judicata with respect to all represented consumers. 88 These sections clearly establish that Congress intended for the attorneys general, in pursuing money damages, to be recovering the property of the individual consumers, not recovering funds for the state as a whole. The legislative history makes this even clearer. The main goal of HSRA was to ensure compensation for consumers. 89 Thus, the mere appellation parens patriae to the attorney general s role in pursuing a claim for treble damages under HSRA does not release the attorney general from her special obligation to ensure that any recovery redounds to the benefit of injured consumers. Although the attorney general indeed represents the state as a whole in bringing an antitrust action, the HSRA instructs that in pursuing a claim for monetary relief, an attorney general acts on behalf of the injured consumers. The attorney general must therefore ensure that the interests of the injured class are protected. The class has a property interest in the funds from the recovery: indeed, once the attorney general has recovered funds on their behalf, they are precluded from pursuing individual claims. The attorney general, therefore, as much as possible, must protect the property interest of the consumers on whose behalf they brought the claim. This does not deny the attorney general s broader duties as parens patriae to represent to the whole state, but merely recognizes that with respect to the particular funds recovered in the consumers name, that the state as a whole has no claim to them. The ramifications of this conclusion are two-fold. First, an attorney general must favor a direct distribution as much as is practicable. Some argue that the state is better served by charitable distributions. 90 However, even if true, this justification cannot stand under the forgoing analysis. In this particular instance, the attorney general cannot balance the interests of the state and the class of consumers, but must prioritize the consumers compensation. One might argue that charitable distributions do compensate consumers, and this is of course the goal. However, the law of cy pres indicates that the doctrine is only to be applied when the best use of funds isn t available. In the law of trusts, this is when the testator s wish is impossible to fulfill or determine. This has been expanded slightly in the law of class actions and HSRA because these distributions involve higher costs than disbursement from a single estate to a single trust or charity. Therefore, in the law of class actions and HSRA, cy pres may be used when direct distributions (the best use of funds, analogous to the testator s actual expressed wish) are impossible or too costly. No one would argue that the attorney general should approve a plan costing $1 million to distribute the same amount to consumers. The decision is less clear-cut when the amount of recovery is slightly more than the cost of distribution, but what is most important is for the attorney general and her staff to keep in mind that their duty is to put funds to the best use direct distribution whenever possible. 88 Id. ( The final judgement in an action under subsection (a)(1) shall be res judicata as to any claim under section 4 of this Act by any person on behalf of whom such action was brought and who fails to give such notice within the period specified in the notice given pursuant to paragraph (1) of this subsection. ) 89 Farmer at See, e.g., Huelin at

15 The second ramification, when a direct contribution is still impossible, an attorney general must endeavor to ensure that funds are directed to the genuine next best use as defined by the law of cy pres. If a charitable distribution is chosen, funds must be directed to a charity which will benefit the injured class, narrowly defined. If this is difficult or impossible, the attorney general must make every effort to craft a creative and effective alternative distribution plan, possibly in the form of a future price reduction. This theory is not uncontroversial. The New York State Bar Association has said: While the classic definition of cy pres is an award that is tied as nearly as possible to the gravamen of the litigation, the case law suggests more fluid parameters. In the real world of class action settlements, the connection between the class, and the harm done to them, and the cy pres award can range from very closely aligned to very tenuous. The parties are often only limited by their own creativity and ability to convince the judge that what they are proposing makes sense. 91 The NYSBA argues that a court can use its broad equitable powers to approve a cy pres distribution even when not closely related to the litigation. 92 Other commentators have noted that the standard requirement of a nexus between the litigation and the next best use has been ignored by some parties and some courts. In the caselaw, it appears that while some cy pres distributions proposed to courts (and in some cases approved) have adequately reflected this nexus between the injured class and the cy pres distribution; in other cases the nexus is remote or completely absent. 93 Despite the growing tendency of parties and courts to ignore the nexus requirements of cy pres aided by organizations like the NYSBA that want to receive cy pres funds, attorneys general should remain mindful of the duties they have to the consumer class. Even if attorneys general can get away with ignoring the nexus requirement which is becoming increasingly probable, if not yet likely they should not. When attorneys general file a case under HSRA they effectively take away any chance of a private class action, despite the opt-out provisions. A single consumer can opt-out, but if they are the only one to do so, they will not be practically able to file a suit. For this and the other reasons outlined above, attorneys general should be mindful of their special responsibilities to the injured consumer class when filing an HSRA claim. V. CURRENT CY PRES PROCEDURES Most attorneys general still enjoy broad discretion in deciding when cy pres distributions are appropriate, when to use charitable distribution as a cy pres method, and how to distribute the money to charity. The decision-making procedures for the first two questions are similar across most states, due to the fact that most of these decisions are made on the multi-state level. The procedures vary most once a state has been given a grant of money and must determine how to distribute it. This section will look at several techniques that have been employed, drawing upon 91 New York State Bar Association, Manual on Cy pres For Legal Services, at 4 (January 2007). 92 Id. 93 Foer, Albert A. and Amore, Robert, Cy Pres as an Antitrust Remedy. The American Antitrust Institute (2003), Working Paper No at 15 (October 27, 2005) (internal footnotes removed). 15

16 the experiences of a recent antitrust case to highlight some issues which will be addressed more fully in the following sections. A. PRE-SETTLEMENT: WHETHER TO USE DIRECT OR CY PRES DISTRIBUTIONS The vast majority of recoveries in antitrust actions by attorneys general are the product of settlements rather than judgment. Often, these settlement agreements provide for whether direct or cy pres distribution will be used, and if a charitable distribution is designated, will define the uses to which the funds must be used, though usually without specifying individual charities. These decisions are therefore made primarily by the staff attorneys on the case, and if it s a multi-state case, will be made collectively for all states at once. 94 Officially, ultimate authority for the decision rests with the attorneys general, though the amount of attorney general involvement varies. 95 In practice, the decision is made as a product of discussions and negotiations among the assistant attorneys general on the case. 96 This decision is subject to the legal limits of cy pres distribution, but there are few institutional or political limits to enforce these legal requirements. 97 As noted above, courts give greater leeway for cy pres distributions in settlements than after judgment. Courts are most used to the standard civil litigation paradigm where parties are the best judges of their own interests. Of course, courts are used to protecting the interest of absent class members in class action settlements, but some of the standard concerns are alleviated when the attorney general takes the place of private attorneys. So, courts often grant broad discretion to attorneys general to craft settlement agreements. However, this discretion is not completely unfettered, as the court s decision in Dairylea makes clear. Courts still do review settlements for fairness to the class, as well as to ensure that direct distributions are truly impracticable before allowing cy pres distributions. However, they give greater discretion to attorneys general than to private attorneys. Defendants have even less incentive to interfere with the states wishes regarding distribution methods. Defendants want peace at the cheapest price, which they may be able to get by allowing the states the distribution method they want. 98 In fact, if defendants do have a preference with regard to distributions, they may prefer a charitable distribution, particularly if it would be in-kind rather than cash. 99 Any kind of charitable distribution might allow the defendant to spin the settlement and get positive or less negative public relations benefits. An in-kind distribution may be more likely to provide such a benefit the distributions going to charity are more clearly identified as coming from a particular company. 100 Additionally, inkind distributions may be cheaper for the defendants. So, if defendants have any preference of one type of distribution or another, it is in favor of charitable distributions. Defendants are therefore unlikely to provide a meaningful check on attorney general decisions. 94 Telephone interview with Kevin O Connor (April 13, 2007). Telephone interview with Tina Kondo (April 13, 2007). 95 Kondo, supra note O Connor, supra note Huelin at Huelin at For more extensive discussion of in-kind distributions, see infra VI.B This assumes that defendants do not try to dump low-quality or obsolete product on charities and suffer the attendant negative publicity. 16