In a refreshingly plain-spoken opinion issued Aug. 6, a three-judge panel of the Third Circuit Court of Appeals criticized a multimillion-dollar class action settlement in litigation over Google’s unauthorized use of internet tracking “cookies,” remanding to the District Court for more detailed findings of fact. In re: Google Inc. Cookie Placement Consumer Privacy Litigation, No. 17-cv-1480 (3d Cir. Aug. 6, 2019).

The case arose from allegations that Google created a web browser cookie, which tracks an internet user’s browsing activity even if the user tries to configure privacy settings to block it. The parties reached a settlement that would require Google to “stop using the cookies for Safari browsers and to pay $5.5 million to cover class counsel’s fees and costs, incentive awards for the named class representatives, and cy pres distributions, without directly compensating any class members.” The District Court certified an injunctive relief-only settlement class under Rule 23(b)(2), notwithstanding the fact that the settlement purported to release all class members’ potential claims for money damages. The only monetary benefit to the class was tangential: Google was to pay $3 million to organizations devoted to advocating for online privacy – a mechanism commonly referred to as cy pres, meaning a distribution that is supposed to be “as near as possible” to direct monetary relief.

A single objector timely appealed and challenged the District Court’s ruling on multiple fronts. Two features of the proposed settlement raised the Third Circuit’s ire.

The first was the proposed settlement’s requirement that absent class members release their claims for money damages, even though the District Court certified the class only for injunctive relief purposes. Although Rule 23(e) requires District Courts to approve all class action settlements, the Rules afford District Courts more leeway in approving injunctive relief-only settlements because such settlements typically do not ask class members to forgo their right to bring monetary damages claims separately. See Rule 23(b)(2). The Rules require more caution, however, for settlements involving class claims for money damages; District Courts must apply heightened certification and notice requirements and give the settlement terms enhanced substantive scrutiny. See Rule 23(b)(3).

In the Google Cookie Placement litigation, class counsel and Google tried to thread a middle ground. Their proposed settlement required class members to release claims for money damages, while seeking to certify an injunctive relief-only settlement class – thus avoiding the more rigorous standards for class certification and settlement approval in damages cases.

The Third Circuit said this “raises a red flag,” noting that Google and class counsel had “obtained – for themselves anyway – the precise benefits that a Rule 23(b)(3) class gives to the defendant and class counsel: 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[,]” while sidestepping the heightened requirements for money damages class settlements. The Court admonished the District Court for its failure to scrutinize this “troubling aspect” of the settlement. Without the means to review the settlement’s fairness, reasonableness and adequacy, the Third Circuit remanded to the District Court to decide this issue: “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.”

The Third Circuit’s second point of concern centered on apparent conflicts of interest between the parties (and counsel) and the organizations selected as cy pres recipients. The Court noted, for example, that Google has longstanding ties to Stanford and is a regular donor and cy pres payor to the Berkeley Center for Law & Technology, the Berkman Center for Internet & Society at Harvard University, the Center for Internet and Society at Stanford University, and the Center for Democracy & Technology. In addition, one of the lawyers representing the class was also a board member of Public Counsel, another cy pres beneficiary.

The District Court had disposed of this concern in one sentence, concluding simply and without any factual findings that “no conflict of interest” had “undermine[d] the selected cy pres recipients.” But the Third Circuit voided this holding as impermissibly shallow. Although it generally approved of the cy pres mechanism in certain cases – such as where direct monetary relief is impracticable or where excess funds remain after class members who submit claims are made whole – it held that the circumstances in this case raised enough concern about the adequacy of the cy pres recipients that the District Court should have scrutinized them more closely. For class action litigants, the lesson is that a relationship between a party and a cy pres recipient will not automatically defeat the propriety of that award – but it may, if the circumstances are egregious enough.

The Court remanded to the District Court to wrestle with this key issue, which is likely to pervade in the lower courts for years to come: Exactly when does a relationship between a cy pres recipient and a class action litigant undermine the proposed settlement’s fairness? While we might not get a clear answer for years, if ever, the Third Circuit’s opinion teaches that District Courts should conduct at least a modicum of fact-finding on the issue. It even offered a few guideposts for making that determination:

  • If challenged by an objector, a District Court must review the selected cy pres recipients to determine whether they have a significant prior affiliation with any party, counsel or the court.
  • A settlement should not be approved if such a prior affiliation “would raise substantial questions . . . whether the selection of the recipient was made on the merits.” (Citing ALI, Principles of the Law of Aggregate Litigation § 3.07 cmt. b.)
  • The parties seeking settlement approval bear the burden of explaining to a court why the cy pres selection was fair, which may include describing the nature of any prior affiliations; what role, if any, each affiliation played in the cy pres selection process; whether other recipients were sincerely considered; and why these recipients are the proper choice.

In the wake of this opinion, class action litigants should keep an eye on two issues: (1) whether a settlement predicated on an injunctive relief-only class can require class members to release claims for monetary damages, and (2) under what circumstances a relationship between a cy pres recipient and a class action litigant will defeat the fairness of that award.