Tuesday, November 22, 2011
Ninth Circuit Overturns Approval of AOL Class Action Settlement
Panel Criticizes Selection of Charities Unrelated to Subject of Lawsuit as Beneficiaries
By KENNETH OFGANG, Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday overturned a district judge’s approval of the settlement of a class action charging America OnLine with illegally attaching ads to customers’ emails.
The settlement, reached in talks overseen by retired U.S. District Judge Dickran Tevrizian, would have required AOL, in addition to changing some of its business practices, to pay $110,000 to several charities. The parties agreed that those donations represented a practical approach to compensation because the class consisted of more than 66 million customers who would have been entitled to no more than a few pennies each if awarded damages.
Such cy pres distributions are an accepted aspect of class action law, Ninth Circuit Judge N. Randy Smith acknowledged. But the way the charities were selected in this case was inconsistent with Ninth Circuit guidelines, the jurist said.
Four plaintiffs, including Los Angeles attorney Robert Nachshin, brought suit in August 2009 in the U.S. District Court for the Central District of California. They asserted claims, on behalf of all AOL users, for violation of the federal Electronic Communications Privacy Act and several California consumer protection statutes, as well as for breach of contract and unjust enrichment.
Following settlement talks, the parties agreed that AOL would notify all subscribers of their right to opt out of having the “footer” ads attached to their emails, that the notice would be repeated every six months for two years, and that future members would be advised of their right to opt out as well. It was also agreed that, because the maximum the class would have recovered in a trial on damages would be about $2 million, or about three cents per class member, a distribution to charity would be an appropriate substitute.
Tevrizian suggested, and the parties agreed, that $25,000 each be donated to the Legal Aid Foundation of Los Angeles, the Federal Judicial Center Foundation, and the Los Angeles and Santa Monica chapters of the Boys and Girls Clubs of America, which would have received $12,500 each. It was also agreed that $35,000 would be distributed to charities of the plaintiffs’ choice in lieu of an incentive for bringing suit.
Two class members objected to the settlement, while more than 3,000 opted out.
One of the objectors, Janel Buycks, said she wanted the donation to go to her own charity, the Imitators of God Foundation, Inc. But it turned out that it was Buycks’ mother who was the AOL subscriber, and the judge allowed the mother to opt out of the settlement.
Class Member Objects
Another objector, Darryl McKinney, contended that the charities were improperly chosen, because their objectives were unrelated to the subject of the lawsuit and because they were not geographically diverse. He also argued that Snyder should have recused herself because her husband, attorney Marc Seltzer—the opinion identifies him as “Mr. Snyder”—serves on LAFLA’s board.
Smith, writing for the Court of Appeals, explained that cy pres distributions have been approved of in the past as a means of using settlement funds “for the aggregate, indirect, prospective benefit of the class.”
The use of the doctrine, the judge went on to say, has been criticized, however, where it is “unbridled by a driving nexus between the plaintiff class and the cy pres beneficiaries” and awards are made “to myriad charities which, though no doubt pursuing virtuous goals, have little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved.” This may lead to self-interest on the part of parties or their counsel, Smith said, or to an appearance of impropriety on the part of the judge making or approving the selections.
He cited Six (6) Mexican Workers v. Ariz. Citrus Growers (1990) 904 F.2d 130, in which the Ninth Circuit rejected an award to a Mexican charity of unclaimed funds from a settlement of claims by undocumented workers over farm labor contracting practices, on the ground that the charity’s work was unrelated to the subject of the lawsuit and there was no showing that class members would benefit.
“The cy pres distribution in this case fails to meet any of the guiding standards in Six Mexican Workers,” Smith declared. “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.”
On remand, Smith said, beneficiaries may be chosen from among groups “that work to protect internet users from fraud, predation, and other forms of online malfeasance,” or the judge may consider escheating funds to the federal government.
Smith added that Snyder was not required to recuse herself as a result of her husband’s membership on the LAFLA board, because no reasonable person would believe that the judge was biased in favor of the group merely because her husband was one of about 50 uncompensated members of its nonprofit board.
Nor was the judge subject to disqualification under a statute that applies when a judge or the judge’s spouse is a director of a “party,” since LAFLA was not a party to the litigation, but merely a “fortuitously impacted” beneficiary, Smith wrote.
The opinion was joined by Senior Judge Betty B. Fletcher and visiting U.S. District Judge James S. Gwin of Cleveland, Ohio.
Attorneys on appeal were Richard L. Kellner of Kabeteck Brown & Kellner LLP for the plaintiffs, Mark D. Litvack of Pillsbury Winthrop Shaw Pittman, LLP for the defendants, and Theodore H. Frank of the Center for Class Action Fairness in Washington, D.C. for the objector.
The case is Nachshin v. AOL, LLC, 10-55129.
Copyright 2011, Metropolitan News Company