Cy pres recipient in false advertising case has to be false-advertising-focused group, court rules

 You might think that class action rules can be a bit like Calvinball, and I'd be hard pressed to disagree. Here's another hurdle to jump, although it's certainly jumpable.

Hawes v. Macy’s Inc., 2023 WL 8811499, No. 1:17-cv-754 (S.D. Ohio Dec. 20, 2023)

The court denies settlement approval in this case alleging that Macy’s misrepresented the thread count in some of the sheets it sold, because it doesn’t like the cy pres part of the remedy. The global class action settlement created a $10.5 million common fund, and the parties jointly moved the court to approve. As part of the settlement, Macy’s agreed to change the packaging on its sheets to include the language: “Thread count determined from a sample of a representative sheet by counting cotton yarns and by separating and counting adjacent parallel polyester yarns.” The $10.5 million fund would first satisfy any notice and administrative costs. The remaining balance was to go towards the class counsel’s attorneys’ fees, incentive payments for the named plaintiffs, and payouts to the class members who submit eligible claims. Class members whose purchases Macy’s can verify through its own records would receive $7.50 per unit of CVC Sheets purchased (and could potentially receive a secondary distribution), as would class members who had proof of purchase through receipts. Class members who attest under penalty of perjury that they purchased CVC sheets would receive $2.50 per household (no matter how many sheets persons in the household claim to have purchased) and no secondary distribution.

If, after all that, it was “economically feasible” to make a second distribution, the first two groups of claimants would receive their pro-rata share of the remaining funds, weighted according to the purchase price that each claimant paid for his or her sheets, but capped at 50% of that purchase price. If it wasn’t economically feasible to make a second distribution, or if funds remain even after a second distribution, the agreement provides that the remaining funds would go to the Public Interest Research Group (PIRG), a nonprofit advocacy organization that the parties chose.

The notice plan already went into effect and was “remarkably successful at generating claim submissions,” with an estimate of over one million claims before the close of the claims period; roughly 10% could be verified either by internal record or proof of purchase.Only 59 class members opted out and none objected.

First, the court found that the state consumer protection law claims couldn’t cover the US because it wasn’t enough to allege that “substantially similar statutes” exist in all other states is insufficient, and they only cited California and Missouri consumer protection law in the complaint. But fraud and unjust enrichment, along with UCC breach of warranty, did not create any conflicts. Thus, the court certified a class.

“The relief provided in the settlement (at least for those whose purchases are verifiable by Macy’s business records or who can provide proof of purchase) likely meets or exceeds what any class member could have procured by an individual lawsuit.” The submitted claims would likely account for around 40% of the class. “For low-value-claim class actions like this one, a 40% distribution rate weighs towards a finding of adequate relief.” Nor were appropriate incentive awards to class representatives a problem.

Although “every circuit to squarely consider the issue” has found that Rule 23 does not preclude cy pres awards. But when are they ok? The Eighth Circuit says only when “existing class-member claimants have been fully compensated and further distribution to remaining class members is not feasible” and when the recipient is “for the next best use for indirect class benefit.” Accordingly, the use to which the funds are put must be “consistent with the nature of the underlying action and with the judicial function.” The recipient must be one that “relates directly to the injury alleged in [the] lawsuit and settled by the parties.”

Here, it was proper to use cy pres as a last resort. “While Category 3 claimants will only receive $2.50, which would fall short of a full recovery for a fully-proven claim, the claimants in that category would likely not succeed at trial because they would struggle to prove they actually bought sheets,” and further distributions to absent class members were also feasible.

So what was the problem?

As far as the Court can tell, … PIRG does no work addressing false or misleading labeling for bed sheets, textiles more generally, or even false advertising as a category. … PIRG’s work appears to primarily focus on company or government policy related to toxins, waste, or climate change. … [M]ost of PIRG’s consumer-related campaigns relate to product safety, food safety, and unfair loan practices. True, the bed sheets here may have had a rougher texture than the customers had been led to believe, but uncomfortable and unsafe are two different categories, and no one contends the sheets raised safety issues.

Perhaps even more troubling to the Court in its assessment of PIRG as a potential cy pres recipient, … PIRG uses portions of its funds to donate to other organizations—organizations whose missions are even a further cry from any issues this suit presents. In 2016, PIRG granted $40,000 to the People’s Action Institute, an organization that advocates for socialized medicine, pursues “climate justice,” and fights against “the growing threat of authoritarianism in rural communities.” PIRG also donated over a million dollars to Environment America, an organization that seeks to ban plastic. Last, but not least, PIRG donated $60,000 to “Onward Together,” a PAC that supports progressive candidates in their runs for offices across the country.  

Whatever one may think of the merits of such endeavors, it is hard to see how they have much to do with bed sheets, thread count mislabeling, or even consumer fraud more generally. In sum, the Court can discern no way in which a potential multi-million-dollar award to PIRG is the “next best use” for a class fund created to settle consumer fraud claims stemming from inaccurate bed sheet thread counts. PIRG does not relate “directly to the injury” suffered by the class members and it would be an inappropriate exercise of the “judicial function” to divert class money to an unrelated organization that has nothing to do with the class or the injury its members suffered.

Worse, the parties didn’t provide argument beyond a “vague, unsupported statement” that PIRG “has as its purpose the advancement of consumer protections and rights.” Nor was it enough to provide a declaration from PIRG’s Director of its Consumer Watchdog Team stating that they will use any award “to promote accurate and truthful labeling and advertising of consumer bedding products … [to] educate consumers with a focus on truth in labeling … [to] serve as a marketplace watchdog … [and to] research and monitor the marketplace.” This was too vague a promise, and anyway there was no mechanism to enforce it. Further, money is fungible, so even enforceable restrictions wouldn’t help. (Does that mean every cy pres recipient has to be newly created? That seems … unhelpful, and also fungibility could presumably be overcome with evidence that there’d be no bedding marketing program at all in the absence of the money.)

“[T]he Court has an obligation to ensure that settlement proceeds benefit the class. The cy pres doctrine simply allows for a distribution that achieves those benefits indirectly.” The court singled out the National Advertising Division of the Better Business Bureau, which “exists entirely to address false advertising,” though TINA seems like a much better bet to me. Apparently NAD would satisfy the court’s desire for “narrow[] tailor[ing]” to the class’s interests, but the parties needed to identify some “organization that verifiably engages in meaningful work related to deceptive advertising,” requiring new notice to the class. The court expressed its concern that “the settlement notice postcard distributed to potential class members included no mention of the cy pres award, [which should] be included in any future notice so that class members can raise objections to that distribution if they wish.”