July 2007

Unclaimed Class-Action Funds Offer Hope for Equal Justice

by Andrea D. Axel and David A. Leen

In a groundbreaking move in 2006, the Washington State Supreme Court codified a common-law practice into Civil Rule 23, requiring that at least 25 percent of class-action residual funds in state cases be disbursed to programs that provide legal aid for those in need. Washington is one of the first states to adopt such a rule. While its ultimate impact remains to be seen, supporters of legal aid in Washington are hopeful that the new rule will generate significant funding to provide access to the civil justice system for all Washington’s residents.

This ray of hope for civil legal aid emerged from the common-law cy pres doctrine applied to unclaimed class-action funds. Cy pres roughly translates to “next best use” and is a court-approved method of distributing a damage fund when the original purpose cannot be achieved. After a class action is resolved and all approved claims have been paid out, additional funds often remain for various reasons. Some class members may not be located or may not submit claims or cash checks, or administrative costs of distributing awards may eclipse the amount of recovery in some cases. Sometimes the relief awarded is so small that it makes no economic sense to try to compensate many thousands of victims who have, for example, suffered $5 in damages. In a theoretical case where a grocery store overcharged many thousands of customers by adding a fraction of an ounce to the reflected weight, it could be very difficult and cost-prohibitive to compensate each victim for their actual loss, and it might be more sensible to direct the total compensation to a charity such as a food bank.

Courts have broad discretion to disburse those residual funds, which can total thousands or millions of dollars. In recent years, a number of federal and state courts have awarded class-action residual funds to legal-aid organizations under the cy pres doctrine.

Access to Justice Denied to Many Low-Income People

Three out of four low-income households in Washington face a significant civil legal problem each year, most commonly impacting basic needs such as housing, personal safety, and health. Yet the chance of having legal assistance at such times is remote at best. More than 90 percent of those living in poverty face urgent legal issues without any help at all. Legal aid and volunteer attorney programs offer assistance, but a 2004 Supreme Court task force found that over twice the current funding is needed to ensure that low-income Washington residents have adequate access to the civil justice system. The Legislature has taken initial steps to increase funding for legal aid, but funding still falls far short of the need.

Whirlpool Case Sets the Stage

One of the first cases in Washington to award class-action residual funds to legal aid was a consumer-financing class action, Zachman v. Whirlpool Acceptance Corp. (Okanogan County Superior Court No. 87-2-00223-5). After bouncing up to the Washington State Supreme Court twice, the case ultimately settled in 1995. Defendant took responsibility for administering the settlement fund and distributed checks for $49 to 23,488 class members. Six months after the end of the claims period, almost 6,000 of those checks remained uncashed. Seattle attorney Bill Kinsel represented defendant Whirlpool Financial Corporation and recalled that the question arose as to how the remaining $300,000 should be disbursed.

Redistributing the money to the class was not feasible, since administrative costs would have eaten the majority of the residual amount. And under the circumstances of the settlement, Kinsel knew that he would be unable to gain approval for the money to be returned to defendant. After researching the cy pres doctrine, he determined that the Legal Aid for Washington (LAW) Fund, a charitable organization that raises financial support for legal aid in Washington, would be a good alternative recipient of the funds. “Class-action members are often unable to afford legal representation to pursue their rights individually, and there is a logical relation between them and low-income residents who cannot afford legal representation without legal aid,” Kinsel explained.

Kinsel said his client was enthusiastic about the idea. “It was actually a great way for them to end the case. They believed that they had been wrongly put through the wringer in this litigation, and they were pleased that a significant portion of the money was going to do something positive in the state. You could say that for them it was a sweet final note on which to end a sour concert.” The court ultimately approved distribution of the majority of the unclaimed residual funds to three organizations that support legal services for the poor in Washington: LAW Fund, Legal Foundation of Washington, and Chelan Douglas Community Action.

A Plaintiffs’ Counsel’s Perspective

Mark Griffin, of Keller Rohrback LLP, has represented plaintiffs in several class-action cases that resulted in cy pres awards to support legal aid. “Obviously our primary goal is to try to ensure that everyone harmed by defendants’ actions receives compensation directly,” Griffin stated. “Unfortunately, there are cases where the administrative costs to identify all members of the class would be greater than the amount awarded. But returning the money to the defendants and allowing them to profit from their illegal conduct isn’t right either. It makes more sense to have the funds used in a productive way, which is the purpose of cy pres awards.”

An example of such a case occurred in 2004, when Griffin represented the plaintiff class in Hansen et al. v. Ticket Track, Inc., 280 F. Supp. 2d 1196 (W.D. Wash. 2003). The case alleged that private parking-lot owners had imposed illegal collection fees on customers. The class was certified, and plaintiffs won their summary judgment motion. But the costs of trying to track down every person who had parked in the lots and been subjected to the improper fines would have outstripped the ultimate recovery value. Griffin considered it a prime example of when the cy pres doctrine could bring a positive result so that the money could be used to help low-income people in the state. Judge Marsha Pechman agreed, approving a $227,987 award to LAW Fund to support legal-aid services, the largest known residual fund award to legal aid in the state.

Griffin was encouraged that the Washington State Supreme Court endorsed the practice of awarding unclaimed class-action funds to legal aid by incorporating it into CR 23. “The class-action device was established to try to answer the problem of big corporations illegally taking small amounts of money from a large number of people. The circumstances of some cases, however, do not allow for significant awards to each class member. This is a way for the defendants in those situations to be held accountable and to also do something useful for vulnerable people in Washington.” Griffin hopes that the Supreme Court’s endorsement of the practice will encourage attorneys to think of legal aid when crafting class-action settlements in both state and federal court.

State Rule Adopted to Direct Residual Funds

The idea behind an amendment to Washington’s civil rule governing class actions came from leaders in the legal-aid community who had observed that class-action residual awards were an occasional source of funding. Jim Bamberger, currently the director of the Office of Civil Legal Aid, comments that, “while the legal-aid community was successful in securing orders directing some residual funds to support civil access to justice, the effort was essentially hit-or-miss, depending on whether anyone was aware of the pendency of the class action and whether class counsel or the trial judge was aware of the possibility of directing the residual funds to support civil access to justice. Over time, members of the civil legal-aid community determined that a more deliberate and consistent approach to the distribution of these funds could help generate urgently needed funding for civil legal aid.”

Representatives of the legal-aid community drafted an amendment to CR 23 addressing administration of residual funds. They grounded their effort in the concept that CR 23’s primary objective is to expand access to the justice system for persons whose claims were unlikely to be prosecuted individually, which dovetails with legal aid’s objective of providing access to the justice system for low-income and vulnerable individuals. Bamberger recalls: “The draft was vetted with a broad array of stakeholders, including plaintiff and defense lawyers, trial court judges, judicial associations, and representatives of the nonprofit community. A consensus approach emerged which (a) defined ‘residual funds’ in a limited manner and protected the prerogatives of class counsel to structure settlements in accordance with the wishes of their clients; (b) directed a portion (at least 25 percent) of residual funds to the Legal Foundation of Washington to promote access to justice for low-income persons; and (c) provided additional guidance to trial courts and counsel with respect to the distribution of the remaining funds.”

Ultimately the proposed amendment was endorsed by the WSBA, the Superior Court Judges’ Association, the Supreme Court’s Access to Justice Board, the Washington State Trial Lawyers Association, the Washington Defense Trial Lawyers Association, and the Legal Foundation of Washington. The Washington State Supreme Court adopted the proposed amendment after a public comment period, and CR 23(f) became effective January 3, 2006.

The amended rule applies to all class actions filed after January 3, 2006, and to all further proceedings in cases that were pending on that date. It applies to all residual funds in state class actions, whether created pursuant to an order of judgment or a court-approved settlement.

Amended CR 23 Breaks New Ground

With the adoption of revised CR 23, Washington became one of the first states to codify what courts have been doing on an ad hoc basis in class-action cases. Most states’ civil rules do not address class-action residual funds. California has a rule that permits, but does not require, courts to allocate residual funds to legal aid. North Carolina’s legislature passed a law effective in October 2005 that directs residual funds to two legal groups serving indigent needs, and Illinois’s legislature is considering a proposed bill that would act similarly to Washington’s rule.

“The Washington Supreme Court is a strong partner in the effort to address access to justice issues. This rule is on the forefront of nationwide efforts to find solutions to the crisis facing low-income clients who do not have access to legal aid,” states Caitlin Davis Carlson, executive director of Legal Foundation of Washington.

Cy Pres Continues in the Federal Arena

The revisions to CR 23 do not extend to federal court, but the common law cy pres doctrine is well recognized by federal courts, many of whom have concluded that if class-action settlements cannot be made to the plaintiffs, legal-aid organizations are a permissible, if not desirable, alternative recipient of unclaimed settlement funds. For example, the 7th Circuit approved a class-action residual award of over $2.3 million to the National Association of Public Interest Law. In re Folding Carton Antitrust Litigation, 1991 WL 32867 (N.D. Ill., Mar. 5, 1991), aff’d in relevant part 934 F. 2d 323 (7th Cir. 1991). And a federal district court in Minnesota approved a $2.5 million dollar residual award to the Minnesota Legal Aid Foundation. Gordon et al v. Microsoft Corp., No. 00-5994, (Minn. Dist. Ct. 2004). (See sidebar for additional case cites.)

The federal Class Action Fairness Act (CAFA), adopted in 2005, also confirms judges’ discretionary power to award residual funds. Under CAFA, when class actions involve coupon settlements, courts have discretion “to require that a proposed settlement agreement provide for the distribution of a portion of the value of unclaimed coupons to one or more charitable or governmental organizations, as agreed to by the parties.” 28 USC § 1712 (e).

Hope for the Future

The access to justice community is cautiously optimistic about the financial impact that the rule will have, but the actual revenue stream is hard to predict. Historically, class actions have not been tracked in Washington, so no one knows how many class-action suits are currently pending in state court. Nor is there any data showing what percentage of certified cases generate residual funds. Furthermore, the new federal jurisdictional rules under CAFA may reduce the total number of class actions adjudicated in state court.

Even so, one or two large cases a year could have a significant impact on legal aid funding. Past awards of residual funds to legal aid in Washington and other jurisdictions have ranged from thousands to millions of dollars. (See resource list following this article.) “We will be watching with interest to see what kind of financial impact the rule has on the legal-aid funding crisis. It is certainly a step in the right direction to address this critical unmet need,” states Yakima Superior Court Judge Michael Schwab, past president of LFW’s Board of Trustees. 

David Leen, of Leen and O’Sullivan, PLLC, is a long-time supporter of legal aid. His practice emphasizes real estate matters and consumer class actions. He was president of the LFW Board of Trustees during 2004 and a sponsor of the amendment. He can be reached at david@leenandosullivan.com. Andrea Axel is an attorney and the grants manager at the Legal Foundation of Washington. She can be reached at andrea@legalfoundation.org.

Sidebar — Class-Action Fund Resources

Resources on Legal Aid

The Washington State Civil Legal Needs Study, published by the Washington State Supreme Court, September 2003. Available on the Washington Courts website at www.courts.wa.gov.

Final Report and Recommendations of the Task Force on Civil Equal Justice Funding, May 2004. Available on the Washington Courts website at www.courts.wa.gov.

Cy Pres Cases

Superior Beverage Co. v. Owens-Illinois, Inc., 827 F. Supp. 477 (N.D. Ill. 1993) (awarding over $1 million of residual funds to various legal-aid and volunteer legal-services programs).

In re Motorsports Merchandise Antitrust Litigation, 160 F. Supp. 2d 1329 (N.D. Georgia 2001) (disbursing $250,000 each to Atlanta Legal Aid, Georgia Legal Services, and Lawyers Foundation of Georgia).

In re Folding Carton Antitrust Litigation, 1991 WL 32867 (N.D. Ill., Mar. 5, 1991) (approving residual fund to be disbursed to National Association for Public Interest Law); aff’d in relevant part 934 F. 2d 323 (7th Cir. 1991).

Jones v. Nat’l Distillers, 56 F. Supp. 355 (S.D.N.Y. 1999) (disbursing $18,000 of unclaimed funds to the Legal Aid Society Civil Division and listing cases granting cy pres awards to legal aid).

Washington v. Resource Dealer Group et al., No. 97-2-15754 (King Co. Super. Ct., May 22, 1998 (disbursing $200,000 to the LAW Fund for legal aid in Washington).

Other Resources

Alba Conte and Herbert Newberg, Newberg on Class Actions §§10.15 – 10.25 (4th ed. 2002) (class-action treatise discussing cy pres doctrine).