Nachshin v. AOL, LLC

• Citation: 11 Cal. Daily Op. Serv. 14067,663 F.3d 1034,2011 Daily Journal D.A.R. 16793
• Decision Date: 21 November 2011
• Docket Number: No. 10–55129.,10–55129.
• Parties: Robert NACHSHIN; Dawn Fairchild; Brian Geers; Laurence Gerard, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees, v. AOL, LLC, a Delaware Limited Liability Company, Defendant–Appellee.Darren McKinney, Objector–Appellant,andJanel Buycks, Objector.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

11 Cal. Daily Op. Serv. 14,067

2011 Daily Journal D.A.R. 16,793

663 F.3d 1034

Robert NACHSHIN; Dawn Fairchild; Brian Geers; Laurence Gerard, on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,

v.AOL, LLC, a Delaware Limited Liability Company, Defendant–Appellee.Darren McKinney, Objector–Appellant,andJanel Buycks, Objector.

No. 10–55129.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 7, 2011.Filed Nov. 21, 2011.

Richard L. Kellner, Kabeteck Brown & Kellner LLP, Los Angeles, CA, for the plaintiffs-appellees.

Mark D. Litvack, Pillsbury Winthrop Shaw Pittman, LLP, Los Angeles, CA, for the defendants-appellees.

Theodore H. Frank, Center for Class Action Fairness, Washington, D.C., for the objector-appellant.Appeal from the United States District Court for the Central District of California, Christina A. Snyder, District Judge, Presiding. D.C. No. 2:09–cv–03568–CAS–PLA.Before: BETTY B. FLETCHER and N. RANDY SMITH, Circuit Judges, and JAMES S. GWIN, District Judge.^*

OPINION

N.R. SMITH, Circuit Judge:

The cy pres doctrine allows a court to distribute unclaimed or non-distributable portions of a class action settlement fund to the “next best” class of beneficiaries. See Six (6) Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1307–08 (9th Cir.1990). Cy pres distributions must account for the nature of the plaintiffs' lawsuit, the objectives of the underlying statutes, and the interests of the silent class members, including their geographic diversity. See id. The cy pres distributions here do not comport with our cy pres standards. While the donations were made on behalf of a nationwide plaintiff class, they were distributed to geographically isolated and substantively unrelated charities.

I.

In August 2009, four named plaintiffs—Dawn Fairchild, Brian Geers, Laurence Gerard, and Robert Nachshin (Plaintiffs)—brought a class action lawsuit against America Online, LLC (AOL) on behalf of a putative class consisting of more than 66 million paid AOL subscribers. Plaintiffs alleged that AOL wrongfully inserted footers containing promotional messages into e-mails sent by AOL subscribers. The amended complaint asserted six causes of action: (1) violation of the Electronic Communications Privacy Act, 18 U.S.C. § 2510 et seq. ; (2) unjust enrichment; (3) violation of California Business and Professions Code § 17200 et seq. ; (4) breach of contract; (5) violations of the Consumer Legal Remedies Act, California Civil Code § 1750 et seq. ; and (6) violation of California Business and Professions Code § 17529 et seq.

The parties entered into voluntary mediation to settle their dispute. Working with retired U.S. District Court Judge Dickran Tevrizian, AOL and Plaintiffs eventually reached a class settlement (the Settlement). The Settlement calls for the certification of a settlement class consisting of “all current AOL members,” or about 66 million subscribers. It further provides that (1) AOL will notify its members of the existence of the e-mail footer advertisements and their ability to opt out of the footers; (2) if AOL continues to append footer advertisements to members' outgoing e-mails, AOL will re-send the same e-mail notification to members every six months for a period of two years; and (3) AOL will inform future members of the e-mail footers and provide a link enabling members to opt out of the footer advertisements.

The Settlement also addressed Plaintiffs' claims for monetary damages. All parties agreed monetary damages were small and difficult to ascertain. The maximum recovery at trial would have been the unjust enrichment AOL received as a result of its footer advertisement sales, or about $2 million. Divided among the more than 66 million AOL subscribers, each member of the class would receive only about 3 cents. The cost to distribute these payments would far exceed the maximum potential recovery.

In lieu of a cost-prohibitive distribution to the plaintiff class and at Judge Tevrizian's suggestion, the parties agreed that AOL would make a series of charitable donations. Because the 66,069,441 plaintiffs were geographically and demographically diverse, the parties claimed they could not identify any charitable organization that would benefit the class or be specifically germane to the issues in the case. At the parties' request, Judge Tevrizian suggested and the parties agreed that AOL would donate $25,000 to three charitable beneficiaries: (1) the Legal Aid Foundation of Los Angeles, (2) the Federal Judicial Center Foundation, and (3) the Boys and Girls Club of America (shared between the chapters in Los Angeles and Santa Monica).

In addition and at the suggestion of Judge Tevrizian, the parties agreed to compensate the named class representatives (for bringing the action) by awarding $35,000 to four charities of the class representatives' choice (rather than providing direct financial compensation). The Settlement provides that AOL will donate $8,750 to a charity designated by each named representative. These designated charities include the (1) New Roads School of Santa Monica, designated by Ms. Fairchild and Mr. Nachshin; (2) Oklahoma Indian Legal Services, designated by Mr. Geers; and (3) the Friars Foundation, designated by Mr. Gerard. Each entity is a non-profit organization with tax deductible status under 26 U.S.C. § 501(c)(3).

The district court granted preliminary approval of the Settlement and provisionally certified the settlement class. Shortly thereafter, AOL sent an e-mail to over 60 million members of the class notifying them of the Settlement (the Notice). The Notice (1) explained that AOL will make donations to several charities totaling $110,000; (2) notified class members that the full settlement agreement is available at the district court or online at the internet addresses provided in the Notice; and (3) provided contact information, including phone numbers and an e-mail address, where inquiries could be sent. Two members of the class objected to the Settlement: Darren McKinney and Janel Buycks.¹ An additional 4,525 AOL subscribers opted out of the Settlement, but 1,037 failed to provide their names for the opt-out as required by the district court's instructions, and seven failed to submit opt-out requests before the opt-out deadline.

On December 7, 2009, McKinney filed a formal Objection to the Proposed Settlement pending before the district court. In his briefs and at oral argument, McKinney argued, among other things, that: (1) the charitable award does not meet the standard for cy pres, because the charities selected by the parties do not relate to the issue in the case and are not geographically diverse; (2) the district court judge should have recused herself given her husband's position as a director on the board of one of the charity beneficiaries, the Legal Aid Foundation of Los Angeles; and (3) AOL's Notice to the class was defective, because it did not specify that Ms. Fairchild worked for the charity she selected to receive a charitable donation.

The district court denied McKinney's objections, finding that (1) Judge Tevrizian's involvement in the negotiations was a significant indicator of the agreement's fairness, (2) the class was receiving significant prospective relief in addition to the cy pres awards, and (3) “the charities that have been chosen are [not] inappropriate or out of line with other class actions settlements that I have seen approved in this court and in other courts.” Judge Snyder also declined to recuse herself, explaining “I have considered [the motion], but I do not think it is a basis for recusing myself in this matter. I certainly had no involvement in picking the charities. The parties picked the charities and I was asked to approve the settlement.” On December 31, 2009, the district court issued a Final Order Re Approval of Class Action Settlement and Final Judgment Thereon, noting that the court “has considered and denied all objections filed in this action.” On appeal, McKinney raises the same three objections he made before the district court.

II.

We review a district court's approval of a proposed class action settlement, including a proposed cy pres settlement distribution, for abuse of discretion. Rodriguez v. W. Publ'g Corp., 563 F.3d 948, 963 (9th Cir.2009). A court abuses its discretion when it fails to apply the correct legal standard or bases its decision on unreasonable findings of fact. Las Vegas Sands, LLC v. Nehme, 632 F.3d 526, 532 (9th Cir.2011).

We have recognized that federal courts frequently use the cy pres doctrine “in the settlement of class actions where the proof of individual claims would be burdensome or distribution of damages costly.” Six Mexican Workers, 904 F.2d at 1305. The cy pres doctrine “takes its name from the Norman French expression, cy pres comme possible, which means ‘as near as possible.’ ” In re Airline Ticket Comm'n Antitrust Litig., 307 F.3d 679, 682 (8th Cir.2002) (citation omitted). The doctrine originated to save testamentary charitable gifts that would otherwise default. The cy pres doctrine allows a court to modify a trust to best carry out the testator's intent—that is, to effectuate the “next best” use of the gift. Id. In the context of class action settlements, a court may employ the cy pres doctrine to “put the unclaimed fund to its next best compensation use, e.g., for the aggregate, indirect, prospective benefit of the class.” Masters v. Wilhelmina Model Agency, Inc., 473 F.3d 423, 436 (2d Cir.2007) (quoting 2 Herbert B. Newberg & Alba Conte, Newberg on Class Actions § 10:17 (4th ed.2002)).

However, as a growing number of scholars and courts have observed, the cy pres doctrine—unbridled by a driving nexus between the plaintiff class and the cy pres beneficiaries—poses many nascent dangers to the fairness of the distribution process. See, e.g., S.E.C. v. Bear, Stearns & Co., 626 F.Supp.2d 402, 414–17 (S.D.N.Y.2009); ...