The Register has a great article about a recent Google debacle, the Google Buzz class action settlement (see also Robert Levine’s piece in Bloomberg, “Google’s Spreading Tentacles of Infuence” and also see Music Rights Now to send a letter to your Members of Congress). The article notes that the Google settlement involved “cy pres” payments to “independent” groups often called “watchdogs” like the American Civil Liberties Union and the Electronic Frontier Foundation. Apparently, the selection process of the groups to receive millions in cy pres payments was a two step process. The first list of cy pres largess was objected to by the Electronic Privacy Information Center for an interesting reason as the Register notes:
“Amongst the groups that failed to squeeze its snouts into the trough was EPIC, which complained that the selection process favored “organizations that are currently paid by [Defendant] to lobby for or to consult for the company”.
To say the least, that’s an interesting description of the ACLU and the Electronic Frontier Foundation, which both hit the jackpot, receiving $1m each.”
So there was a first cut at the cy pres process and when EPIC objected, the judge modified the settlement to include EPIC and at least one other lucky beneficiary:
“In addition to EPIC’s ticket on the gravy train, Judge Ware managed to find $500,000 for the Markkula Center for Applied Ethics at Santa Clara University. Why that particular faculty? It’s anyone’s guess, but quite coincidentally, the Honorable Judge Ware is a lecturer at Santa Clara University.”
You’ve probably never heard the term “cy pres”. It is vulgarized French that has come to describe an ancient legal doctrine that first arose in application to wills and was a doctrine that allowed a court to comply with the intent of the deceased as nearly as possible when to do so directly would not be legally possible or practicable.
But the direct contemporary translation in class action practice would be more like “snout in trough.” The cy pres process is an inside way for groups to raise essentially free money. I’m not sure of the tax implications, but I’d be interested to know if cy pres contributions are taken as a deduction for liability losses.
For example, the ubiquitous Samuelson-Glushko legal clinic at Berkeley received contributions from The Dennis v. Metromail Cy Pres Fund, The Supnick, et al. v. Amazon, Inc. and Alexa Internet Cy Pres Fund, The UCAN v. Financial Services Companies Cy Pres Funds and the Zadeh Cy Pres Fund. Oh, and the Google Buzz Cy Pres Fund.
They’ve done this before.
Now imagine this scenario. A corporation that thinks itself above the law gets caught doing something illegal to potentially millions of its customers. Big liability, bad for the balance sheet. What to do? The corporation can avail itself of the class action process.
But wait, you say. Class actions are supposed to be the heroic actions of white knights protecting consumers, right? True. But if you think that, you clearly have not been to the Temporary Autonomous Zone known as the Northern District of California with its locus in San Jose, the capitol of Silicon Valley and home to People Who Are Smarter Than We Are.
So just go with me on this and hear out my interpretation of a class action in modern times, which will get back to “cy pres”, I promise. The corporation who has done the bad thing calls a class action law firm. They say, how about you find you some class representatives, sue us, we will do a prepackaged settlement, we’ll pay you some millions, pay the class representatives some walking around money (and maybe some non-cash goodies–like oh say stock options–we can keep between us), and then we can dump a bunch of money into the pockets of people we like through the cy pres. And then we get a class settlement that will apply to all of our customers not before the court so we can close off any liability because no one pays attention to these things and probably none of our customers will opt out of the class. Sounds good? Big money, not a lot of work? Kind of like Google Books, but without the messy scanning.
But wait, you say–there’s more. We have heard of a “prepackaged bankruptcy” in Chapter 11 bankruptcy reorganization, which is a plan for financial reorganization that the bankrupt company drafts alongside its creditors (represented by its creditors committee, a group that are designated as the good fiduciaries of all creditors, or all of its creditors) that everyone agrees will be the winning plan once the company enters bankruptcy. The prepackaged plan must also be voted on by shareholders of the soon-to- be bankrupt company before the company files its petition for bankruptcy.
Note–the essential aspect of the prepackaged bankruptcy is that it has some efficiency benefits, but it does one thing that is often overlooked. It very often guarantees that the management that drove the company into bankruptcy will still be in control when the company comes out of bankruptcy.
Now see how the analogy works in class actions, remembering that Google spent a lot of time learning how to twist the class action process on its head during the Google Books litigation. How would you blunt the class action from someone else’s sword into your shield? Get an agreement among the class action lawyers, potential class representatives (like a potential creditors’ committee), and file the action in your home town where people don’t think you’re evil.
Then reach a quick class certification, a quick settlement agreement, and make sure you funnel money through the class action to all the groups that are likely to challenge you (through the cy pres process).
The settlement, however, applies to all members of the class, most whom probably have no idea what is happening, that they have a claim, or that there’s anything they can do about it. In fact, only 578 class members opted out. In case anyone is interested, there is a list of their names at buzzclassaction.com (see Exhibit A).
So see what may have happened: Google knows it is exposed to a class action by all users of Google Buzz. Somehow, class action lawyers find Google. Largely silent class representatives are identified and certified by the court. A settlement is reached–less than a year after filing, rather quickly in my curbstone point of view–and then large payments are made to “watchdogs” and to counsel. And perhaps most importantly–any member of the class who has not opted out of the settlement–and as we saw in Google Books, Google is all about opting out–is prohibited from pursuing a claim against Google. And what consideration was paid to the class members for giving up these valuable rights? Nothing. Zero. Zip.
Presto chango–Google limits its liability to chump change, lawyers make money, cy pres recipients make money, the class gets zero.
Google justice if I ever saw it.
I don’t know that this is what happened, I’m just guessing. But it sure looks like it’s worth a second look. Whether or not it was premeditated, the result is the same.
To be continued.
Here are the cy pres recipients (Settlement at p. 6):
” (a) American Civil Liberties Union $700,000
(b) Berkeley Center for Law & Technology $500,000
(c) Berkeley Law School, Samuelson Law, Technology & Public Policy Clinic $200,000
(d) Berkman Center for Internet & Society at Harvard University $500,000
(e) Brookings Institution $165,000
(f) Carnegie Mellon, Cylab Usability, Privacy & Security Lab $350,000
(g) Center for Democracy & Technology $500,000
(h) Electronic Frontier Foundation $1,000,000
(I) Indiana University, Center for Applied Cybersecurity Research $300,000
(j) Stanford, Center for Internet & Society $500,000
(k) YMCA of Greater Long Beach $300,000 [that well known hotbed of privacy watchdogs]
(l) The Electronic Privacy Information Center $500,000
(m) The Markkula Center for Applied Ethics Santa Clara University $500,000
(n) Youth Radio $50,000″