Antitrust Cy Pres Distributions by States’ Attorneys General

Daniel Stujenske Role of the States’ Attorneys General

Profs. Lott and Tierney April 23, 2007

I. INTRODUCTION In the last several years, commentators have begun turning attention to the role of states’ attorneys general in distributing settlement funds of large antitrust actions to charities. Federal legislation gave attorney generals the power to bring these actions to recover for the individual injuries to consumers of their state. These cases often result in large recoveries, either from a judgment or a settlement. However, it is often difficult to track down individual injured consumers, and even where this may be possible, the costs of notifying consumers, validating claims, and distributing funds directly to consumers may be larger than the recovery itself. The cy pres doctrine was borrowed from the law of trusts to allow these funds to be distributed in an alternative way, while still having the purpose of compensating consumers. Often, these funds are distributed to charities for programs which are aimed at helping individuals belonging to the group of injured consumers. Attorney generals enjoy wide discretion in fashioning these remedies and in choosing to which charities to distribute the funds. While this system tends to work well, it often ignores the rights of the injured consumers. Funds are given to charities with little or no connection to the consumers, or funds are distributed to particular charities for political reasons. Sometimes, the state appropriates the funds from these settlements for its own use. The solution to this problem, this paper will argue, is for the attorney general to develop a prospective set of procedures which will be used in deciding how to distribute the recoveries from antitrust cases. This procedure will both ensure that funds are used properly, and provide a tool for attorneys general to defend themselves against unfounded criticism. This paper seeks to draw together two different strands in the scholarship. The first strand is more developed and focuses on the legal requirements of cy pres distributions. The second strand is nascent, and instead turns attention to the procedures employed by attorney general offices in making cy pres distributions. Both of these aspects are necessary. An attorney general’s decisions must be guided by the law, but decisions must be made within a process, and often the results of a process are determined by the process itself. This paper seeks to propose a process for ensuring that an attorney general’s office makes decisions which are guided by the law and not by political or other considerations. In addition, this paper draws upon the legal doctrines in play in order to make some substantive policy recommendations. Both the procedural aspects and the underlying substantive considerations are thus addressed. Accordingly, Part II of this paper details the attorney general’s powers as parens patriae to represent the residents of a state, and to represent the state itself. This will help flesh out the ethical responsibilities of the attorney general and her office. Part III focuses on the cy pres doctrine, tracing its history through the law of trusts, to its current flourishing in the context of class actions and similar cases. Part IV argues that in cases brought under federal antitrust laws, state attorneys general have special duties to the injured class, and do not merely act for the

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benefit of the state. Part V outlines the current procedure of offices of attorneys generals in managing cy pres distributions. Part VI raises some concerns with the current system, and identifies some reasons why attorneys general may be tempted to deviate from the legal requirements of cy pres in certain circumstances. Part VII outlines a proposal for attorneys general to create a prospective and objective process for making cy pres decisions, in order to insulate the decision-making process from outside influences. II. ATTORNEY GENERAL PARENS PATRIAE ANTITRUST ACTIONS Many of the largest cy pres funds requiring distribution arise out of judgments or settlements in cases brought under the power of states’ attorneys general to represent consumers of their state as parens patriae. The doctrine of parens patriae exists at common law in all states.1 In most states, the common law vests this power in the attorney general. In some others, the attorney general has been given this power by statute. Most recently, federal legislation expanded attorney general powers as parens patriae in the antitrust realm, making acute the problems of large, unclaimed recovery funds. A suit brought on behalf of consumers under parens patriae powers vindicates a state’s quasi-sovereign interests.2 This can be contrasted with a state’s sovereign and proprietary interests. “[T]he state has a sovereign interest in seeing that its laws are obeyed and enforced.”3 A state may bring an action for violation of its laws. Alternately, in vindicating its proprietary interests, a state may sue for damages it has suffered to its own property in the same way as any other civil plaintiff. A state has a quasi-sovereign interest in the health, safety, and welfare of its citizens as well as in the environment.4 An antitrust suit might be brought to vindicate any of these three categories of interests. A state may bring a suit seeking injunctive relief for violation of its antitrust laws — vindicating its sovereign interests in seeing the law obeyed. A state may bring an action for proprietary damages, alleging that certain prohibited anticompetitive actions have resulted in direct financial harm to the state or a state body.5 Finally, a state may bring actions on behalf of injured consumers, as parens patriae. Although parens patriae is ultimately a doctrine which addresses the issue of a state’s standing, application of this doctrine also raises other legal questions. Who has the authority within a state to direct litigation? When an attorney general brings a parens patriae action, who are her clients? These questions are acute when considering cy pres distributions, as the former question translates into one about who should have discretion over cy pres funds, and the latter question translates into one about whose interests the attorney general must prioritize. An examination of the law of parens patriae may provide some guidance.

1 Richard P. Ieyoub and Theodore Eisenberg, State Attorney General Actions, The Tobacco Litigation, and the Doctrine of Parens Patriae, 74 Tul. L. Rev. 1859, 1863 (2000). 2 Id. 3 Id. at 1863. 4 Id. 5 For example, a conspiracy to fix prices in paper may result in state agencies overpaying for office supplies.

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A. PARENS PATRIAE AT COMMON LAW At English common law, the King had certain powers and prerogatives as “father of the country” or parens patriae. Specifically, the King was guardian of children and incompetent persons.6 Additionally, the King was guardian of all charitable interests. After the American Revolution, the King’s powers belonged to the governments of the states. However, when the term was adopted in the United States, it appears to have taken on a broader meaning.7 The original prerogatives remained, but the term parens patriae also encompassed the power of the states to sue to protect their sovereign and quasi-sovereign interests.8 Although the historic prerogatives will still have some bearing on the Attorney General’s role in antitrust cases,9 more fundamental issues are addressed by the broader and more recent concept of parens patriae. For it is this doctrine which opens the doors of the courthouse to states and gives them standing to prosecute antitrust actions on behalf of their citizens. B. THE STATE’S POWER AS PARENS PATRIAE TO VINDICATE QUASI-SOVEREIGN INTERESTS The Supreme Court originally developed the law defining quasi-sovereign interests in cases dealing with the Court’s original jurisdiction over suits between states or between a state and a citizen of another state.10 Initially these suits would be over clearly sovereign interests like borders and raised no question about a state’s standing.11 In 1900, the Supreme Court first recognized that a parens patriae action could be brought to vindicate a quasi-sovereign interest.12 In Louisiana v. Texas13 the Court addressed the issue of whether Louisiana had standing to try to enjoin a de facto embargo by Texas, resulting in harm to Louisiana’s economy. Although the Court ultimately decided that original jurisdiction was inappropriate, it recognized that Louisiana’s interest as parens patriae. The Court noted, “Its gravamen is not a special and peculiar injury such as would sustain an action by a private person, but the state of Louisiana presents herself in the attitude of parens patrioe, trustee, guardian, or representative of all her citizens.”14 The Court went on to find:

Inasmuch as the vindication of the freedom of interstate commerce is not committed to the state of Louisiana, and that state is not engaged in such commerce, the cause of action must be regarded, not as involving any infringement of the powers of the state of Louisiana, or any special injury to her

6 Susan Beth Farmer, More Lessons from the Laboratories: Cy Pres Distributions in Parens Patriae Antitrust Actions Brought by States Attorneys General, 68 Fordham L. Rev. 361, 362 n. 5 (1999). 7 Michael Malina and Michael D. Blechman, Parens Patriae Suits for Treble Damages under the Antitrust Laws, 65 Nw. L. Rev. 193, 196 (1970). 8 Id. 9 For example, the Attorney General retains parens patriae supervision over charities, which has some consequences when considering cy pres distributions to these organizations. 10 Malina and Blechman at 202. 11 Id. at 202–03. 12 Alfred L. Snapp & Son, Inc. v. Puerto Rico, 458 U.S. 592, 602 (1982). 13 176 U.S. 1 (1900). 14 Id. at 19.

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property, but as asserting that the state is entitled to seek relief in this way because the matters complained of affect her citizens at large.15

Justice Harlan, in a concurrence, disagreed that a state has standing except to pursue sovereign or proprietary interests.16 A series of cases followed, establishing the state’s power to go to court to protect the health of its citizens by abating public nuisances.17 Further cases established the state’s power to protect the land and air within its borders, even absent any interest in citizens’ health. However, at first the Court refused to permit jurisdiction where the state was bringing a case to protect its citizens’ economic interests.18 In Oklahoma v. Atchison, Topeka, and Santa Fe Railway Co., Justice Harlan, writing for the court, found that the state interest in the action — alleging illegally high railroad charges — was only nominal. The Court held that:

We are of opinion that the words in the Constitution conferring original jurisdiction on this court in a suit “in which a state shall be a party” are not to be interpreted as conferring such jurisdiction in every cause in which the state elects to make itself strictly a party plaintiff of record, and seeks not to protect its own property, but only to vindicate the wrongs of some of its people, or to enforce it own laws or public policy against wrongdoers generally.19

Of course, strictly speaking, this case did not decide the issue of standing, since it was decided on the Constitutional clause establishing original jurisdiction. However, the holding that a state’s interest in enjoining a trade restraint implicitly rested on the finding that the state either had no quasi-sovereign interests, or that such an interest was insufficient in this case. Notably, the Supreme Court itself in 1982, while examining the history of quasi-sovereign interests, did not include the Atchison case in its analysis. In 1945, the Supreme Court found that a state has the standing to sue for an injunction under the federal antitrust laws on behalf of its citizens.20 Although the exact holding of Georgia v. Pennsylvania Railroad has been disputed21 the Supreme Court’s gloss of the landmark case is that the case stands for the proposition that when injury due to anticompetitive practices is sufficiently widespread that states have standing to sue for injunctive relief as parens patriae.22 However, in Hawaii v. Standard Oil Co.,23 the court held that the Clayton Act did not permit a state to recover treble damages when suing as parens patriae.

15 Id. 16 Id. at 24. 17 See Snapp & Son v. Puerto Rico, 458 U.S. at 603 (1982) (listing cases). 18 Oklahoma v. Atchison, Topeka & Santa Fe Railway Co., 220 U.S. 277 (1911). 19 Id. at 289. 20 Georgia v. Pennsylvania Railroad, 324 U.S. 439 (1945). 21 See Malina & Blechman at 210–12. 22 See Snapp & Son v. Puerto Rico at 606–07. 23 405 U.S. 251 (1972).

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C. THE HART-SCOTT-RODINO ACT The landscape was changed in 1976 when Congress passed the Hart-Scott-Rodino Antitrust Improvements Act (HSRA).24 The HSRA amended the Clayton Act to allow states’ attorneys general to bring antitrust actions for monetary relief on behalf of residents in their state:

Any attorney general of a State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States having jurisdiction of the defendant, to secure monetary relief as provided in this section for injury sustained by such natural persons to their property by reason of any violation of the Sherman Act. 15 USC 1–7.25

Additionally, HSRA explicitly provided for the state to recover treble damages in such an action.26 HSRA also provided for notice to the residents whose claims would be adjudicated, and for an opt-out mechanism by these residents.27 Because of the procedural parallels, HSRA often is said to have given the states’ attorneys general the power to bring class actions on behalf of consumers harmed by antitrust violations. A notable difference however, is that HSRA provides for proof of damages in the aggregate:

[D]amages may be proved and assessed in the aggregate by statistical or sampling methods, by the computation of illegal overcharges, or by such other reasonable system of estimating aggregate damages as the court in its discretion may permit without the necessity of separately proving the individual claim of, or amount of damage to, persons on whose behalf the suit was brought.28

Normally, damages in class actions must be proven individually, but “[i]n authorizing estimation of damages, Congress recognized that there was no reasonable alternative to ensure that such cases could be pursued, while also maintaining judicial efficiency.”29 Indeed, Congress’s goal in passing HSRA was to encourage suits to be brought for redress of antitrust violations which cause damages that are too small and widespread to be brought by any individual consumer, and that class actions faced difficult procedural hurdles. “The legislative history of the Act demonstrates that Congress sought to achieve three goals: (1) compensation of victims of antitrust violations; (2) disgorgement of profits by the offenders; and (3) deterrence of future anticompetitive actions.”30 States’ attorneys general were thought to be well suited to fill the void. In part, this was due to the state’s traditional role in protecting the health and welfare of its residents.31 Additionally, attorneys general were thought to be accountable to their populations, due to the fact that the vast majority of these offices are filled

24 Pub. L. No. 94-435 25 Id. at § 301. 26 Id. 27 Id. 28 Id. 29 Farmer at 382 (internal citations omitted). 30 Id. at 377. 31 See H.R. Rep. No. 94-499, at 5.

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through popular election.32 Finally, and most importantly for purposes of this paper, enforcement of antitrust laws at the state level had the advantage of being able to provide compensation to consumers.33 In order for this advantage to be realized, courts and attorneys general soon realized that a system was needed to distribute part or all of the class recovery in these cases. III. CY PRES Cy pres has been variously described as a legal doctrine and a method of distribution.34 Originally developed in the common law of trusts, it is now used not only by state attorneys general, but by private class action plaintiff in antitrust, mass tort, environmental, and civil rights class actions. It is perhaps most common, for reasons to be explored more fully below, in antitrust actions brought by states’ attorneys general as parens patriae, representing a class of consumers from their state. Before turning to the decision making process within an attorney general’s office, it is important to understand the outer bounds of the options available when considering a cy pres distribution. The legal rules, in addition to providing hard limits on attorney general discretion, also embody certain principles which attorneys general should consider when fashioning remedies. A. HISTORY The term cy pres is derived from the Norman French “cy pres comme possible.” Literally, this translates to “as close as possible.” The doctrine was first employed in the United States as a tool for construing charitable bequests. American courts turned to the English doctrine of cy pres to deal with the problems that arise when the wishes of testators are either impossible to determine or fulfill.35 For example, a testator may leave funds to an organization which no longer exists, may phrase her gift indefinitely (e.g., “I leave all of my assets to charity.”), or may name a trustee for her charitable gift who predeceases her. In such situations, a court invokes the cy pres doctrine to try to save the gift, by putting it to a use that is similar, or “as close as possible” to the testator’s wishes. 1. Cy Pres in the Law of Trusts Lost in many recent discussions of the history of the cy pres doctrine is an important subtlety, the brief exploration of which may lead to a fuller understanding of the possible roles of the Attorney General in distributing cy pres funds. English law recognized two categories of cy pres: judicial and prerogative. The prerogative power rested originally in the king, who had

32 See Id. 33 See Farmer at 377. 34 See e.g., Huelin, Robert, Building a Better Mousetrap: Cy Pres Distribution Mechanisms for the 21st Century, National State Attorneys General Program at Columbia Law School, Attorney General Library at 1, available at: http://www.law.columbia.edu/center_program/ag/Library/AG_Std_Papers#93126; Miyakawa, Hiromitsu, “Promotion of Antitrust and the Public Interest Through Use of Cy Pres Distribution.” The American Antitrust Institute (2003), available at: http://www.antitrustinstitute.org/recent2/283.pdf. 35 “A Revaluation of Cy Pres” 49 Yale L. J. 303, 303 (1939).

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jurisdiction over charities through his position as parens patriae. This power was then gradually taken over by the king’s council, and then by the chancellor.36 The chancellor, as a judicial officer, also exercised the judicial power.37 Judicial cy pres more resembles cy pres as currently applied in the law of trusts. Its function was to ensure that the intent of the donor was approximated.38 39 Prerogative cy pres was a discretionary power of the crown — often used to block gifts to outlawed religious groups, or other gifts deemed to be against public policy. Often these prohibited gifts would be deemed to fall to the king.40 Over time, the distinction in England between the two strands of cy pres became a mere formalism, without any substantial difference in application or result.41 However, the law in the United States was heavily influenced by concerns about the abuses which had occurred under uses of prerogative cy pres. Many courts refused to apply prerogative cy pres, voiding any gifts which fell under its traditional ambit. This resulted in minor formalistic failures of a bequest having large practical consequences. 2. Cy Pres in Class Actions The underlying concept of cy pres — putting funds to their next best use — has become increasingly common in other contexts. Courts have adopted this doctrine from the law of trusts, and turned it into a method to solve a recurring problem in large class actions. In many actions, especially those where each individual class member’s recovery is small, there are leftover funds from the judgment or settlement. These leftover funds are the result of class members who cannot be identified or located, or who simply fail to claim their portion of the recovery.42 Courts have used the philosophy behind the cy pres doctrine as a guiding principle, by putting the funds to their “next best” use. Sometimes, a court will order that funds not be paid to class members because the costs associated with distribution are larger than the recovery.43 This will be the case where each class member’s claim (or the recovery of each member of a subset of the class) is very small. If a court so orders, this will result in a cy pres distribution for the entire recovery, not merely the excess after claims are paid out. This paper will use the term “traditional cy pres” to refer to the doctrine as applied to the first category — when funds from a class action judgment or settlement are leftover after class members have had the chance to file individual claims. The term “expansive cy pres” will be used to refer to the second category — where the court determines (or parties agree, with the

36 Id. at 304. 37 Id. at 305. 38 Id. at 305. 39 There is some evidence that the original purpose of applying judicial cy pres was not to effectuate the intent of the donor. In the 15th century, charitable gifts were seen as a way for the deceased to pave his way to heaven. Under this mindset, the primary goal of cy pres was not to closely match the testator’s intent but to ensure his salvation, and therefore every effort was made to ensure that the gift was still put to charitable use. Id. at 309. 40 Id. at 305. 41 When a gift was bequeathed to charity generally with no trustees named, it would be distributed under prerogative cy pres. When a trustee was named, but the trustee failed to distribute all of the funds (possibly due to the trustee’s death), the gift would be distributed under judicial cy pres. Over time, in England, both of these would be applied by the courts in the same way. 42 Farmer at 393; See also Kevin M. Forde, What Can a Court Do with Leftover Class Action Funds? Almost Anything!, 35 No. 3 Judges’ J. 19, 19 (1996). 43 Forde at 19.

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court’s approval) that class members will not receive any individual compensation, and the entire fund is to be distributed cy pres. As early as 1946, a California court used the fluid recovery doctrine44 in this expansive way in a class action. Market Street Railway Co. v. Railroad Commission dealt with bus fare overcharges, and the court, finding that passengers would not claim their small refunds, ordered the remainder of the damages to be used to improve the railway system.45 3. The Growth of Expansive Cy Pres in Parens Patriae Antitrust Cases The past twenty-five years has seen the growth of the use of expansive cy pres in antitrust cases brought by attorneys general on behalf of consumers. This use tends to cause more controversy than traditional cy pres. Under traditional cy pres, before any funds are put to an alternate use, all injured plaintiffs have had the opportunity to opt-out of the class action all together, opt-out of the settlement (if the case did not go to final judgment), or file a claim for individual compensation. In expansive cy pres, this last option is foreclosed. Indeed, no effort is made even to try to directly compensate individual members of the class. At the same time, the settlement binds the class members — those who did not opt-out of the case or settlement — and precludes any individual recovery. i. A First Step: New York v. Dairylea Cooperative, Inc. The first use of expansive cy pres in an antitrust parens patriae case brought under HSRA was in 1982.46 In New York v. Dairylea Cooperative, Inc.47 the New York Attorney General represented approximately 4.4 million New Yorkers in an antitrust action alleging a price fixing conspiracy.48 The defendants settled for a total of $6.1 million, which the court estimated would result in individual compensation of $1.50 per household or $0.50 per person, before deducting costs. Additionally, the court found that 36–50% of the affected population had changed between the beginning and end of the conspiracy. Finally, the court found that it would have cost $2.5 million to distribute the funds. The Attorney General proposed printing $0.25 coupons on milk cartons, redeemable on any brand of milk. The court rejected this proposal, citing inter alia the effect of the coupons on the market. The court further decided that allowing consumers to make individual claims was too difficult and costly. Ultimately, the court chose that the entire settlement fund be distributed to schools in the affected area, to be used on nutrition programs and other nutrition related purposes. ii. Jumping in with Both Feet: the Sneaker Cases The first multistate antitrust parens patriae case brought under HSRA was also another major step in the use of expansive cy pres in cases brought by states’ attorneys general on behalf of their consumers. In 1994, the fifty states and the District of Columbia alleged that Keds, a

44 Fluid recovery is the name often used in the class action context for cy pres (and similar) distributions. 45 Market Street Railway Co. v. Railroad Commission, 171 P.2d 875 (Cal. 1946). 46 Farmer at 402. 47 New York v. Dairylea Cooperative, Inc., 547 F. Supp. 306 (S.D.N.Y. 1982). 48 Farmer at 402.

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sneaker manufacturer, had engaged in price-fixing.49 A settlement was reached for $7.2 million, with $5.7 million to be distributed to charities. Each state would receive a share of the settlement proportional to its population, and each would determine which charities would receive their share of the funds. State could choose from a list of five agencies or choose any other charities which benefited women between fifteen and forty-four years old.50 The court approved the settlement, noting that the states alleged overcharges of approximately $1.00 per pair of shoes sold.51 The court further noted that the costs of distribution would swallow up the benefits. The next year, a similar claim was brought against Reebok and Rockport.52 Again the defendants settled with all fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The settlement provided for the entire fund of $9.5 million, after deducting fees and expenses, to be distributed cy pres. Each state could take their proportional share of the settlement in cash or shoes, to be distributed to public, non-profit or charitable organizations, for use for athletic facilities, equipment or services.53 The court found that the costs of distribution would be inefficient: experts estimated that it would cost $2.47 to process each of 1.3 million claims worth about $4. The district court also found a large risk of fraudulent claims, and approved the settlement. The Second Circuit affirmed on appeal. iii. The Other Shoe Drops: Nine West More recently, the states, along with the FTC, brought suit against Nine West, a women’s shoes and accessories retailer, alleging vertical price fixing.54 The settlement agreement provided for $30.5 million to be distributed to consumers.55 Because of difficulties in identifying class members and the high distribution costs compared to the individual claims, the funds were distributed cy pres. Each state could choose to distribute the money to the state directly, a sub-division of the state, or a non-profit or other charitable organization. The money was to be used for women’s health, educational, vocational, or safety programs.56 The actual distributions in the Nine West case raised some controversy, but more importantly raise fundamental legal questions about the role and duties of the states’ attorneys general in distributing cy pres funds, as first identified by Robert Huelin. The three distributions Huelin identified frame some of the issues, which will be examined below. South Carolina’s Attorney General Charles Condon, while campaigning for his party’s gubernatorial nomination, traveled the state and conspicuously distributed grants from the fund to anti-abortion crisis pregnancy centers. In Wisconsin, under Attorney General James Doyle, the largest grant was given to the Wisconsin Alliance for Boys and Girls Clubs. With Attorney General Richard Blumenthal’s support, Connecticut disbursed the money to the state’s

49 New York v. Keds Corp., 1994 WL 97201 at *1 (S.D.N.Y. Mar. 21, 1994). 50 Id. at *1. 51 Id.; Farmer at 400. 52 New York v. Reebok Int’l Ltd., 903 F. Supp. 532 (S.D.N.Y. 1995). 53 Id. at 532; Farmer at 400–01. 54 Huelin at 1. 55 Florida v. Nine West Group Settlement Agreement, No 00-CV-1707, 8-9 (S.D.N.Y. March 6, 2000) available at http://www.oag.state.ny.us/business/antitrust/pdfs/ninewest.pdf. 56 Huelin at 1.

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Department of Public Health, to be used to provide breast and cervical cancer treatment services.57 B. CURRENT STATE OF LAW There is some confusion over what constitutes cy pres distributions. Some commentators use “cy pres” to refer to all methods of distribution other than direct, individual compensation to each class member.58 Other commentators use the term to refer exclusively to disbursements to charity from unclaimed funds (or the whole fund in expansive cy pres cases). Adding to the confusion is the proclivity of some courts and commentators to use “fluid recovery” for different legal concepts. Some courts use the term to refer to a legal device for proving damages in a class action in the aggregate, rather than proving damages to individual class members, along with the use of unclaimed funds to indirectly benefit class members. Other courts use the term exclusively to refer to the method of spending unclaimed funds. Federal courts59 have generally disapproved of fluid recovery when such a term is used to refer to a method of proving damages in the aggregate, holding that such a method is unauthorized by the Federal Rules of Civil Procedure and violates the constitutional requirements of due process.60 On the other hand, courts have approved the use of fluid recovery merely as a method of distributing unclaimed class funds, or even for distributing an entire recovery when individual compensation is unmanageable.61 Even in those jurisdictions where courts have been reluctant to approve cy pres distribution after a judgment, cy pres has been approved in the settlement context.62 Courts tend to be less intrusive in cases brought by states’ attorneys general than in cases brought by private class counsel.63 Courts, probably reasonably, trust attorneys general more than private counsel. The former are elected public officials whose actions are more or less transparent, while the latter have no such transparency and who may be motivated by private pecuniary gain. Antitrust actions, particularly multistate antitrust actions are often complicated, time-consuming cases, and the judge is often more than willing to clear his docket by approving a cy pres distribution — and letting the attorney general sort out the minutae of where the money goes.64

57 Id. at 1–2 58 See e.g., Forde at 19, Miyakawa at 3. 59 Because multistate antitrust cases are the focus of this paper, this paper will focus on the law of cy pres in federal courts. 60 Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973). Of course, HSRA has specifically permitted this method of proving damages in actions brought by states’ attorneys general under the Clayton Act. 61 Re: “Agent Orange” Product Liability Litigation, 818 F.2d 179 (2d Cir. 1987); See also Wilson v. Southwest Airlines, Inc., 880 F.2d 807 (5th Cir. 1989), Re: Folding Carton Antitrust Litigation, 744 F.2d 1252 (7th Cir. 1984), Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990), and Nelson v Greater Gadsden Housing Authority, 802 F.2d 405 (11th Cir. 1986). 62 Forde at 20. 63 In addition to reduced judicial oversight, cases brought by attorneys general tend to result in broader settlement agreements, due to a variety of factors. See Huelin at 4. 64 See generally Huelin at 4.

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C. METHODS OF CY PRES DISTRIBUTION After determining that cy pres distribution (with the broadest meaning of any distribution other than a direct one) is appropriate at all, it is necessary to decide what method of indirect distribution to use.65 In addition to charitable distribution, courts have considered a variety of techniques for distributing unused class action recoveries. Among these are: escheat to the state, reversion to defendant, additional disbursement to claiming class members, and future price reductions. Only the last of these is a reasonable alternative to charitable distribution when distributing an entire recovery, but the legal and practical consequences of each of these alternatives informed the decision making process of the court and the attorney general in determining a distribution plan. 1. Escheat Generally, funds which are deposited in the United States Treasury to satisfy a judgment and remain unclaimed for five years escheat to the federal government.66 Courts have approved funds to escheat to the government in certain circumstances,67 and the court in Six Mexican Workers found that such distribution is proper when it serves the deterrence and enforcement goals of the substantive federal statute under which the action is brought or where a charitable distribution is inappropriate and reversion of the funds to the defendant is contrary to the goals of the statute.68 Under 28 U.S.C. 2042, late claimants may still be paid, even after title to the money has passed, so this is not a permanent forfeiture. 2. Reversion to Defendant As noted in section III.C.1 above, reversion to the defendant is appropriate where it does not run contrary to the goals of the substantive statute sued under.69 In Van Gemert v Boeing Co.70 the court held that it was within the discretion of the district court to approve reversion to defendants of excess funds in a breach of contract action where defendants had acted free of bad faith and in reliance on legal advice.71 The order which was affirmed also provided that claims would be paid in perpetuity and that notice of the unclaimed funds would be published for ten years.

65 Again, some commentators would consider these plans to be alternatives to cy pres distribution rather than methods of cy pres distribution, but the distinction for present purposes is merely semantic. The essential question addressed by this section is whether funds should be distributed to charities or used in some other way. 66 28 U.S.C. 2042. 67 See Van Gemert v Boeing Co. 739 F.2d 730 (2d Cir. 1984), Re: Folding Carton Antitrust Litigation 744 F.2d 1252 (7th Cir. 1984), Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990), Tim A. Thomas, “Permissible methods of distributing unclaimed damages in federal class action” AMERICAN LAW REPORTS, 107 A.L.R. Fed. 800. 68 See Six Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301 (9th Cir. 1990). 69 See id. 70 739 F.2d 730 (2d Cir. 1984). 71 See Thomas at § 9a.

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3. Additional Disbursement to Class Members The additional disbursement of unclaimed funds to class members who have already claimed their recovery is impermissible when the fund is the result of a judgment.72 However, an additional disbursement is permitted when specifically provided for in a settlement agreement.73 4. Future Price Reductions An option considered specifically in antitrust actions is the distribution of the recovery through a reduction in the future price of the good or service which is the subject of the action. This option was considered and rejected by the court in Dairylea74 a case brought by the New York Attorney General under HSRA. In that case, the settlement provided for a distribution of $750,000 through “cents-off” coupons, to be printed on Dairylea’s products and to be redeemable for Dairylea milk and milk products.75 The court held that such a plan would give Dairylea a significant competitive advantage in the future, as its milk would be cheaper than its competitors. “As I read it, the plan which plaintiff and Dairylea propose converts a ‘compensatory’ legal settlement into a marketing program.”76 Additionally, the court noted that the plan made no efforts to ensure that the compensated consumers were those injured in the past.77 These are the general criticisms of coupons or other future price reduction plans: that the plan turns the defendant company’s wrongdoing into a future benefit by granting the company a competitive advantage, and that the plan doesn’t compensate the injured consumers. However, these shortcomings are not insurmountable. Indeed, the court in Dairylea did not condemn coupon plans completely, noting, “I decline to approve such a settlement where it appears possible to develop an appropriately compensatory couponing program which does not disadvantage Dairylea's competitors at every turn.”78 The court even went so far as to say that if the proposed plan was the only workable alternative that it may be approved, but that a more detailed record must be developed to demonstrate that to be the case.79 A similar program was approved in an action alleging that a grocery store chain and ten grocery store manufacturers conspired to reduce the number of discount coupons available to consumers.80 The defendants agreed to a settlement of $4.2 million in coupons. In that case, the coupons could be used in any grocery store and could be redeemed for any products.81 Additionally, the conspiracy was alleged to have existed between 1995 and 1997, and the

72 See Thomas at § 2 (“Distribution of unclaimed damages to previously claiming class members has been disapproved, but it has been held that where a class action has been resolved by settlement, unclaimed funds may be distributed to class members who have already made damage claims if the parties' settlement agreement provides for this disposition.”) 73 See Van Gemert. 74 547 F. Supp. 306 (S.D.N.Y. 1982). 75 Dairylea at 308. 76 Id. 77 Id. (“Further, this plan seems unfair to those actually injured for it makes no effort to specifically reimburse those who were allegedly overcharged in the past but in effect is a payout to future milk drinkers in general.”) 78 Id. 79 Id. at n2 (“It may eventually appear that the here-proposed general approach to the instant settlement, poor though I view it, is the only practical alternative, but on this record that is not apparent.”) 80 In re Western New York Coupon Litig., No. 97 CV-0707 A(M), Final Judgment, at 5-8 (W.D.N.Y. Mar. 18, 1997); See also Farmer at 403–04. 81 Farmer at 403–04.

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settlement was in 1997, so there was not the same problem of a large time lapse as in Dairylea.82 The propriety of coupon settlements, or other price reduction settlements, is thus dependent on the context of the case, and on the creativity of counsel.83 5. Alternative Distributions in State Attorney General Antitrust Actions. Of these alternatives, the last gets the most consideration in the antitrust context. Certainly, it is the only logical alternative when an entire recovery fund is to be distributed cy pres. Even where only unclaimed funds are to be distributed in an action under HSRA, reversion and escheat are inappropriate. The statutory purposes of HSRA are compensation for victims and disgorgement of profits by offenders.84 Reversion fails to meet both of these purposes, and escheat fails to compensate victims. Under the test of Six Mexican Workers, these distributions are therefore inappropriate. Attorneys general and courts have the discretion to fashion a remedy including extra payments to claiming class members or future price reductions, and must weigh these alternatives against charitable distribution when determining the “next best use” of funds. IV. THE SCOPE OF THE ATTORNEY GENERAL’S DUTIES IN DISTRIBUTING CY PRES FUNDS AS PARENS PATRIAE Robert Huelin argues that “[t]he attorney general represents the people of the state as a whole in her anti-trust actions, not solely the injured class of consumers.”85 This is undoubtedly true, as is made clear by Louisiana v. Texas and Georgia v. Pennsylvania Railroad.86 The attorney general as parens patriae may sue under the antitrust laws on behalf of the state as a whole, for injuries suffered apart from the injuries to any individuals. However, this is also beside the point. When bringing a claim for treble damages under the Hart-Scott-Rodino Act, the attorney general is acting on behalf of the injured consumers, distinctly from his representation of the state as a whole in the claims for injunctive relief. HSRA provides: “Any attorney general of a State may bring a civil action … as parens patriae on behalf of natural persons residing in such State, … to secure monetary relief as provided in this section for injury sustained by such natural persons to their property…”87 The Act provides explicitly that the claim for money damages is brought on behalf of the injured persons to secure relief for those persons. The attorney general could not bring such a claim at common law. Apart from the plain meaning of the statutory language, it is clear from the overall structure of the Act and from its legislative history that any recovery was for the benefit of the injured consumers. The Act establishes a parallel procedure to the standard class actions of Rule 23 of the Federal Rules of Civil Procedure. The Act provides that the resolution of the attorney

82 Id. at 404. 83 For example, coupons usable on a variety of products may be a workable solution in the grocery context, where the products and stores are fairly interchangeable, and where purchases are frequent and small. However, they may be impossible in other contexts such as automobiles, where someone who has overpaid for a car may not be making another purchase for some time. New, creative solutions to the problems of price reduction settlements would be needed in these cases. Of course, it is precisely the situation where purchases are frequent and small that cy pres distributions are needed in the first place. 84 See supra § II.C. 85 Id. at 10. 86 See supra § II.B. 87 Pub. L. No. 94-435 § 301.

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general’s action will be res judicata with respect to all represented consumers.88 These sections clearly establish that Congress intended for the attorneys general, in pursuing money damages, to be recovering the property of the individual consumers, not recovering funds for the state as a whole. The legislative history makes this even clearer. The main goal of HSRA was to ensure compensation for consumers.89 Thus, the mere appellation “parens patriae” to the attorney general’s role in pursuing a claim for treble damages under HSRA does not release the attorney general from her special obligation to ensure that any recovery redounds to the benefit of injured consumers. Although the attorney general indeed represents the state as a whole in bringing an antitrust action, the HSRA instructs that in pursuing a claim for monetary relief, an attorney general acts on behalf of the injured consumers. The attorney general must therefore ensure that the interests of the injured class are protected. The class has a property interest in the funds from the recovery: indeed, once the attorney general has recovered funds on their behalf, they are precluded from pursuing individual claims. The attorney general, therefore, as much as possible, must protect the property interest of the consumers on whose behalf they brought the claim. This does not deny the attorney general’s broader duties as parens patriae to represent to the whole state, but merely recognizes that with respect to the particular funds recovered in the consumers’ name, that the state as a whole has no claim to them. The ramifications of this conclusion are two-fold. First, an attorney general must favor a direct distribution as much as is practicable. Some argue that the state is better served by charitable distributions.90 However, even if true, this justification cannot stand under the forgoing analysis. In this particular instance, the attorney general cannot balance the interests of the state and the class of consumers, but must prioritize the consumers’ compensation. One might argue that charitable distributions do compensate consumers, and this is of course the goal. However, the law of cy pres indicates that the doctrine is only to be applied when the best use of funds isn’t available. In the law of trusts, this is when the testator’s wish is impossible to fulfill or determine. This has been expanded slightly in the law of class actions and HSRA because these distributions involve higher costs than disbursement from a single estate to a single trust or charity. Therefore, in the law of class actions and HSRA, cy pres may be used when direct distributions (the “best use” of funds, analogous to the testator’s actual expressed wish) are impossible or too costly. No one would argue that the attorney general should approve a plan costing $1 million to distribute the same amount to consumers. The decision is less clear-cut when the amount of recovery is slightly more than the cost of distribution, but what is most important is for the attorney general and her staff to keep in mind that their duty is to put funds to the best use — direct distribution — whenever possible.

88 Id. (“The final judgement in an action under subsection (a)(1) shall be res judicata as to any claim under section 4 of this Act by any person on behalf of whom such action was brought and who fails to give such notice within the period specified in the notice given pursuant to paragraph (1) of this subsection.”) 89 Farmer at 377. 90 See, e.g., Huelin at 10.

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The second ramification, when a direct contribution is still impossible, an attorney general must endeavor to ensure that funds are directed to the genuine “next best use” as defined by the law of cy pres. If a charitable distribution is chosen, funds must be directed to a charity which will benefit the injured class, narrowly defined. If this is difficult or impossible, the attorney general must make every effort to craft a creative and effective alternative distribution plan, possibly in the form of a future price reduction. This theory is not uncontroversial. The New York State Bar Association has said:

While the classic definition of cy pres is an award that is tied as nearly as possible to the gravamen of the litigation, the case law suggests more fluid parameters. In the real world of class action settlements, the connection between the class, and the harm done to them, and the cy pres award can range from very closely aligned to very tenuous. The parties are often only limited by their own creativity and ability to convince the judge that what they are proposing makes sense.91

The NYSBA argues that a court can use its broad equitable powers to approve a cy pres distribution even when not closely related to the litigation.92 Other commentators have noted that the standard requirement of a nexus between the litigation and the “next best use” has been ignored by some parties and some courts. “In the caselaw, it appears that while some cy pres distributions proposed to courts (and in some cases approved) have adequately reflected this nexus between the injured class and the cy pres distribution; in other cases the nexus is remote or completely absent.”93 Despite the growing tendency of parties and courts to ignore the nexus requirements of cy pres — aided by organizations like the NYSBA that want to receive cy pres funds, attorneys general should remain mindful of the duties they have to the consumer class. Even if attorneys general can get away with ignoring the nexus requirement — which is becoming increasingly probable, if not yet likely — they should not. When attorneys general file a case under HSRA they effectively take away any chance of a private class action, despite the opt-out provisions. A single consumer can opt-out, but if they are the only one to do so, they will not be practically able to file a suit. For this and the other reasons outlined above, attorneys general should be mindful of their special responsibilities to the injured consumer class when filing an HSRA claim. V. CURRENT CY PRES PROCEDURES Most attorneys general still enjoy broad discretion in deciding when cy pres distributions are appropriate, when to use charitable distribution as a cy pres method, and how to distribute the money to charity. The decision-making procedures for the first two questions are similar across most states, due to the fact that most of these decisions are made on the multi-state level. The procedures vary most once a state has been given a grant of money and must determine how to distribute it. This section will look at several techniques that have been employed, drawing upon

91 New York State Bar Association, Manual on Cy pres For Legal Services, at 4 (January 2007). 92 Id. 93 Foer, Albert A. and Amore, Robert, “Cy Pres as an Antitrust Remedy.” The American Antitrust Institute (2003), Working Paper No. 05-09 at 15 (October 27, 2005) (internal footnotes removed).

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the experiences of a recent antitrust case to highlight some issues which will be addressed more fully in the following sections. A. PRE-SETTLEMENT: WHETHER TO USE DIRECT OR CY PRES DISTRIBUTIONS The vast majority of recoveries in antitrust actions by attorneys general are the product of settlements rather than judgment. Often, these settlement agreements provide for whether direct or cy pres distribution will be used, and if a charitable distribution is designated, will define the uses to which the funds must be used, though usually without specifying individual charities. These decisions are therefore made primarily by the staff attorneys on the case, and if it’s a multi-state case, will be made collectively for all states at once.94 Officially, ultimate authority for the decision rests with the attorneys general, though the amount of attorney general involvement varies.95 In practice, the decision is made as a product of discussions and negotiations among the assistant attorneys general on the case.96 This decision is subject to the legal limits of cy pres distribution, but there are few institutional or political limits to enforce these legal requirements.97 As noted above, courts give greater leeway for cy pres distributions in settlements than after judgment. Courts are most used to the standard civil litigation paradigm where parties are the best judges of their own interests. Of course, courts are used to protecting the interest of absent class members in class action settlements, but some of the standard concerns are alleviated when the attorney general takes the place of private attorneys. So, courts often grant broad discretion to attorneys general to craft settlement agreements. However, this discretion is not completely unfettered, as the court’s decision in Dairylea makes clear. Courts still do review settlements for fairness to the class, as well as to ensure that direct distributions are truly impracticable before allowing cy pres distributions. However, they give greater discretion to attorneys general than to private attorneys. Defendants have even less incentive to interfere with the states’ wishes regarding distribution methods. Defendants want peace at the cheapest price, which they may be able to get by allowing the states the distribution method they want.98 In fact, if defendants do have a preference with regard to distributions, they may prefer a charitable distribution, particularly if it would be in-kind rather than cash.99 Any kind of charitable distribution might allow the defendant to spin the settlement and get positive — or less negative — public relations benefits. An in-kind distribution may be more likely to provide such a benefit — the distributions going to charity are more clearly identified as coming from a particular company.100 Additionally, in-kind distributions may be cheaper for the defendants. So, if defendants have any preference of one type of distribution or another, it is in favor of charitable distributions. Defendants are therefore unlikely to provide a meaningful check on attorney general decisions.

94 Telephone interview with Kevin O’Connor (April 13, 2007). Telephone interview with Tina Kondo (April 13, 2007). 95 Kondo, supra note 94. 96 O’Connor, supra note 94. 97 Huelin at 4. 98 Huelin at 4. 99 For more extensive discussion of in-kind distributions, see infra § VI.B.3. 100 This assumes that defendants do not try to dump low-quality or obsolete product on charities and suffer the attendant negative publicity.

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With neither the courts nor defendants having great incentives to object to settlement, the primary institutional limits on the decision whether to use cy pres are from within the attorney general offices, either the assistant attorneys general on the case or higher in the hierarchy. In some states, the staff attorneys on the case only make recommendations about whether to use cy pres and the decision is made by others in the office.101 In deciding whether to write a cy pres distribution into the settlement agreement — and thus bind all states to a cy pres distribution, attorneys in attorneys general’s offices are guided primarily by the expected costs of distribution.102 Some states have written policies about cy pres, and some do not, but all states rely on the discretion and judgment of their attorneys rather than on bright line quantitative rules.103 For example, the Washington cy pres guidelines say that cy pres distributions should be used when direct distributions are “difficult,” “impracticable,” or not “reasonabl[e].”104 The costs of distribution are influenced by a variety of factors. One of the most important is whether there is any way to identify members of the injured class. While this is often possible in consumer protection cases, where the defendants will have customer lists and contact information, this is often impossible in antitrust cases.105 In antitrust cases, the injured consumers are often the consumers which did not purchase goods, due to inflated prices or artificially limited supply.106 Where this is the case, it is impossible to identify consumers. O’Connor estimates that in cases where the claims process relies on self-identification that less than 10% of potential claims will be filed.107 Obviously, if the claims administrator has to try to track down potential claimants, the distribution will be more expensive. Another factor which will be relevant is the estimated size of each claim. Since the costs of distribution, at least in part, increase with a greater number of claims, having small claims is more likely to swallow up the distribution in costs. For example, if each claim costs $5 to process, the relative costs are lower where each claim is worth $50 than where each claim is worth $10. In the first situation, the costs, even if the same in absolute dollars, are much lower as a percentage of the recovery. Instead of considering this as a measure of costs, this could also be considered a measure of benefits, to be weighed against costs, but the results are the same. Once a cy pres distribution is chosen, attorneys general usually choose a charitable distribution as the cy pres method. Again, this decision is made primarily by the attorneys working on the case when they craft the settlement agreement. Once a cy pres distribution has been put in a settlement agreement and approved by a court, the office cannot change the distribution method, so the power that the staff attorneys have in most offices to write settlements without much interference normally means their decisions are dispositive. B. POST-SETTLEMENT: WHICH CHARITIES? There tends to be more variety between states in the procedures used to choose beneficiaries for the cy pres funds. This is likely due to the fact that while the prior questions are 101 Kondo, supra note 94 102 Id.; O’Connor, supra note 94 103 Washington is an example of a state with a written cy pres policy. Kondo, supra note 94. Wisconsin does not have a written cy pres policy. O’Connor, supra note 94. 104 Washington Office of the Attorney General Cy Pres guidelines. Email from Tina Kondo, April 12, 2007. 105 O’Connor, supra note 94. 106 O’Connor, supra note 94. 107 Id.

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often addressed at the multi-state level in the settlement agreement, choosing beneficiaries is usually done by each state individually, within the broad guidelines of the settlement. For example, the Nine West Settlement Agreement provided that:

Each Plaintiff State, through its Attorney General or as otherwise authorized by state law, shall direct that its pro rata share of the Distribution be distributed to that State, a political subdivision(s) thereof, a not-for-profit corporation(s) and/or a charitable organization(s) with express conditions ensuring that the funds be used to fund women's health, women's educational, women's vocational, and/or women's safety programs.108

Likewise, the settlement in In re: Compact Disc Minimum Advertised Price Antitrust Litigation, discussed infra, provided that:

Plaintiffs and Distributor Defendants have agreed on the Music Products to be provided to Plaintiffs by Distributor Defendants. These Music Products are prerecorded album length music compact discs. Per the terms of the Settlement Agreement between Plaintiffs and Distributor Defendants, these compact discs are to be distributed by the Plaintiffs pursuant to the Cy Pres Distribution Plan (to be submitted with the Motion for Final Approval) to not-for-profit corporations and/or charitable organizations and/or governmental or public entities, with express conditions ensuring that these compact discs be used to further music-related purposes or programs reasonably targeted to benefit a substantial number of the persons who purchased Music Products from one or more retailers.109

As can be seen from these two cases, settlements vary to some degree in how narrowly they define the possible uses of funds. In In re: Compact Disc, the settlement agreement does little more than reemphasize the legal principle that funds should be used to benefit the injured class, without defining that class any more explicitly. In Nine West, the settlement agreement, while still broad, at least implicitly defines the class of injured consumers as women. Of course, in only defining the outer bounds of permissible uses of the money, even more narrow settlements like Nine West allow each attorney general a great deal of discretion in where to allocate funds. Courts, though they still officially have a supervisory role over distributions, rarely get involved after a settlement has been approved. Even within offices, procedures often vary from one case to another as the situation requires.110 As noted above, some offices have written policies for cy pres, and some do not, but where written policies exist, they usually more extensively address this question than the prior ones.111 The policies tend to address more specific points on this issue. For example, the Washington cy pres policy specifies that, “the AGO may involve outside individuals and entities in the decision making process in a cy pres distribution of recoveries to organizations,

108 Nine West Settlement Agreement, supra note 55. 109 In re: Compact Disc Minimum Advertised Price Antitrust Litigation, proposed Distribution Plan, available at http://www.musiccdsettlement.com/english/default.htm. 110 Kondo, supra note 94. 111 Washington Cy Pres guidelines, supra note 104.

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individuals, and other entities.”112 The policies are not comprehensive, however, and much discretion remains for attorneys general and their offices when distributing cy pres funds. Because the distribution procedures vary, any description of the process cannot incorporate all of the unique methods used in different offices. Also complicating matters is that sometimes distribution plans are incorporated into settlements, and sometimes only the broad guidelines are so incorporated.113 Robert Huelin described the procedures in place in the Utah Attorney General’s Office in 2003, which are a useful example of one of the more formalized structures in place. Most offices do not have such a formal procedure, relying instead on the experience and judgment of its antitrust division attorneys.114 The first step in distributing cy pres funds in most states is to form a team to organize the process. States vary in who forms and leads this team. In Wisconsin, the attorney general appoints the members of a small team.115 Other states have larger teams,116 and often the chief of the antitrust division is in charge.117 States also vary in how the team is comprised. Sometimes the attorneys who worked on the case are included in the cy pres team, though not always. Kevin O’Connor says that when he worked on a case, he preferred not to be on a cy pres team, since he wanted someone independent for that role.118 In Wisconsin, the AG would appoint both lawyers and non-lawyers to the team, and would particularly try to get people on the team who know about the topical area.119 For example, if funds are to be used for a health issue, the attorney general would try to put people who know about the health care area on the team. After forming a team, Utah, Huelin’s exemplar state, uses a four step process, managed by the chief of the antitrust division. First, the nature of the injured class is identified, based on factors such as severity, frequency, and scope of the harm suffered.120 Second, potential fund recipients are determined, either the pool of actually injured parties or groups that provide services to the injured parties.121 An internal inquiry is directed toward finding appropriate recipients, based on the relationship between the recipient and the injured class and the recipient’s ability to effectuate the goals of the distribution.122 Third, after this internal inquiry is finished, the office contacts potential recipients to discuss the potential grant, or solicits proposals from the potential recipients already identified. At this stage, the office also accepts unsolicited proposals from recipients.123 This is also the step in the process that some states contact legislative leaders to discuss potential distributions. Finally, the office reviews proposals and determines where funds will be distributed.124

112 Id. 113 The states’ distribution plans were incorporated into the settlement in In re: Toys “R” Us Antitrust Ligitation, 191 F.R.D. 347 (E.D.N.Y. 2000). The distribution plan in Nine West only provided for the broad purposes to which the funds were to be used. 114 Kondo, supra note 94; O’Connor, supra note 94. 115 O’Connor, supra note 94. 116 Id. 117 Huelin at 4. 118 O’Connor, supra note 94. 119 Id. 120 Huelin at 5. 121 Id. 122 Id. at 5–6. 123 Id. at 6. 124 Id. at 8.

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Other states do not have a formalized set of steps, though of course, most states will identify an injured class first, if this has not already been done in the settlement agreement. There is little reason to solicit applications before the office knows what the money is to be used for. Most departures from the Utah procedures have to do with the solicitation of applications. As noted above, Utah pre-selects some charities before soliciting and accepting applications. Some states such as Wisconsin will first put out a general call for proposals from the public at large.125 Some states use the internet for this purpose, and will place an open notice of available grants on the attorney general’s website, along with the application.126 Even where applications are accepted without a pre-selection process, this may be supplemented by the attorney general specifically soliciting some big organizations for applications.127 The actual criteria for choosing charities vary from state to state.128 Ultimately, the attorney general retains final discretion in making a cy pres distribution, but some are more involved than others.129 Some actually make the final decisions, while some take no involvement, and allow the team, a deputy, or a division chief to give the final approval.130 Most are in between, or vary from case-to-case. Some states employ blue-ribbon committees instead of or as a supplement to their in-house cy pres teams.131 Washington uses these committees extensively. In the Vitamins distribution, for example, which was to be used for health and nutrition programs, the blue-ribbon committee was comprised of nutritionists, community health leaders, legislators, and health industry leaders.132 This brought a great deal of expertise in the health and nutrition area to the table. Tina Kondo also notes that bringing legislators onto blue-ribbon committees is helpful not only because legislators often have valuable expertise, but involving them in the process serves to educate them about the requirements of cy pres distributions.133 There is no one process for cy pres distributions. Most distributions are currently done ad hoc, and rely on the experience of the attorney general’s antitrust staff, rather than on written policies. C. THE FUTURE? INTERNET DISTRIBUTION IN THE CDS CASE For some, the direct distribution in In re: Compact Disc Minimum Advertised Price Antitrust Litigation is an example of the future of distributions in attorney general antitrust cases. This would mean that cy pres distributions would become increasingly rare due to the comparatively lower costs involved in an internet distribution. Any discussion of current cy pres

125 O’Connor, supra note 94. 126 Huelin at 6. 127 O’Connor, supra note 94. 128 Huelin at 8. 129 Kondo, supra note 94. 130 Id.; Huelin at 8. 131 Kondo, supra note 94; Huelin at 7–8. 132 Kondo, supra note 94. 133 Id. For discussion of the problems that arise when legislatures do not understand the legal requirements of cy pres, see infra § VI.B.1–2

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procedures would be incomplete, therefore, without considering this distribution, even if it is an example of the future of direct distributions.134 The states and eight defendants entered into a settlement agreement over antitrust claims brought against the five major music companies and three large music retailers. Defendants were to provide both cash and CDs as part of the settlement. The CDs were to be distributed cy pres to state libraries.135 Although the initial impulse among the assistant attorneys general on the case was for a cy pres distribution, a direct distribution was ultimately decided upon.136 An online claims procedure was developed. The settlement provided that no claimant would receive more than $20.137 The settlement further provided that if the number of claims were great enough to result in each claim being worth less than $5, that the entire fund would be subject to cy pres distribution.138 Ultimately, the value of each claim was about $10, so the direct distribution went forward. The cost of the distribution has been estimated at $1 per claim,139 though this may ignore the time assistant attorneys general had to spend fixing the claims administrator’s errors.140 Most agree, however, that initial concerns about fraudulent claims were exaggerated.141 Initially, there were concerns that the number of claims would exceed the number of CDs sold during the time period. This did not turn out to be true. It must be noted, however, that this does not mean that there were no fraudulent claims, merely that the number of unclaimed purchases exceeded the number of fraudulent claims. For similar reasons, it is unclear how many consumers abandoned their claims, though indications are that the percentage of claims was better than usual. Internet distributions such as in the CDs case have the large advantage of providing a cheaper method of filing claims and distributing funds directly back to consumers. Disadvantages are that they are still untested, and therefore subject to unexpected problems, requiring additional time by assistant attorneys general, the cost of which may swallow up some or all of the cost savings. Additionally, internet claims are considered to be more susceptible to fraud. Internet distributions may also be entirely inappropriate in cases where the consumer class is less likely to have experience with computers and the internet. Finally, Robert Huelin has argued that an additional disadvantage of internet distributions is that they make cy pres distributions less necessary, though this seems to confuse ends with means. Opinion on the internet distribution in the CDs case is obviously mixed, which means that it is unlikely that internet distributions will be as widely adopted as some hoped, at least until they have proven more reliable. It seems therefore unlikely that cy pres distributions will become obsolete in the near future.

134 There was also a cy pres component to the settlement, particularly with respect to the physical CDs delivered as part of the settlement, but this section focuses on the viability of internet distributions generally, so will focus on that aspect of the settlement. 135 In re: Compact Disc Minimum Advertised Price Antitrust Litigation, proposed Distribution Plan, available at http://www.musiccdsettlement.com/english/default.htm. 136 O’Connor, supra note 94. 137 Compact Disc Distribution Plan, supra note 135. 138 Id. 139 O’Connor, supra note 94. 140 Kondo, supra note 94. 141 O’Connor, supra note 94.

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VI. POTENTIAL PROBLEMS WITH CHARITABLE DISTRIBUTIONS In attempting to fulfill their duties to the injured class, attorneys general must answer three questions. First, should funds be distributed directly to injured consumers or via a cy pres distribution? Second, if a cy pres distribution is chosen, what method should be employed? Third, if a charitable distribution is chosen, which charities should get the money? The current procedure used by states attorneys general has been outlined above. Before offering a new proposal for making decisions related to cy pres, it will be useful to first crystallize some of the considerations and problems that arise in the area. These considerations fall into two broad groups. The first group is problems that arise from within the process itself. This includes the temptation to overuse cy pres distributions and to misallocate funds. The second group of problems relates to the response of other actors to cy pres distributions, particularly the legislature, media, and public. What this section will highlight is that the use of charitable distributions, while providing easier administration than direct distributions, is not without a cost. At worst, it is a system open to abuse, either where the state appropriates the funds, or where the attorney general uses the funds to his own benefit. Likewise, funds may be spent to satisfy narrow political interests. However, even where attorneys general and their staffs act with the purest hearts, problems may arise. It must be remembered that the mandate associated with cy pres distributions in antitrust cases is not for the attorney general to use the money to do the most good, or to be used most efficiently. Rather, it is to put funds which cannot be directly distributed to injured consumers to their “next best use” in ameliorating the injury. The fact that actions are brought by the attorney general as parens patriae does not change this principle. A. INTERNAL CONSIDERATIONS An attorney general and her staff face many difficulties in appropriately executing their duties to the injured class members. Many of these can be overcome by recognizing of this duty, and by recognizing the distinction between the attorney general’s role under HSRA and her role under the common law. However, dangers still remain. These dangers are most acute when actors try to manipulate the process to their own benefit, but even exist where all of the parties seek to faithfully execute their responsibilities. 1. Overuse of Cy Pres There is an unmistakable allure to cy pres distributions. Kevin O’Connor, a former assistant attorney general in Wisconsin, says that cy pres is no longer a last resort in antitrust cases, but a first resort.142 There are two major reasons for this. First, O’Connor says, is the realization that returning money to consumers is difficult and uncertain.143 The second reason is that it is very appealing to give money to charity. The attorney general gets to show up at a sympathetic charity holding a big check and staff attorneys can feel good about the fruits of their labor. Even apart from the personal or political benefits, there is much to be said for cy pres distributions over direct distributions. Often a charity will be able to use the funds more

142 Id. 143 Id.

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efficiently than the class of consumers. From a social welfare standpoint, such distributions often serve to redistribute wealth from the wealthier to the poorer, as in Nine West. In short, it is tough to begrudge money going to charity. Of course, it is important to recognize that it is not the attorney general’s or the state’s money to give away. The money belongs, in the first instance, to the injured consumers. It is inequitable to choose a cy pres distribution simply because a charity could make better use of the money or because it seems to need the money more. It is ultimately not the attorney general’s job to set social policy through determining when to employ cy pres distributions. Cy pres distributions should only be employed when direct distributions are impossible or too costly. The problem of overuse of cy pres is particularly acute when the consumer class is unsympathetic, as was the class of consumers of high-end women’s shoes in Nine West. In deciding the question of whether a direct distribution is too costly, therefore, the only factor that should be considered is a comparison of the costs of distribution with the size of the recovery. This inherently considers the size of claims and the number of claims. A large number of small claims will be more costly to distribute than a smaller number of larger claims. Technological progress may also change the cost dynamics. 2. Overly Broad Class Definition After a cy pres distribution is chosen, a class of consumers must be defined. When the class of injured consumers is defined too broadly, consumers will be inadequately compensated for their injuries, since the funds will be distributed across too wide of a population. This occurred in many Nine West distributions. The class was defined as all women, over 50% of the population. A substantially smaller percentage of the population was actual purchasers of Nine West shoes. If, for example, even half of women in a state (likely a high estimate) were Nine West customers, they would only receive half compensation by a charitable distribution aimed at all women. As is clear from Dairylea, the purpose of cy pres distributions is to try to reach the consumers actually harmed. The settlement in that case was rejected in part because coupons would not be used by the same set of consumers who were injured. Charitable grants should be designed to reduce payment to non-injured consumers as much as is possible. This will ensure that injured consumers receive the maximum possible compensation through a charitable distribution. 3. Unequal Access to Grants As noted above144 many states perform an internal investigation of possible grant recipients before soliciting proposals. While this saves resources by reducing the number of applications which must be reviewed, it also favors charities which are large, well-known, or favorites of the attorneys conducting the screening. These may not be the ideal recipients for a particular cy pres distribution. This may also result in the same charities receiving grants from many cy pres distributions, and thus having little incentive to ensure that their organizations are managed efficiently. Organizations which are not identified by the internal investigation will not be solicited for applications, and may not even learn of the existence of the grants.

144 See supra § V

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This may be particularly problematic when the amount of funds to be distributed is small. A small community health organization may be able to do more with a small grant than the Red Cross. At the same time, when the amount of funds to be distributed is small, the attorney general’s office may be least likely to do an extensive search, due to the costs involved. A well crafted cy pres procedure would ideally be able to avoid this irony. It is possible that the internal investigation considers all charities registered with the attorney general’s office.145 Furthermore, attorney general’s offices have shown themselves to be willing to consider unsolicited applications even after an internal investigation.146 The merits of different processes will be discussed below, but it is necessary to recognize the problem. Competition between charities for grants likely has many of the same benefits as competition between businesses. This competition is enhanced by allowing all charities equal access to apply to cy pres funds. 4. Misdirection of funds Even when a class is well-defined, funds may be misdirected. This can take a variety of forms: where funds are simply given to a charity or for a purpose that does not compensate the injured class or where funds are given to a charity to satisfy a narrow political interest. In trying to avoid these problems, the attorney general’s greatest enemy is herself. An example of the first problem was Wisconsin’s distribution of some of the cy pres fund to the Wisconsin Alliance for Boys and Girls Clubs in the Nine West distribution.147 The settlement agreement provided that funds would go to “women’s health, women’s educational, women’s vocational, and/or women’s safety programs.”148 This problem can result simply from the attorney general or her attorneys forgetting that cy pres funds are not general pots of money to be doled out to charities, but rather have a specific purpose. Misdirection can also be caused by political concerns, as in South Carolina Attorney General Charles Condon’s use of cy pres distributions for publicity in his gubernatorial campaign.149 Of course, in this case the funds were used for women’s issues, but this distribution should still be considered a misdirection of funds, since the purpose of the distribution was not compensation, but political. Just as overly broad distribution fails to adequately compensate consumers, so would a distribution targeted to only a subset of the injured consumer class. Such a narrow distribution is the natural result of distributions for political purposes. Even where political concerns do not lead to an overly narrow distribution, they still may result in charities being given grants not because they are best capable at reaching the injured class, but for political reasons. In these cases, therefore, funds are not put to their “next best use” as cy pres requires. More benign, but still potentially problematic are situations like Connecticut’s disposition of the Nine West fund, where money was given to the state Department of Health to fund cancer

145 Indeed, most if not all charities would be so registered, as the attorney general’s office is responsible for oversight of these organizations. 146 Huelin at 6 (“Utah’s Mylan experience provides an instructive example. A charity group, Volunteers of America, familiar with the settlement and the availability of a cy pres fund conducted an internal study regarding its own potential viability as a fund recipient. The group then contacted Utah and offered an unsolicited grant proposal that was accepted…”) 147 Id. at 1. 148 Florida v. Nine West Group Settlement Agreement, supra note 55. 149 See Huelin at 2; see also supra note 57.

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screening programs.150 Certainly, it is possible that in some or even many situations that a state agency will be able to put funds to their “next best use.” The danger, however, is that it is difficult to ensure that funds are put to the use as approved in the settlement agreement. A related problem is that it is difficult to ensure that cy pres funds are not simply used to replace funding for a program that would have existed anyway, with the other funds redeployed to any use the legislature or agency wish. For example, if the Stone City Public Library was going to spend $10,000 on children’s books in a given year, and was given a cy pres grant of $4,000 earmarked for children’s books, it could easily reduce its other funding of children’s books to $6,000, and use the diverted $4,000 elsewhere. Money is fungible, and while most settlements have rules mandating that funds must be used for programs that wouldn’t have otherwise been funded,151 this rule is difficult to enforce, particularly in the case of state agencies. Attorneys general must therefore be vigilant when granting money to these bodies. There are many pressures on the attorney general’s office that push against the duties under the HSRA. Although these political pressures may come from within the office itself, they may also be the result of interference by legislative leaders or other political officials. These officials have their own political agenda, and likely care less than the attorney general about the fact that cy pres funds are supposed to be earmarked for a specific class of consumers. This problem is addressed more fully below. 5. Waste of Lawyers’ Time Cy pres distributions take a great deal of lawyer’s time. In most offices, doing cy pres distributions is seen as a perk of working in the attorney general’s office.152 Therefore, much of the work of soliciting and reviewing grant applications is done by lawyers. Making the ultimate decision involves not only reviewing applications but researching charities both before and after applications are received.153 This problem is more potent in smaller cases and smaller states, where the cy pres funds are smaller. Reviewing an application for a $5,000 grant and a $50,000 grant probably takes the same amount of time, or close to it, so as grant sizes go up, relative costs go down. Procedural devices should take into account this economy of scale. The amount of lawyer time required for a distribution also tends to be greater when the distribution involves goods instead of or in addition to cash, an issue discussed more fully below.154 The cost of lawyers’ time is also a factor in the earlier question of whether to do a direct distribution or a cy pres distribution. Often, this cost is ignored or underestimated when calculating the costs of a direct distribution.155 Tina Kondo of the Washington Office of Attorney General says that this was a particular problem in In re: Compact Disc, where an internet distribution was used. As noted above, this case has been held as an example of the future of distributions, with the internet providing an opportunity for cheaper and more efficient direct distributions. The often cited figure is that the cost per claim in Compact Disc was about $1 per claim, a striking reduction from the traditional estimate that direct distributions cost $5 per claim.156 However, Kondo says that this figure ignores the amount of time that assistant 150 Huelin at 1. 151 See, e.g., Nine West Settlement Agreement, supra note 55. 152 Huelin at 12. 153 Id. 154 Kondo, supra note 94. 155 Id. 156 See Huelin at 9-10.

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attorneys general spent supervising the claims administrator, Rust Consulting, and resolving the variety of problems that arose during the distribution.157 6. Conflict Between Office’s Role in Supervising Charities and Distributor of Funds A rarely addressed though important issue is that a potential conflict exists because of the role most attorneys general have in supervising charities and other non-profits. The conflict may take the following form. When an attorney general is doing a cy pres distribution, ideally it will have a lot of information about the charities it considers. This will allow the cy pres team to ensure that funds are put to the “next best” use. At the same time, charities may be wary of disclosing some information to their regulators. Even where there is no actual conflict of interest, or reason for a charity to be concerned, this perception may mean that some charities are chilled from applying B. EXTERNAL AND POLITICAL CONSIDERATIONS Attorneys general, unlike private attorneys, act within a political fishbowl. Most attorneys general are elected officials, and are therefore directly accountable to the population of their state. All attorneys general, even those which are not elected, must interact with other public actors. In particular, they must face a state legislature, media, and population which do not necessarily understand the special duties attorneys general have in cy pres distributions. These institutions watch attorney general actions with varying degrees of care, and with varying interests they seek to vindicate. In some cases, this may lead to problems, when these institutions try to inappropriately interfere with the attorney general’s duties under HSRA to ensure compensation for injured consumers. In addition, attorneys general may face difficulties from recalcitrant defendants when enforcing a settlement calling for in-kind distributions. The Compact Disc and Toys R Us cases indicate the difficulties that can arise in these distributions. 1. Public Criticism The state legislature, media and public usually do not understand cy pres distributions: what they are, what they are for, and what the legal requirements are for their distribution. When uninformed, the legislature and public see their Attorney General handing out sums of money to charity, and think that the money should rightfully belong to the state. This leads to criticism, often unfounded. The Attorney General of West Virginia, Darrell McGraw has most recently faced this kind of criticism, and in response has set up a special committee for charity distributions.158

“I think he's done a great job with (consumer protection programs),” said Delegate Mitch Carmichael, R-Jackson. “And if the purpose (of the new committee) is to find businesses that are abusing consumers and breaking the law,

157 Kondo, supra note 94. 158 Part of the criticism involves McGraw’s use of private attorneys to recover money. He is also criticized for overagressiveness. While the criticisms are interlinked, these aspects are beyond the scope of this paper.

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then I don't have a problem with that. But when it comes to distributing funds, that absolutely is a legislative thing.” McGraw has been under fire by legislators, especially in recent months, for the way he allocates money from settlements of lawsuits initiated by his office. McGraw has distributed some of the money from those suits to entities of his office's choosing, a process he contends is cleared through the court system when the funds are awarded. Legislators argue it is their constitutional role to budget and distribute any money awarded to the state.159

This attitude is not uncommon among legislators, particularly those who have not been educated about the rules and policy of cy pres.160 McGraw had earlier been criticized for asking for more funding for his office at the same time that he was distributing class funds to charities:

… It is obvious to most reasonable minds that money brought in as revenue ought to be controlled by the state Legislature. After all, the state Constitution grants power to appropriate funds to the legislative branch — not to the executive, of which McGraw’s office is a part. But, for a few years now, McGraw has not been turning all of the money won in court settlements over to the state treasury. … McGraw has been handing out hundreds of thousands of dollars in grants to various worthy causes. * * * But now, having handed out all that money, McGraw’s office is going to the Legislature, hat in hand, seeking an increase in its budget. The office is budgeted at $9.4 million this year; $9.9 million is being sought for the coming year. … That’s disgusting. We’ll leave aside the fact that most state agencies are managing to hold the line on their budgets, even as McGraw’s office says it needs a big boost. … McGraw has operated the attorney general’s office as his own personal fiefdom for too long.161

Of course, the writer of this editorial simply misunderstood the legal status of the money McGraw was distributing. The money did not belong to the state, nor was it being appropriated by Attorney General McGraw. The theory implied by the article is that the money lost by

159 Kris Wise, McGraw Panel Has Political Punch; Union Chiefs, Other Special Interest Groups to Meet and Advise Attorney General, CHARLESTON DAILY MAIL (WEST VIRGINIA), Apr. 9, 2007 at P1A. 160 Kondo, supra note 94. 161 McGraw’s Office Out of Control, WHEELING NEWS-REGISTER, Feb. 5, 2007.

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consumers due to antitrust violations belongs to the state and can be used as general revenue — essentially a 100% contingency fee on antitrust recoveries won by the attorney general.162 However, the criticisms McGraw has faced demonstrate some of the common criticisms that all offices may face if the state legislature and public are insufficiently educated about the legal requirements behind cy pres. Apart from general criticisms about the use of cy pres, as above, the legislature or press may criticize specific grants, for a variety of reasons. As explained below, sometimes legislatures simply have their own opinions about which charities should receive grants and will criticize distributions which ignore these opinions. Distributions may be criticized if they appear to serve a particular political ideology too heavily, such as Attorney General Condon’s distributions to crisis pregnancy centers.163 Criticisms can do more harm than simply generate bad publicity for the attorney general. Seeking to avoid such criticisms may push cy pres distributions more toward bigger charities with better name recognition, or more political connections. This may or may not be the “next best” use for a particular distribution, as noted above.164 Fear of criticism might therefore lead to a less than ideal use of cy pres funds. 2. Legislative Interference Besides public criticism, legislatures can directly interfere with the cy pres process in two ways. The more extreme of these is for the legislature to appropriate settlement funds. The less extreme method is when legislators try to influence the attorney general in order to ensure that particular charities are given grants. In the past, the Texas legislature has written appropriations riders into laws directing that cy pres funds be granted to a particular state agency, for use consistent with the settlement agreement.165 Problems here arise because the same misconceptions that have led state legislators to criticize Attorney General McGraw may lead to misuse of cy pres funds. The state legislature, in allocating a settlement fund is less likely than the lawyers in the attorney general’s office to understand that the money belongs to a quasi-client class. Furthermore, as noted above, grants to state agencies make it difficult to ensure that funds are not simply replacing other state funding, thus essentially freeing up the money for general use.166 Some state legislatures have threatened to go farther, and pass laws requisitioning cy pres funds for the state’s general fisc. It is unlikely that these laws would have any effect on a court’s rulings under the cy pres doctrine, but the threat indicates the political controversies surrounding cy pres in some states. Less extremely, some legislatures have threatened to take authority from attorneys general in choosing where to distribute cy pres money. This is in contrast to the actions of the Texas legislature which are usually on a case-by-case basis. Kevin O’Connor thinks it unlikely that courts would defer to the legislature if these laws were passed,167 but this is less clear. 162 Of course, the editorial also ignores the logical consequence of general adoption of this theory: that the West Virginia Attorney General will be obligated to use direct distributions even when costs consume most of the recovery — since that will get consumers more than the alternative of full escheat. 163 Supra § III.A.3.iii 164 Supra § VI.A.3 165 Huelin at 11. 166 See Huelin at 11. 167 O’Connor, supra note 94

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Apart from outright appropriation, individual legislators try to informally influence the cy pres distribution process.168 This can have both positive and negative consequences. Legislators sometimes have worked with charities before, or have better local information than the attorney general’s office does. Sometimes legislators have expertise in a particular field which is relevant to the distribution.169 In short, sometimes legislators bring information to the table which can result in better decisions. On the other hand, sometimes legislators are trying to satisfy narrow political interests, or fight turf wars. Also, legislators are less likely than staff attorneys to be concerned with the office’s duties toward the consumer class or be interested in narrowly tailoring the distribution to target that class. So, the degree to which legislative input is helpful and to which it is harmful varies widely. 3. Defendants Dumping in In-Kind Distributions Sometimes a settlement provides for the defendant companies to provide goods for cy pres distribution, usually in addition to cash payments. This paper refers to these distributions as “in-kind” distributions. These distributions are the product of negotiations between the plaintiff states and the defendants. Obviously plaintiffs would prefer cash of equal value to the goods themselves, but defendants may prefer in-kind distributions since the goods are presumably cheaper to produce than they’re worth at market value. So, after negotiations, sometimes in-kind distributions make up part of a settlement. Problems arise when defendants try to dump low-quality or obsolete products through the in-kind distribution. For example, In re: Toys “R” Us Antitrust Litigation, 191 F.R.D. 347 (E.D.N.Y. 2000) was settled, and provide for, “a combined payment by defendants of almost $57 million in toys and cash, over $20.3 million of which will be in cash and over $36.6 million in toy distributions.170 The toy distributions were to be handled via cy pres.171 Due to earlier problems, the settlement provided for a detailed procedure to prevent dumping:

Among other things, the toys distributed must be in good condition, include toys suitable for both boys and girls in a wide age range and be taken from current inventory. Prior to each distribution (the distributions will take place over two or three years) TRU must provide plaintiffs with a toy list identifying the quantity, mixture, diversity and Original Retail Price of each toy to be contributed that year well in advance of the distribution date. And plaintiffs have the right to veto toys which do not meet the Settlement criteria. The manufacturers also must provide plaintiffs with an advance list of toys to be distributed. Thus, the plaintiffs have undertaken to verify compliance, for example, by sending investigators to retail shops to ascertain that the toys to be included in a given distribution are varied, are from current inventory and meet the criteria for value set forth in the Settlement Agreements.172

168 Huelin at 11. 169 Kondo, supra note 94. 170 In re: Toys “R” Us Antitrust Litigation, 191 F.R.D. 347, 349 (E.D.N.Y. 2000). 171 Id. 172 Id. at 354.

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The Court went on to discuss a test distribution where defendants had tried to dump unwanted toys.173 For example, in Minnesota, the toy manufacturer Mattel’s Christmas season shipment of toys to Toys for Tots, which was administering the toy distribution to charities, included hundreds of Hot Wheels collectors cases, but no Hot Wheels toy cars to be collected or stored.174 Other toys were old, and indeed Mattel said many of the toys had been set aside over a year earlier.175 Similar problems occurred in the Compact Disc distribution.176 That settlement provided for compact discs to be provided to states for distribution to state libraries. Music companies used the opportunity to dump old or unpopular titles. One Ohio library received fifteen copies of Whitney Houston’s recording of the Star Spangled Banner.177 Another Ohio library received three copies of “Martha Stewart’s Spooky Scary Sounds for Halloween,” a CD with a single track filled with cackles and screams.178 It was common for a single library to receive a large number of duplicates of the same CD.179 Dealing with dumping problems takes valuable lawyer time, even if the disputes are ultimately resolved — which they were in both the Toys “R” Us and CDs distributions. This is true even where there was an outside claims administrator handling the claims, as in Compact Disc.180 So in-kind distributions may have hidden costs which should be considered when evaluating their practicality. Tina Kondo suggests that in-kind distributions are best used when there is only a single product at issue.181 This would be the case where there is a single drug at issue, for example. When only a single product is at issue, not as many resources need to be devoted to oversight of the agreement. A company does not have different qualities of drugs such that they could dump a low-quality one through the settlement agreement. Where the products at issue are broad, and especially where a variety of items are desired — as is the case with both toys and music CDs — careful oversight is necessary to make sure that the goods received in the settlement are of equal quality and selection as those distributed commercially. VII. A PROPOSAL FOR A PROCEDURE TO CONSTRAIN DISCRETION A. HAVING A POLICY IS MORE IMPORTANT THAN THE CONTENT OF THE POLICY Many of the problems with the current system of cy pres distribution arise from the wide discretion of the attorney general’s office in choosing whether to employ cy pres distributions and to which charities to distribute the money. In any individual case, there are pressures to use this discretion to deviate from the strict requirements of cy pres, and to deviate from the office’s

173 Id. 174 Conrad deFiebre, Hatch Criticizes Some Toys Shipped Under Settlement, STAR TRIBUNE (MINNEAPOLIS, MN) at 1B (Dec. 7, 1999). 175 Id. 176 Kondo, supra note 94. 177 Kevin Joy, Windfall of Old CDs Strikes Sour Note with Libraries, COLUMBUS DISPATCH (COLUMBUS, OH) at 01A (July 31, 2004). 178 Id. 179 Id. 180 Kondo, supra note 94. 181 Id. 94.

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duties to the injured customers. From an ex ante perspective, however, it is highly likely that attorney generals and their staffs recognize this problem, and wish to prevent it. Additionally, this apparently unlimited discretion may cause confusion among the state legislature and public, who do not understand that there are in fact legal limits on what may be done with cy pres money. This proposal, therefore, looks to internal rather than external limits on the discretion of the attorney general’s office. A well-crafted formalized process will allow the attorney general’s office to address the legal requirements of cy pres, while avoiding the pressures for deviation in any particular case. Having a formal process is also useful in educating the legislature and public, and justifying actions taken in cy pres distributions. Finally, such a policy will not rely upon the individual experience and knowledge of assistant attorneys general. Having a formalized policy in place will ensure more continuity in institutional knowledge. Some would object in principle to a formalized process, especially in smaller states. There, the size of grants tends to be small enough that ad hoc decisions tend to suffice, and the costs of setting up a system outweigh the benefits. However, the process proposed here doesn’t require new staff, or even staff dedicated to cy pres issues. There are some smaller additional expenses, but these are on a case-by-case basis, and do not require any initial outlay of funds. The main feature of this proposal is merely that the office establishes a formal and written policy that the office will adhere to. What the policy requires is not as important as the simple fact of having a policy. It is likely that these policies, like the current procedures, will vary from state to state, due to size, resources, personal preference, or any other factor. The crux of the proposal is simply: have a policy in advance. Ultimately, each attorney general has duties to her own state and her own consumers. Therefore, these policies should be done by each office. Individual state policies are likely to be more useful when justifying cy pres actions to the legislature than a policy promulgated by the National Association of Attorneys General or another national organization. Additionally, individual state policies will be able to be sufficiently detailed and adapted to the particular needs of that state and that office, in ways in which a national policy would not be able to be. B. SPECIFIC RECOMMENDATIONS FOR THE CONTENT OF A CY PRES POLICY The first decision the attorney general’s office must make is whether to employ direct or cy pres distributions. Often in antitrust, this choice is made in the context of a multi-state litigation, so this decision is made collectively by the assistant attorneys general of several states. As noted above, direct distributions are favored in the law, and should be favored by the attorney general’s office in the exercise of its discretion. Currently, this decision is made subjectively on a case-by-case basis, with guidance from experts on issues related to the size of the average claim and the costs of distribution. Given the evidence and expert testimony that is generally available, there is no need for this decision to be made subjectively, or ad hoc. Instead, the attorney general should develop a prospective, objective, and publicly available policy regarding when cy pres distributions will be recommended in lieu of direct distributions. This policy should indicate that when costs of distribution exceed a certain percentage of the recovery, as determined by reliable experts, that cy pres will be used, but when costs fall below this threshold, direct distributions will be used. Of course, given that this decision is often made by a number of states collectively, and different states may set different thresholds, this policy will more often simply indicate how a particular office should “vote” when the group makes the decision. Determining the exact percentage threshold prospectively is a valid situation for the exercise of

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the attorney general’s discretion, and if the policy is public, this transparency will make sure that the percentage is set at an appropriate level.182 Having this objective standard established prospectively allows the attorney general and her staff to make her own legal and policy judgment about cy pres distributions, while ensuring that the individual circumstances of each particular case do not bias this judgment. When a charitable distribution is appropriate, the attorney general’s office must determine which charitable activities will best serve the injured class. The first procedure to be established in this regard must answer the question: who is involved in the process and who makes the final decision? The attorney general should not be personally involved in the process. As noted above183 the attorney general may be her own worst enemy in any particular case, due to the political pressures she faces. The attorney general’s role should be to set up a good, functioning process, to staff her office with good lawyers, and to trust both the process and lawyers to come to fair decisions. The ultimate decision-making authority should be a lawyer. The attorney general’s office has a pseudo–attorney-client relationship with the injured class in an HSRA case, and a lawyer is in the best position to understand the office’s duties to the injured class. A lawyer is also better equipped to understand the law and requirements of cy pres. When available, the staff lawyers working on the case should remain centrally involved in the cy pres distribution. They are most likely to zealously advocate for the injured class,184 and their involvement will best protect the class’s interests. Of course, in multi-state cases, sometimes an office will have no staff assigned to a particular case when a settlement fund is made available. There is no need for a dedicated cy pres officer.185 Such a position may be desirable in a big office, in order to create a liaison between the office and the public, and to isolate the decision from political factors. This position does not need to be filled with a lawyer, and in fact, in big offices where it makes sense to have such a dedicated position, it may be better to hire someone from the non-profit community to fill this role. Such a person would already have experience in choosing between grants and organizations, and would be able to share that experience with the other members of the cy pres team. However, in small offices, such a position may be a waste of resources. A less costly option which may serve some of the same purposes would be to have an attorney develop some expertise in cy pres issues. This can be done by staffing the same attorney to cy pres teams until this expertise has been developed. This should be someone at a lower level than the antitrust chief, who often has many other responsibilities. Even this position is not strictly necessary, but such a lawyer might bring a broader perspective to cy pres distributions than lawyers intimately involved in a specific case. This lawyer may also develop a network of contacts in the non-profit community. Of course, this may be a double-edged sword. The lawyer would have more information to bring to the decision-making process, but this information may be limited to several charities, which may reduce the equality of access between charities.

182 The author considers a good starting point for this determination to be when costs are 50% of the gross recovery. That is, where consumers’ net benefit will be less than the costs of distribution, cy pres distribution should be used. However, the exact percentage is not as important as the establishment of the process. 183 Supra § VI 184 See Huelin at 4. 185 See id. at 13.

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The size of the team should vary based on the number of grants and applications expected. However, wherever possible, there should be a team involved in the process, to bring a variety of interests to the table. This should include at least the ultimate decision-making authority (possibly the antitrust chief), the staff attorney(s) on the case, and the cy pres officer if one exists. Where the injured class is confined to a particular locality, it would also be helpful to add an individual to the team with particular local knowledge, either a lawyer in the office or a local official. Most of the decisions regarding the composition of cy pres distribution teams should be made prospectively, for the same reasons outlined above. Doing so will help the attorney general resist the temptation to skew the team in a particular case to achieve a particular result. Attorneys general should develop a process for constituting blue-ribbon committees to assist the in-house cy pres team. This is a step in the process where the attorney general may need to be personally involved, particularly if the blue-ribbon committee is going to include legislators or industry leaders. Such individuals may expect an invitation from the attorney general himself to serve on a blue-ribbon committee, rather than the antitrust chief or a deputy. As noted above, it is useful for blue-ribbon committees to include legislators, often the heads of committees dealing with the specific area of the distribution. For example, the head of the legislature’s education committee would bring a great deal of useful expertise to the process when funds are earmarked for education. Legislators may also have useful contacts in the community. Finally, and more self-servingly, bringing legislators into the process will help to educate them on cy pres issues, and forestall unwanted interferences in cy pres activities. Blue-ribbon committees are also a useful way to bring in other individuals with expertise in the area, so should not be limited only to legislators or local elected officials. The actual process should be comprised of three steps. First, the injured class should be defined, as specifically and narrowly as possible. Importantly, the cy pres team should have the discretion to define the class more narrowly than does the settlement agreement. Settlement agreements in multistate cases may allow funds to be used for a broad range of programs, not necessarily narrowly tailored to the actual injured class.186 That does not, and should not preclude an individual office from making its own decision within the bounds of the settlement agreement. Once a class is defined, specific areas of spending should be identified where appropriate, such as education or health. Second, proposals should be generally solicited, via the Internet as well as more “traditional” procedures. The goal should be to notify as many charitable organizations as possible about the availability of cy pres funds. No pre-screening or internal investigation should be conducted. This will partially offset the increased workload resulting from open solicitation. More importantly, it will prevent there from being a bias toward certain charities, either due to size, name recognition, or personal contacts. To keep the number of applications manageable, the cy pres website and other notices should indicate the limitations on the grant based on the definition of the injured class and the area of spending. Open solicitation has several additional benefits besides eliminating bias, including a reduction of legislative interference, and the progressive improvement of proposals.187 Third and finally, the decision between proposals should be made according to prospective criteria.188 These criteria, such as organizational size or need, should be published.

186 See e.g., Nine West Settlement Agreement. 187 Huelin at 14. 188 See Huelin at 14.

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Transparency, as Huelin notes, improves public accountability, and as noted above, will improve the quality of grant proposals and thus will improve the use of cy pres funds.189 However, part of the benefit of bringing individuals with expertise into the process is to allow them to use their judgment. Therefore, while the criteria should be prospective and public, it does not need to be rigidly quantitative. The oversight of the process by an in-house team will ensure that the decision is made according to objective criteria, but they should not be afraid to listen to the recommendations of the blue-ribbon committee based on the committee’s experience in the field. The most important part of developing this policy is not the actual decisions that are made about the number of people in the team, or the composition of blue-ribbon committees — though these decisions are important. The key to this proposal is to ensure that the attorney general and her office take the appropriate actions ex ante to make sure that they remain faithful to their special obligations to the injured consumer class, to make sure that cy pres funds are indeed put to their “next best” use, and not merely to any charitable use. VII. CONCLUSION State Attorney Generals are given authority under Hart-Scott-Rodino Act to bring actions for treble damages on behalf of the residents of their states. These actions often result in a recovery representing a huge number of small claims of individual consumers. These funds are often distributed to charity under the legal doctrine of cy pres due to the difficulty and expense of direct distribution to injured consumers. State attorneys general must craft a policy to ensure that these charitable distributions will result in actual compensation for the injured class, and are not merely a grant to general charitable purposes. Such a policy should employ objective criteria established prospectively, and should establish the framework of a cy pres team designed to bring a variety of perspectives and knowledge to the table.

189 Id.

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