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Non-Competition “In Any Capacity”: Broad Scope Can Sink Your Non-Compete

By Robert B. Fitzpatrick

A recent opinion from the Calvert County Circuit Court in Maryland highlights a common drafting error which can undermine the enforceability of non-compete agreements. In Electronic Security Servs., Inc. v. Higgs, Judge Chandlee ruled that a non-compete which precluded the former employee from working for a competitor "in any capacity" was overly broad and thus unenforceable. See Case No. 04-C-15-304 (Calvert Cnty. Cir. Ct. Md. Sept. 2, 2015) (hereafter "Higgs").

In Higgs, a company sued a former employee and the former employee's new employer, alleging that the employee breached a non-compete agreement and the employee's employment with the new employer was prohibited by a confidentiality agreement. The non-compete agreement forbade Mr. Higgs from "compet[ing] directly or indirectly with the company by serving as an officer, partner, director, agent, employee, or consultant with any firm or entities substantially engaged in a business similar to or competitive to the business of the company or an active client of the company in the last 2 years with the company." It "extend[ed] to the geographic area for the entire states of Maryland and Virginia, The District of Columbia, and any other area that falls within a 150 mile radius of Upper Marlboro." Notwithstanding these restrictions, the employee went to work for a competitor in a neighboring county.

The court found the agreement overbroad and unenforceable as a matter of law, noting that it "effectively restricts [the former employee] from obtaining employment from a competitor . . . in any role conceivable." The court further held that, even if such a broad restriction were somehow necessary to protect the company's legitimate business interests, the "need [was] not remotely demonstrated in the complaint." As a result, the court severed the clause from the non-compete agreement, which "render[ed] the entirety of the agreement void."

The decision in Higgs reflects a trend in non-compete litigation in favor of scrutinizing the scope of the restrictions to which employees are subject. Several other states have held that language similar to that present in Higgs is overly broad and therefore unenforceable – though some courts have applied blue-penciling rules to save the agreement in a less restrictive form.

In CopyPro, Inc. v. Musgrove, the North Carolina Court of Appeals held that a non-compete agreement that prohibited a former sales representative from working at a competitor in any capacity, "even as a custodian," was overly broad and unenforceable. 754 S.E.2d 188 (N.C. App. 2014). In CopyPro the defendant, former employee, Mr. Musgrove, had signed a non-compete agreement that precluded affiliation with a competitor of CopyPro, a purveyor of office equipment systems, for three years following the termination of his employment. The substantive scope of the agreement was limited to "any business of the type and character of the business engaged in by the Employer at the time of such termination." Id. at 192.

During his employment with CopyPro, Mr. Musgrove primarily worked in Pender and Onslow County. After he resigned, Mr. Musgrove joined a competitor to work in a different county, and he refrained from contacting CopyPro's customers in the two counties he had covered for CopyPro. Further, his new employer forbade him from contacting CopyPro's customers in said counties.

CopyPro nevertheless brought suit against Mr. Musgrove seeking, among other things, a permanent injunction to enforce the terms of the non-compete agreement that he had signed. CopyPro prevailed in the Superior Court and obtained an injunction preventing Mr. Musgrove, in pertinent part, from working for the allegedly competitive entity. The Court of Appeals reversed, explaining that "[a]s our decisions reflect, we have held on numerous occasions that covenants restricting an employee from working in a capacity unrelated to that in which he or she worked for the employer are generally overbroad and unenforceable." CopyPro, 754 S.E.2d at 192 (citing VisionAIR, Inc. v. James, 167 N.C. App. 504, 508-09, 606 S.E.2d 359, 362-63 (2004) (holding that a covenant that prohibited an employee from "own[ing], manag[ing], be[ing] employed by or otherwise participat[ing] in, directly or indirectly, any business similar to" the employer's business was overly broad and unenforceable)). The Court went on to hold that "such overly broad restrictions are generally not enforceable in the employer-employee context on the grounds that the scope of the restrictions contained in such agreements far exceeds those necessary to protect an employer's legitimate business interests." CopyPro, 754 S.E.2d at 193.

The Court noted that its decision here was distinguishable from prior holdings:

Aside from the fact that the restriction at issue in Precision Walls was to remain in effect for only one year while the noncompetition agreement at issue here will remain in effect for three years, the present record contains no indication that Defendant ever had either the same level of responsibility or the same level of access to competitively sensitive information as the defendant whose conduct was at issue in Precision Walls. Simply put, the record developed in this case, unlike the record developed in Precision Walls, contains no evidence that Defendant had the responsibility for developing client-specific pricing proposals or adjusting prices for competitive reasons or that Defendant was involved in the development and operation of his employer's bidding or pricing strategies. Although Plaintiff contended in the court below that Defendant might share vital information even if he were hired by a competing business as a custodian, nothing in the present record indicates that Defendant actually possessed sufficiently important information to render him a competitive threat regardless of the position he held with a subsequent employer."

See Precision Walls, Inc. v. Servie, 152 N.C. App. (2002).

Of course, it is well established that non-competes such as those described above are unenforceable in Virginia under the so-called "Janitor Rule." In Home Paramount Pest Control Cos., Inc. v. Shaffer, the Supreme Court of Virginia found a non-compete provision in an employment agreement overbroad on its face and therefore unenforceable. 282 Va. 412 (Va. Nov. 4, 2011). Mr. Shaffer, the Plaintiff, was an employee of Home Paramount Pest Control Companies, Inc. In January 2009, he signed an employment agreement containing the following provision:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever, in any city, cities, county or counties in the state(s) in which the Employee works and/or in which the Employee was assigned during the two (2) years next preceding the termination of the Employment Agreement and for a period of two (2) years from and after the date upon which he/she shall cease for any reason whatsoever to be an employee of [Home Paramount].

Id. at 414-415.

The Court explained that, in Virginia, a provision that restricts competition "is enforceable if it is narrowly drawn to protect the employer's legitimate business interest, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy." Id. at 415. The burden of proving each factor rests with the employer seeking court enforcement of the restriction. Id. "When evaluating whether the employer has met that burden, we consider the function, geographic scope, and duration elements of the restriction. These elements are considered together rather than as three separate and distinct issues." Id. In Home Paramount, the Court held that the provision was unenforceable, noting that "[o]n its face, it prohibits Shaffer from working for Connor's or any other business in the pest control industry in any capacity. It bars him from engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary. The circuit court therefore did not err in requiring Home Paramount to prove it had a legitimate business interest in such a sweeping prohibition." Id. at 418.

In NanoMech, Inc. v. Suresh, U.S. Court of Appeals for the Eighth Circuit, applying Arkansas law, affirmed the district court's decision that a non-compete agreement which prevented the employee from performing any work for any competitor anywhere in the world was overbroad and unenforceable under Arkansas law. 777 F.3d 1020 (8th Cir. 2015) (Colloton, J.). In NanoMech, defendant, former employee Ms. Suresh, had signed a non-compete agreement before being hired at NanoMech, a company involved in the research and development of nanotechnology. The non-compete agreement prohibited her from "directly or indirectly" entering into, being employed by or consulting "in any business which competes with the Company" for two years after her departure. The covenant contained no geographic limitation and did not define "any business which competes with" NanoMech. Ms. Suresh eventually left NanoMech and joined a competitor as a chemist within the two-year departure term. NanoMech sued to enjoin her from working there for the remainder of the term of the non-compete and to prevent her from disclosing any of NanoMech's confidential information.

Generally, a non-compete agreement is enforceable under Arkansas law if the employer has a valid interest to protect, the geographical restriction is not overly broad and a reasonable time limit is imposed. The covenant's plain language prohibited the employee from working for any competitor of NanoMech, in any capacity, worldwide. The Court rejected NanoMech's argument that the covenant was reasonable due to the global nature of the business and the employee's broad access to trade secrets, and refused to enforce the covenant, finding it was overbroad. The Court held that global non-compete agreements may be permissible if the prohibitions on employee activities are narrowly drawn.

Finally, in Clark's Sales and Service, Inc. v. Smith and Ferguson Enterprises, Mr. Smith, Defendant, was required to sign a non-compete agreement by employer Clark's Sales & Service, Inc. after several years of employment as a salesman. 4 N.E.3d 772 (Ind. Ct. App. 2014).

The key provisions of the agreement stated that for two years after the employee's termination from employment, he was prohibited from, in any capacity:[S]oliciting or providing services competitive to those offered by his employer to any business account or customer who was a business account or customer at any point in time during his employment;" and "working in a competitive capacity with a named competitor of the employer in the state of Indiana, in any city or state in which the competitor conducts business, or to work for any business that provides services similar or competitive to those offered by the employer during the term of his employment, including but not limited to within the state of Indiana, Marion County, the counties surrounding Marion County, or within a 50 mile radius of his principal office with the employer.

Id. at 780. After the employee resigned and went to go work for one a competitor, the employer filed suit to enforce the non-compete and sought injunctive relief. The Court noted that its supreme court has "long held that noncompetition covenants in employment contracts are disfavored in the law, and we will construe these covenants strictly against the employer and will not enforce an unreasonable restriction." Id.

The Court of Appeals took issue with several parts of the agreement. First, the Court found that the restriction on contacting or serving customers was overbroad and unreasonable because it prohibited the employee from servicing anyone who had been a customer at any point in time during his employment. Id. at 782. Second, the Court viewed the scope of prohibited activities as too broad because it went beyond the sales job he had with his prior employer and prohibited him from engaging in any service that offered but which he personally never performed during his employment-- i.e., drafted so as to prohibit "seemingly harmless conduct." Id. Third, the Court viewed the geographic restriction as "unquestionabl[ly] unreasonable as written", and stated that the 50-mile restriction alone might have been acceptable, as "it is reasonable for individuals in the community to travel up to 50 miles to visit Clark's." Id.

If you're considering having your employees sign a non-compete, you should ensure that the restrictions are narrowly drawn to address legitimate business needs. In other words, the primary inquiry should be what relationships and knowledge the employee gained while employed by your organization and what legitimate business concerns about the use of the knowledge and relationships you hope to address. The more you can tailor your non-compete so that it addresses your concerns but isn't overly broad, the greater the chances that it will be enforceable in most jurisdictions.

While much could be said about the appropriate duration and scope of a restrictive covenant, those are subjects for another day. What the decisions above make clear is that, in drafting the substantive restrictions in a non-compete agreement – or any other restrictive covenant – you should focus on areas of actual concern. These might include preventing an employee from working for a specific list of competitors, preventing an employee from performing a specific job or function for entities in similar line(s) of business, and soliciting current customers, vendors, or employees. As demonstrated above, courts are skeptical of sweeping language which prevents an individual from working for a competitor "in any capacity." Including such language, especially in states which do not blue-pencil agreements, raises the very real possibility that the entire clause or agreement will be stricken. Regardless of a state's blue-penciling rules, it is never advisable to gamble on how a court might re-write your agreement. Instead, you should use language such as "in any position or performing any function substantially similar to any position held or function performed by the employee during the twelve-month period prior to the termination of her employment."

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NLRB May Be Expanding Definition of Joint Employer

By Edwin S. Hopson

On May 13, 2014, the National Labor Relations Board (Members Hirozawa and Schiffer; Member Johnson, dissenting) announced that in Browning-Ferris Industries and Leadpoint Business Services, Case No. 32-RC-109684, a union representation election case, that it had granted review of the regional director's decision in order to determine if the Board's current joint employer standard should be modified. The current Board consists of three Democratic and two Republican Members. One can assume that the Democratic Members wish to loosen the standard so that union bargaining units can be expanded to include persons formerly considered independent contracts or employees of another employer.

The Board has invited the filing of briefs by not only the parties but also interested amici. The issues identified to be addressed are:

  1. Under the Board's current joint-employer standard, as articulated in TLI, Inc., 271 NLRB 798 (1984), enfd. mem. 772 F.2d 894 (3d Cir. 1985), and Laerco Transportation, 269 NLRB 324 (1984), is Leadpoint Business Services the sole employer of the petitioned-for employees?
  2. Should the Board adhere to its existing joint-employer standard or adopt a new standard? What considerations should influence the Board's decision in this regard?
  3. If the Board adopts a new standard for determining joint-employer status, what should that standard be? If it involves the application of a multifactor test, what factors should be examined? What should be the basis or rationale for such a standard?

The briefs may be filed on or before June 26, 2014.

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NLRB Attacks Employee Handbook Rules

By Edwin S. Hopson

In early June 2014, a National Labor Relations Board Administrative Law Judge (ALJ) in Professional Electrical Contractors of Connecticut, Case No. 34-CA-071532, ruled that a number of handbook provisions violated the National Labor Relations Act. The handbook applied to employees who largely worked in the field on customers' premises.

The challenged handbook rules were:

  1. A rule prohibiting employees from disclosing the location and telephone number to outsiders of the customer to which the employee was assigned.
  2. A rule stating that no employee shall disclose customer information to outsiders, including other customers or third parties and members of one's own family.
  3. A prohibition of boisterous or disruptive activity in the workplace.
  4. A rule against initiating or participating in distribution of chain letters, sending communications or posting information, on or off duty, or using personal computers in any manner that may adversely affect company business interests or reputation.
  5. A series of rules prohibiting employees from taking photographs or making recordings at the workplace without prior authorization by management.

The ALJ largely held for the NLRB's General Counsel and issued an order requiring that the company cease and desist from:

(a) Maintaining a provision in its employee handbook that requires employees not to disclose the location of their customer assignment to outsiders.

(b) Maintaining a provision in its employee handbook that prohibits employees from engaging in "boisterous" activities in the workplace.

(c) Maintaining a provision in its employee handbook that prohibits employees from initiating or participating in the distribution of chain letters, sending communications or posting information, on or off duty, or using personal computers in any manner that may adversely affect company business interests or reputation.

(d) Maintaining a provision in its employee handbook that prohibits employees from taking photographs or making recordings at the workplace without the prior authorization by management.

The case likely will be appealed to the Board in Washington, D.C., and thereafter to a court of appeals.

This case is a good example of how closely the NLRB will scrutinize employee handbook provisions. This can be particularly problematic if the employer finds itself in the midst of a union organizing campaign. Thus, if the employer wins the election, it may be set aside should there be in place handbook provisions the NLRB finds objectionable.

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Supreme Court Invalidates NLRB Recess Appointments in Noel Canning Case

By Edwin S. Hopson

On June 26, 2014, the U.S. Supreme Court in NLRB v. Noel Canning et al., 573 U.S. ___ (2014), held in a unanimous decision that President Obama's purported recess appointment of three members (Richard Griffin, Sharon Block and Terence Flynn) to the National Labor Relations Board in January 2012 was invalid. The opinion written by Justice Breyer was joined in by Justices Kennedy, Ginsburg, Sotomayor and Kagan. Justice Scalia wrote a concurring opinion in which Chief Justice Roberts, and Justices Thomas and Alito joined.

Some of Justice Breyer's key points in his analysis were:

"Accordingly, we conclude that when the Senate declares that it is in session and possesses the capacity, under its own rules, to conduct business, it is in session for purposes of the Clause.

"Applying this standard, we find that the pro forma sessions were sessions for purposes of the Clause. First, the Senate said it was in session. The Journal of the Senate and the Congressional Record indicate that the Senate convened for a series of twice-weekly "sessions" from December 20 through January 20. 2011 S. J. 923– 924; 158 Cong. Rec. S1–S11. (The Journal of the Senate for 2012 has not yet been published.) And these reports of the Senate "must be assumed to speak the truth." Ballin, supra, at 4.

"Second, the Senate's rules make clear that during its pro forma sessions, despite its resolution that it would conduct no business, the Senate retained the power to conduct business.

"Senate has enacted legislation during pro forma sessions even when it has said that no business will be transacted. Indeed, the Senate passed a bill by unanimous consent during the second pro forma session after its December 17 adjournment. 2011 S. J. 924. And that bill quickly became law. Pub. L. 112–78, 125 Stat. 1280.

"We thus hold that the Constitution empowers the President to fill any existing vacancy during any recess—intra-session or inter-session—of sufficient length."

The justices split only over the question of whether the vacancy to be filled had to itself have occurred during the recess or whether it could have occurred prior to the recess. The majority held that the vacancy could occur prior to the recess, based on historical practice.

Justice Scalia, in his concurring opinion, argued that the vacancy to be filled by a recess appointment by the President had to occur during the recess and relied upon the fairly precise language contained in the Constitutional provision at issue:

"The President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session."

Thus this more restrictive view did not carry the day. However, the NLRB is now left with hundreds of cases which will have to decided again by the newly constituted Board which was properly confirmed by the Senate.

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Cy Pres on the Supreme Court's Radar

By Robert B. FitzpatrickCy pres is a legal doctrine under which courts, when unable to effectuate a direct monetary payment to plaintiffs, undertake to distribute moneys to provide an indirect benefit to plaintiffs. The term cy pres originally comes from French. Literally, the phrase means "so near/close" though a more figurative translation would be "as near as possible" or "as near as may be". Black's Law Dictionary, p. 349 (5th Ed. 1979). Cy pres remedies are important to plaintiffs both because they may be in the position of negotiating such remedies in appropriate cases, and because certain charitable or legal organizations which serve low-income populations may find themselves eligible to receive cy pres moneys. E.g. Public Justice, "Cy Pres Donations: Serving the Class and the Public Interest" (available at: http://publicjustice.net/support-us/cy-pres-donations-serving-class-public-interest). The ALI's Principles of the Law of Aggregate Litigation, which are discussed in more detail below, provide that cy pres awards should be made to organizations "whose interests reasonably approximate those being pursued by the class." § 3.07(c); See also In re Pharm. Indus. Average Wholesale Price Litig., 588 F.3d 24 (1st Cir. 2009) (cy presdistribution to cancer or patient related charities was appropriate where defendant was accused of price inflation for a cancer drug).

The Supreme Court recently declined to review the class action settlement inMarek v. Lane, 134 S. Ct. 8 (Nov. 4, 2013) (denying petition for certiorari). However, the Chief Justice issued a statement, concurring in the denial of certiorari indicating that cy pres provisions of settlements raise "fundamental concerns." The Chief Justice also noted that cy pres remedies are a "growing feature of class action settlements."

The original complaint, which originated as a challenge to a Facebook program known as "Beacon", which automatically shared purchase and other personal information with both Facebook and the users' friends lists, sought both monetary and injunctive relief. Marek, 134 S. Ct. at 8. The settlement eventually agreed to between the parties, and which gave rise to the challenge which is the subject ofMarek, provided the vast majority of class members with neither remedy. Id. The underlying settlement at issue in Marek provided no monetary damages to the class at large. Id. The named plaintiffs received "modest incentive payments", and class counsel received approximately $2.5 million. Id. at 8-9. Instead of providing monetary relief to the class, the settlement created a grant-making organization, the Digital Trust Foundation (the "DTF"), the mission of which would be to educate the public about online privacy. Id. at 9; see also Mike Keefe-Feldman, "The Digital Trust Foundation: Facebook's Unwanted Child", Nonprofit Quarterly (June 2, 2014) (available at: https://nonprofitquarterly.org/policysocial-context/21895-the-digital-trust-foundation-facebook-s-unwanted-child.html). The Foundation would be run by a three-member board, including Facebook's public policy director. Marek, 134 S. Ct. at 9. In addition, the settlement provided for the creation of a "Board of Legal Advisors", consisting of counsel for the plaintiff class and Facebook, to "advise and monitor the DTF". See Lane v. Facebook, 696 F.3d 811, 818 (9th Cir. 2012). Further complicating the settlement, the class of those barred from future litigation included not just individuals injured by the specific program during the time period cited in the original complaint, but also all individuals injured by subsequent iterations of the program at time periods not covered by the original complaint. Id. As the Chief Justice notes, "Facebook thus insulated itself from all class claims arising from the Beacon episode by paying plaintiffs' counsel and the named plaintiffs some $3 million and spending $6.5 million to set up a foundation in which it would play a major role." Id.

The Chief Justice notes dryly that, when this settlement was challenged by class members, the District Court, Judge Richard Seeborg, found it to be "fair, reasonable, and adequate." Id., citing Fed. R. Civ. P. 23(e)(2); Lane v. Facebook, Inc., Civ. No. C 08-3845, 2010 U.S. Dist. LEXIS 24762, 2010 WL 9013059 (N.D. Cal. Mar. 17, 2010). On appeal, a panel of the Ninth Circuit affirmed the District Court's determination by a vote of 2-1.

In that decision, authored by Circuit Judge Hug, with a dissent by Judge Kleinfeld, the Ninth Circuit indicated that its responsibility was to "evaluate the fairness of a settlement as a whole, rather than assessing its individual components." Lane, 696 F.3d at 818. As to the adequacy of cy pres remedies, the Ninth Circuit indicated that the Court must ensure that the remedy "account[s] for the nature of the plaintiffs' lawsuit, the objectives of the underlying statutes, and the interests of the silent class members." Id. at 819-20 (internal quotations omitted). Plaintiffs raised two principal challenges to the settlement – the amount and the use of a cy pres remedy. Id. at 820. Here, we focus only on the latter, which the Ninth Circuit characterized as the strongest objection to the settlement. Id.

First, the Court turned to plaintiff's argument that the cy pres remedy was inappropriate because the presence of Facebook executives on DTF's board would "create[] an unacceptable conflict of interest that will prevent DTF from acting in the interests of the class." Id. Finding that the cy pres remedy here was proper, the court explained that "we do not require…that settling parties select a cy pres recipient that the court or class members would find ideal."Id. at 820-21. The only requirement was that the cy pres remedy should account for the interests of the lawsuit, the statute, and silent plaintiffs. Id.Finding the notion "[t]hat Facebook retained and will use its say in how cy presfunds will be distributed so as to ensure that the funds will not be used in a way that harms Facebook is…unremarkable" and declining to "undermine those negotiations by second-guessing the parties' decision", the Court upheld the arrangement. Id. at 822.

The dissent, noting the potential for embarrassment created by the "Beacon" program, also pointed out that mediation and settlement occurred prior to any class certification. The class was only certified for settlement purposes.Id. at 828. Other details contained in the dissent cast further doubt on the utility, if not the validity, of the settlement. For instance, while Facebook agreed never to relaunch the "Beacon Program", this term was defined to include only programs "bearing the 'Beacon' name" – in other words, the same program under a different name would not be a "Beacon Program". Judge Kleinfeld's dissenting opinion notes that "[t]he injunctive relief the class received was no relief at all, not even a restriction on future identical conduct." Id. Regarding the monetary relief, Judge Kleinfeld explained "Facebook users…got no money, not a nickel, from the defendants. Even those who…were arguably entitled to statutory damages…got nothing. Class counsel, on the other ha[n]d, got millions." As to the "incentive payments", only $39,000.00 of the $9 million settlement was allocated to those payments. Id. at 829.

Judge Kleinfeld's spirited dissent is worth reading in its entirety for its detailed exposition of the numerous conflicts to which class actions are susceptible – and which arose in this case. A flavor, however, can be gleaned from this excerpt:

Defendant and class counsel, in any class action, have incentives to collude in an agreement to bar victims' claims for little or no compensation to the victims, in exchange for a big enough attorneys' fee to induce betrayal of the interests of the purported "clients." The defendant's agreement not to oppose some amount for the fee creates the same incentive as a payment to a prizefighter to throw a fight. A real client may refuse a settlement that is bad for him but benefits his lawyer, but a large class of unknown individuals lacks the knowledge or authority to say no. It is hard to imagine a real client saying to his lawyer, "I have no objection to the defendant paying you a lot of money in exchange for agreement to seek nothing for me." "The absence of individual clients controlling the litigation for their own benefit creates opportunities for collusive arrangements in which defendants can pay the attorneys for the plaintiff class enough money to induce them to settle the class action for too little benefit to the class (or too much benefit to the attorneys, if the claim is weak but the risks to the defendants high).

Over a dissent written by Judge Milan D. Smith, and joined by five of her colleagues, including Chief Judge Kozinski, the Ninth Circuit denied rehearingen banc. The dissent focused what, in its view, constituted several major departures from the Ninth Circuit's prior case law on the subject of cy pres remedies. Among the problems identified by the dissenters are the lack of any track record on the part of the DTF, and the divorce between the DTF's goals and the objectives of the underlying statutes. Lane, 709 F.3d at 793-794. As to the former, the dissenters explained that the DTF "has no record of service" and that, given this lack, there is simply no way of knowing how the settlement funds will be used in the level of detail required by the Court's prior cy pres precedent. Id. at 793. The dissenters argue that there is no assurance that the class members will "actually benefit" from DTF's activities, and that DTF's mission statement amounts to little more than promising that "DTF will do some 'stuff' regarding some more 'critical stuff.'" Id. at 794. Regarding the latter, the dissenters explain that the statutes cited by the original plaintiffs all, with one exception, have the goal of preventing "unauthorized access or disclosure of private information." Id. (emphasis in original) (citing the Electronic Communications Privacy Act, 18 U.S.C. § 2510; the Computer Fraud and Abuse Act, 18 U.S.C. § 1030; the Video Privacy Protection Act, 18 U.S.C. § 2710; the California Legal Remedies Act, Cal. Civ. Code § 1750, and the California Computer Crime Law, Cal. Penal Code § 502). The dissenters note that DTF's stated goals focus on educating users on controlling their private information, but not in the issue central to this case – controlling the unauthorized use of personal information which even educated users cannot anticipate, prevent, or direct. Id. at 794.

Returning to Chief Justice Roberts' statement concerning the denial of certiorari, we can glean several insights into the concerns about cy pres settlements. Although the Chief Justice joined the Court's decision to deny certiorari, his rationale is telling:

Marek's challenge is focused on the particular features of the specific cy pres settlement at issue. Granting review of this case might not have afforded the Court an opportunity to address more fundamental concerns surrounding the use of such remedies in class action litigation[.]

Marek, 134 S. Ct. at 9. Among the Chief Justice's concerns are: 1) When, if ever, cy pres remedies should be considered; 2) How to assess the fairness of cy pres remedies; 3) Whether new entities may be established as part of cy pres relief; 4) How existing entities should be selected; 5) What role is to be played by both the Judge and the parties in shaping a cy pres remedy; and 6) How closely the goals of any organization selected must correspond to the interests of the class. Id. It may be of note that the Chief Justice referenced Redish, Julian, & Zyontz's article in the Florida Law Review, entitled "Cy Pres Relief and the Pathologies of the Modern Class Action: A Normative and Empirical Analysis". 62 Fla. L. Rev. 617, 653-56 (2010) (available at:http://www.floridalawreview.com/wp-content/uploads/2010/01/Redish_BOOK.pdf). The Chief Justice concluded with an open invitation to further challenges, noting that "[i]n a suitable case, this Court may need to clarify the limits on the use of such remedies." Id.

Another vivid example of the potential problems in using cy pres remedies in the class action context is provided by In re Baby Prods. Antitrust Litig., 708 F.3d 163 (3d Cir. 2013). See Wasserman, Rhonda, Cy Pres in Class Action Settlements (March 24, 2014). Southern California Law Review, Vol. 88, 2014, Forthcoming; U. of Pittsburgh Legal Studies Research Paper No. 2014-14. Available at SSRN:http://ssrn.com/abstract=2413951 ("Wasserman"). InBaby Products, the plaintiffs alleged that defendants had conspired to set a "floor price" on select products. Wasserman at 32. Unlike in Lane, the district court certified a class of purchasers, and various subclasses, well in advance of settlement. Id. While the formula for distributing the funds was somewhat complex, assuming adequate moneys were available, plaintiffs would be eligible to receive up to treble damages, with any remainder to be donated to a charitable organization selected by the Court from among those proposed by the parties. Baby Products, 708 F.3d at 171. However, because most class members were unable to provide proof that they purchased a qualifying product, only roughly ten percent of the $35.5 million settlement fund was used to compensate class members.

As an initial matter, the court held that "[w]e join other courts of appeals in holding that a district court does not abuse its discretion by approving a class action settlement agreement that includes a cy prescomponent." Id. at 173. However, the Court immediately cautioned that "direct distributions to the class are preferred over cy pres" remedies. Id. The Court noted that the ALI has published recommendations limiting the use of cy pres awards:

If the settlement involves individual distributions to class members and funds remain after distributions (because some class members could not be identified or chose not to participate), the settlement should presumptively provide for further distributions to participating class members unless the amounts involved are too small to make individual distributions economically viable or other specific reasons exist that would make such further distributions impossible or unfair.

American Law Institute Principles of the Law of Aggregate Litig. § 3.07, comment b (2010) (the "Principles"). The Principles provide that the cy pres doctrine should be used as a last resort only when other methods of distribution are not practicable, whether due to the unknown composition of the plaintiff class or due to the impracticability of cost-effectively distributing numerous small awards. See Karen Shanley, The Institute in the Courts: Principles of the Law of Aggregate Litigation, The ALI Reporter (available at:http://www.ali.org/_news/reporter/summer2012/07-institute-courts-aggregate-litigation.html). The Principles indicate that cy pres is an inappropriate remedy where there was still a possibility of compensating plaintiffs. Id.; see also Klier v. Elf Atochem N. Am., Inc., 658 F.3d 468 (5th Cir. 2011) (use of cy pres remedy denied. Court, citing section 3.07 of the Principles, reasoned that "a cy pres distribution to a third party…is permissible 'only when it is not feasible to make further distributions to class members."). The Principles provide guidance as to when distribution of settlement proceeds to class members is viable. Principles § 3.07(a); Shanley at 1. Factors courts should consider include whether class members can be "identified through reasonable effort" and whether "the amounts involved are too small to make individual distributions economically viable" as well as "other specific reasons that would make such further distributions impossible or unfair." Principles at § 3.07(b); Shanley at 2.

To assess whether a settlement containing a cy pres provision is "fair, reasonable, and adequate" the Third Circuit indicated that courts should consider "the number of individual awards compared to both the number of claims and the estimated number of class members, the size of the individual awards compared to claimants' estimated damages, and the claims process used to determine individual awards." Baby Products, 708 F.3d at 174. More particularly, the Court advised that, in general, "cy pres awards should generally represent a small percentage of total settlement funds." Finally, the Court opined that if Defendants refused to alter the claims process to result in a higher payout to the class, "the Court will need to determine whether the class received sufficient direct benefit to justify the settlement as fair, reasonable, and adequate." Id. at 176. As part of its order remanding the matter, the Court vacated the $14 million attorneys' fee award, as the settlement was no longer in effect. Id.

The Baby Products opinion is part of a line of cases that have expressed concern about the implications of the cy pres doctrine. Joshua Dunlap, Closer Scrutiny for Cy Pres Distributions?, FirstClassDefense Blog (March 8, 2013) (available at:http://pierceatwood.typepad.com/first_class_defense/2013/03/closer-scrutiny-for-cy-pres-distributions.html). In In re Compact Disc Minimum Advertised Price Litig., the district court for the Federal District of Maine expressed skepticism of the benefit of a cy pres award to the class plaintiffs. No. 2:00-MD-1361, 2005 U.S. Dist. LEXIS 11332 (D. Me. June 10, 2005). InCompact Disc, the Court actually reduced the fee award to class counsel "in light of the modest benefit" received as a result of the cy pres award. Id.

Of course, despite criticism, courts continued to employ cy pres awards out of a belief that they are superior to the alternatives. In general, if a cy pres award is not available, then the settlement funds would revert to either the Defendant or the government. Wasserman at 10-12. In the former case, courts have expressed concern that that such a remedy would risk "undermining the deterrent effect of class actions by rewarding defendants for the failure of class members to collect their share of the settlement." Baby Products, 708 F.3d at 172. This is especially true where statutory objectives include deterrence or disgorgement. Wasserman at 11; Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301, 1308 (9th Cir. 1990). Of course, where compete distribution is impossible, the preference is to increase the award to class members before engaging in cy pres distribution. See In re Lupron Mktg. & Sales Practices Litig., 677 F.3d 21 (3d Cir. 2012). Commentators have long complained of the use of cy pres awards for numerous reasons, including the due process and First Amendment rights of class members. See Ilya Shapiro, "Curbing Class Action Settlement Abuses", Cato at Liberty Blog (Aug. 28, 2013) (available at:http://www.cato.org/blog/curbing-class-action-settlement-abuses). Chief Justice Roberts' concurrence to the denial of certiorari in Marek raises the possibility that these arguments may soon receive a hearing before the Court.

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