To be Presented by Professor Suzanne Chiodo* at the Perfect Law Conference

Recent developments in the Merricks case have raised serious questions about the distribution of unclaimed damages in collective proceedings. Back in 2021, I said of that case:

[I]t remains to be seen how many of the 46.2 million class members in the Mastercard class action will claim against any settlement or judgment. If the majority of the proceeds is distributed … cy-près… then serious questions may be raised as to the compensatory and access to justice purposes of the new opt-out regime. Such questions should be asked.

Why should such questions be asked? Because the distribution of damages is directly relevant to the justification for and purpose of collective proceedings. For collective proceedings before the Competition Appeal Tribunal (CAT), and as Mr Justice Marcus Smith has said, the focus of any such distribution must be the compensation of class members.

But what happens when, due to low take-up rates or for other reasons, the direct compensation of class members is impractical or impossible? This article looks at that question. At the recent hearing on the Collective Settlement Approval Order application in Merricks, most of the focus was on how much of the undistributed residue of the settlement fund could go to solicitor and own client fees and to the litigation funder. However, the Joint Application for a Collective Settlement Approval Order and the participants in the hearing also discussed the possibility of a portion of the fund going to charity – either the Access to Justice Foundation or the Good Things Foundation, a digital and financial inclusion charity.

Distribution of all or part of a settlement or judgment amount to a charity or non-profit organisation in a manner that is likely to indirectly benefit class members (what Professor Mulheron calls ‘organisational cy-près’ distributions)[1] is the subject of this article. The literature in this area and my own empirical research raise serious normative concerns with cy-près distributions.[2]

Under the CAT regime, undistributed amounts of aggregate damages awarded as part of a judgment must be paid to the Access to Justice Foundation[3]or used to meet the litigation costs and expenses of the representative.[4]Undistributed amounts of a settlement fund may go to recipients agreed by the parties, but the settlement agreement must be approved by the CAT.[5]

The primary theoretical justification for cy-près distributions is behaviour modification. If the undistributed amount does not revert to the defendant,the defendant will be made to internalise the costs of its wrongdoing, thereby deterring it (and hopefully others similarly placed) from future wrongdoing.[6]However, there is some question as to whether behaviour modification measures actually work as intended – defendants may pass on the costs to their customers, or accept that collective proceeding judgments against them are simply a cost of doing business, or even engage in risk-averse behaviours such as ceasing to offer certain products or services in the relevant jurisdiction.[7]

In addition, a focus on behaviour modification may have a distorting effect. It can reduce efforts to compensate class members (or even getting ‘as near as possible’ to compensating class members), because the focus is on making the defendant pay. The role of behaviour modification in a settlement where there has been no finding or admission of liability is also questionable – precisely what behaviour is being modified?If the sole aim is behaviour modification, one might also ask why the amount the defendant must pay is tied to compensatory damages. Indeed, in some North American class actions, class members have claimed disgorgement of the defendant’s profits in place of compensation.[8]For these and other reasons, cy-près distributions have been regarded with some suspicion in a system where claimant compensation is still paramount.[9]

Cy-près is just one way in which settlement residues can be distributed. Other options include reversion to the defendant, pro-rata distribution amongst class members who have already claimed, escheat, application to the costs and expenses incurred by the class representative in prosecuting the proceeding (including litigation funding), or the parties can agree that they will seek the guidance of the court on distribution.

Despite these numerous options, the experience in Ontario and Australia shows that cy-près distributions are by far the favourite (see Figure 1 in the appendix to this article).[10] Notably, however, there are no examples in Australia,[11] and none in Ontario since 2013, of what Professor Mulheron calls ‘price rollback cy-près’ distributions[12] (whereby the defendant reduces the price of its product or service into a certain point in the future).Such distributions have generally been frowned upon in North America because of their tendency to force consumers to keep purchasing the defendant’s products or services in order to collect their refunds.[13]

The experience in British Columbia is a little different because of the requirement, since 2018,that the Law Foundation of British Columbia receive 50 per cent of the undistributed amount of any settlement or judgment unless it would be impractical or impossible to do so.[14] As demonstrated in Figure 2 in the appendix, although the statutory requirement is only 50 per cent, half of the settlement agreements I reviewed provided for the distribution of 100 per cent of the residue to the Law Foundation. The 2018 changes were made with the express purpose of behaviour modification of defendants,[15] and this now seems to be the primary focus in British Columbia.[16]

Where a cy-près distribution is made, there is also a key difference between a ‘fixed’ distribution (whereby the entire settlement amount that is available to class members is distributed cy-près) and a residual distribution (whereby only the residue is distributed cy-près).[17]Fixed distributions do not directly compensate class members at all, and are primarily focused on behaviour modification. From the normative perspective of access to justice and class member compensation, then, they are to be discouraged. Until 2012, fixed cy-près distributions were the norm in Ontario and across Canada;[18] since then, however (and as shown in Figure 3) the majority of cy-près distributions have been residual.

Nevertheless, my research shows that the beneficiaries of those residual distributions are not, for the most part, ‘as near as possible’ to the circumstances, grievances, and characteristics of the non-claiming class members (see Figure 4). Instead, most beneficiaries in Ontario (as well as Australia[19]) are ‘next best’ recipients: that is, theyare not closely related to the origin of the collective proceedings, even though they are likely to apply the unclaimed residue for public interest purposes.[20]

This indicates that finding ‘proxies’ for the class, as suggested by the Court of Appeal in Gutmann,[21] may actually be quite difficult. In the face of this difficulty, and often without even questioning it, counsel and courts in Ontario and Australia seem to have defaulted to more generalised charities and public interest good causes. In fact, it seems that the lower the per-claim amount, the fewer questions are asked – which is why ‘next-best’ distributions in Ontario are more popular in securities, competition, and consumer protection cases (see Figure 5).

This ‘default’ benefits more sympathetic charities, including law-related charities,[22]as demonstrated for Ontario in Figure 6. For Australia, as Dimopoulos and Morabito concluded, after finding that many beneficiaries had ‘no nexus at all to the class members and their losses’, ‘[t]his finding strongly suggests that the choice of relevant entities was based on an assessment by the lead plaintiff or their solicitors as to which charities and not-for-profit organisations were worthy of financial assistance.’[23]

The proposal of the Access to Justice Foundation as a cy-près recipient in the Merricks case indicates the difficulties with aligning cy-près recipients with the interests of the class. While the Access to Justice Foundation is undoubtedly a worthy cause, one might wonder how increasing access to justice generally will benefit those affected by unlawful fees imposed by credit card companies.The question of cy-près distributions, then, should be approached carefully. While efforts to compensate class members directly may be difficult (and while defendants should not benefit from a windfall simply due to low take-up rates), cy-près distributions should not become the default option. As is the case in our civil justice system generally, compensation matters and should be the ultimate goal.

APPENDIX

[1]Rachael Mulheron, ‘The conundrum of undistributed residues under the United Kingdom’s collective proceedings regime’ (2024) 23(2) Competition Law Journal 79, 87.

[2] The concept is derived from the law of charitable trusts and means ‘cy-près comme possible’ or ‘as near as possible’:Mulheron (n 2) 87.

[3] The Access to Justice Foundation is ‘the charity for the time being prescribed by order made by the Lord Chancellor under section 194(8) of the Legal Services Act 2007’ (Competition Act 1998, section 47C(5)).

[4]Competition Act 1998, section 47C(6).

[5] Competition Act 1998, sections 49A(1) and (5) or 49B(1).

[6]Brian T Fitzpatrick, Do Class Actions Deter Wrongdoing? (UC Berkeley School of Law 2022), online: https://civiljusticeinitiative.org/wp-content/uploads/2023/10/Class_Actions_Deter_Wrongdoing.pdf.

[7]Some defence-side submissions to the Law Commission of Ontario made these points: Law Commission of Ontario, Class Actions: Objectives, Experiences and Reforms (LCO 2019) at 90-91. However, Professor Brian Fitzpatrick provides empirical evidence to refute them (n 6).

[8] The Supreme Court of Canada, at least, has halted this development: see Atlantic Lottery Corp Inc v Babstock, 2020 SCC 19.

[9]Department for Business, Innovation, and Skills, Private actions in competition law: a consultation on options for reform – government response (BIS 2013) [5.46]-[5.49]. According to this report, respondents stated that cy-près distributions would ‘cross the line from compensation to punishment’. Instead, most respondents stated that any funds that could not be distributed to class members should be donated to the Access to Justice Foundation in order to support the aims of access to justice and deterrence. Fewer than 10% of respondents supported cy-près distributions to charity generally.

[10] In the Ontario case law, reversion seems increasingly to be an option of last resort. The preference instead seems to be for several rounds of distribution to class members, followed by distribution of the residue cy-près. The England and Wales Court of Appealhas also indicated that reversion should be an option of last resort, primarily to prevent the wrongdoer obtaining a windfall:BT Group plc v Justin Le Patourel [2022] EWCA Civ 593 [98].

[11] Georgina Dimopoulos and Vince Morabito, ‘Cy-Près Remedies in Class Actions – Quo Vadis?’ (2021) 95 Australian Law Journal 710, 720.

[12] Mulheron (n 2) 89.

[13] The defendant may also use the ‘price rollback’ as a marketing promotion to its own benefit, or may even recoup the cost of the rollback from consumers, such that the latter receives no benefit at all. A notorious example in Canada is Garland v Enbridge Gas Distribution Inc, [2006] OJ No 4273 (SCJ).

[14] Class Proceedings Act, RSBC 1996, c 50, section 36.2(1). Indigenous claims are an exception (section 36.2(2)).

[15]British Columbia, Legislative Assembly, Official Report of Debates (Hansard), 41st Parl, 3rd Sess (22 Nov 2018) (David Eby).

[16]Ontario’s Class Proceedings Act, 1992, SO 1992, c 6, section 27.2(3), also allows for cy-près distributions to a registered charity or (if parties cannot agree on a charitable recipient) Legal Aid Ontario. However, there appear to be no decisions in which a cy-près distribution has been made to Legal Aid Ontario.

[17] This distinction is made in Jasminka Kalajdzic, ‘“The Illusion of Compensation”: Cy-Près Distributions in Canadian Class Actions’ (2013) 92(2) The Canadian Bar Review 173.

[18]Kalajdzic (n17) 189.

[19] Dimopoulos (n11) 725: ‘with respect to a majority of cy-près provisions, we were not able to identify how the activities of the recipients of the settlement residues provided any benefit to the class members, directly or indirectly.’

[20] Rachael Mulheron makes this distinction between ‘as near as possible’ and ‘next best’ in The Modern Cy-près Doctrine: Applications and Implications (UCL Press 2006) 271–274; see also Mulheron (n 2) 87.

[21]London & South Eastern Railway Ltd, First MTR South Western Trains Ltd & Or v Justin Gutmann [2022] EWCA Civ 1077.

[22]This may give the impression that lawyers are just ‘taking care of their own’.

[23] Dimopoulos (n11) 725.