American Bar Association | Litigation Section | Class Actions and Derivative Suits
Litigation Committee
Winter 2023, Vol. 33 No. 1
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ARTICLES
A Practical Guide to the Undistributed Settlement Funds
Problem and the Cy Pres Solution
By Bill Boies and Kelly Shami
When you finally reach an agreement to settle a hotly contested class action, you want more than
anything for the court to approve your settlement agreement and for the case to be over. But, to
get to the end of the case, both class counsel and defense counsel need to anticipate problems in
the settlement process and build effective solutions into the settlement agreement and fairness
hearing. One obvious and important problem is what to do about any undistributed residue after
distribution of the settlement funds to class members. This article is your guide to dealing with
the residue problem and the cy pres solution in a way that will satisfy the most meticulous judge
and will avoid or defeat objections to the settlement.
Plan Ahead for Undistributed Settlement Funds
Let’s begin by recognizing the problem. A class action settlement fund is intended to make
distributions to class members, after paying class counsel fees and the expenses of settlement
administration. But, despite the best efforts of the settlement administrator to make payments to
class members, there will typically be funds left over. This occurs for many reasons: Few class
members actually submit claims for small recoveries in large consumer class actions; class
member address lists are outdated; class members don’t open or don’t trust mail about the
settlement; and settlement checks go uncashed. Indeed, “a claim rate as low as 3 percent is
hardly unusual in consumer class actions[.]” Keil v. Lopez, 862 F.3d 685, 697 (8th Cir. 2017).
Kroll Settlement Administration estimates that about 45 percent of checks for less than $20.00
and about 70 percent of checks for more than $200.00 are ultimately cashed (although electronic
payment options can achieve better results).
While the problem should be obvious in advance, it may be many months before the amount of
undistributed settlement funds becomes apparent. Because of that time lag, you will want to
avoid later work and complications by preemptively addressing the problem in your settlement
agreement and related court filings.
So what should you suggest for the disposition of any residual funds? Three possible answers are
(1) a reversion to the settling defendant, (2) escheat to the state or federal government, or (3) cy
pres awards. Of the three choices, only one will be expected and well received by your judge.
Reversion is not the correct answer. If you represent a defendant that is unfamiliar with the
nuances of class action litigation, you may need to explain to your client that judges firmly reject
returning undistributed settlement funds to settling defendants—because returning the money
undermines the deterrent effect of class action litigation (see In re Baby Prods. Antitrust Litig.,
708 F.3d 163, 172 (3d Cir. 2013); Diamond Chem. Co. v. Akzo Nobel Chemicals B.V., 517 F.
Supp. 2d 212, 218–19 (D.D.C. 2007)), and because the defendant has agreed to pay a set amount
in exchange for releases from class members (see In re Motorsports Merch. Antitrust Litig., 160
F. Supp. 2d 1392, 1395 (N.D. Ga. 2001)). The opposite side of this coin is that courts have
