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Microsoft Class Action Defense Case-In re Microsoft I-V Cases: California Appellate Court Affirms Cy Près Provision Of $1 Billion Class Action Settlement

California State Court Holds that Provision in Class Action Settlement for Cy Près Distribution of Unclaimed and Unredeemed Vouchers to Public Schools did not Violate State Law

In February 1999, plaintiffs filed a putative class action against Microsoft in state court alleging violations of California’s Cartwright Act and Unfair Competition Law based on “‘exclusionary and restrictive practices’ that resulted in software overcharges [for Windows and MS-DOS] passed on to the class members.” In re Microsoft I-V Cases, 135 Cal.App.4th 706, 710 (Cal.App. 2006). Because we focus here on the cy près distribution of unclaimed settlement proceeds, we note only that following a 1999 federal court trial of state and federal antitrust actions, the district court found against Microsoft, see United States v. Microsoft Corp., (D. D.C. 1999) 84 F.Supp.2d 9), and a wave of class action lawsuits against the company followed. Other California class action cases against Microsoft were coordinated with plaintiffs’ class action, and the coordinated cases became the Microsoft I-V Cases. After the court certified the coordinated litigation as a class action, the parties reached a $1.1 billion settlement and presented it to the court for approval. In re Microsoft I-V Cases, at 711. In approving the class action settlement, the trial court rejected the arguments by an objector to the cy près distribution of unclaimed settlement proceeds, and the objector appealed. The Court of Appeal affirmed.

In broad terms, the class action settlement provides for vouchers as direct compensation to members of the class, In re Microsoft I-V Cases, at 711-13. In the event that less than $1.1 billion was claimed, then the agreement provided for cy près distribution of the balance of the settlement proceeds such that Microsoft retained one-third of the unclaimed settlement funds, and two-thirds would be distributed to eligible schools. Id., at 713-14. Similarly, if consumers obtained vouchers but failed to redeem them, then Microsoft would retain one-third of the unused settlement funds, and two-thirds would be distributed to schools. Id., at 714. If schools failed to redeem the vouchers within six years, then they would be given to “other needy organizations in California” upon court approval. Id., at 715.

One of the objectors to the settlement challenged the cy près provisions in the settlement, In re Microsoft I-V Cases, at 716, arguing that California Code of Civil Procedure section 384(b) “flatly prohibits” such a distribution in this case. Section 384(b) provides in part,

[P]rior to the entry of any judgment in a class action … the court shall determine the total amount that will be payable to all class members [and] shall also set a date when the parties shall report to the court the total amount that was actually paid to the class members. After the report is received, the court shall amend the judgment to direct the defendant to pay the sum of the unpaid residue, plus interest … to nonprofit organizations or foundations to support projects that will benefit the class or similarly situated persons, or that promote the law consistent with the objectives and purposes of the underlying cause of action, to child advocacy programs, or to nonprofit organizations providing civil legal services to the indigent.

The objector claimed that the “eligible schools” designated in the settlement agreement were not among the entities set forth in the statute and, accordingly, the trial court ignored the plain meaning of the statute in approving the settlement. In re Microsoft I-V Cases, at 717. The trial court rejected this argument, concluding that section 384 “provide[d] for distribution of unpaid residuals … only when the parties have not made other provisions for those funds.” Id. The issue before the appellate court, then, was whether section 384(b) “properly applies to preclude approval of the settlement agreement.” Id., at 718. The appellate court analyzed the statutory language and legislative history at length, see id., at 718-22, and concluded that the trial court did not err in refusing to apply section 384 to the case before it, id., at 722.

The objector argued on appeal that even if section 384 did not apply to the class action settlement agreement, the trial court erred in approving the cy près distribution provisions. In re Microsoft I-V Cases, at 722. He maintained that the trial court failed to exercise its discretion because it did not consider alternative distributions and therefore could not have concluded that the distribution provided for in the proposed settlement was the “best” option available, id., at 723-24; he further contended that the proposed cy près distribution did not “serve the purposes of the underlying cause of action” therefore precluding approval of the settlement, id., at 725.

With respect to the first argument, the Court of Appeal explained that the trial court’s obligation was not “to fashion a cy près distribution” but rather “to approve a [cy près] distribution” fashioned by the parties “through extensive negotiated compromise.” In re Microsoft I-V Cases, at 724. As to the second argument, the appellate court held that “the court acted within its discretion in determining that the proposed distribution was useful in furthering the purpose of the law underlying the plaintiffs’ cause of action in that it provided an indirect compensatory effect.” Id., at 727. The fact that Microsoft may retain one-third of certain settlement funds, if unclaimed or not redeemed, did not alter the appellate court’s conclusion: “Microsoft’s minimum liability would be real and significant-notwithstanding its negotiated retention of the one-third of the value of any unclaimed direct compensation.” Id., at 729. The Court of Appeal affirmed the trial court judgment, concluding that the lower court did not abuse its discretion in finding the settlement to be fair, adequate and reasonable.

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