Last week the Third Circuit issued its first opinion on the subject of cy pres relief (i.e., distributions to charity instead of directly to class members) in class action settlements.  There have been several federal appellate decisions over the last year on this issue.  These decisions have suggested a need for greater scrutiny of cy pres relief with respect to: (1) whether providing additional benefits directly to class members would be preferable to cy pres; (2) whether the charity or charities selected for such relief will be likely to reach class members and/or aid the objectives of the class action; and (3) the need for class members (and the court) to be informed of the identities of the proposed cy pres recipients and have an opportunity to object.  For summaries of two other recent decisions, see my May 1, 2012 blog post addressing the First Circuit’s decision in the Lupron Marketing case, and my July 19, 2012 blog post addressing the Ninth Circuit’s decision in Dennis v. Kellogg Co.  Last week the Third Circuit added its voice in its first opinion on this issue.

The new Third Circuit opinion, In re Baby Products Antitrust Litigation, Nos. 12-1165, 12-1166 & 12-1167, 2013 U.S. App. LEXIS 3379 (3d Cir. Feb. 19, 2013) is an antitrust case alleging that Toys “R” Us, Babies “R” Us and certain baby product manufacturers conspired to set a “floor” on prices for certain baby products, thereby driving up consumers’ costs.  The class action settlement called for creation of a $35.5 million settlement fund, from which direct payments would be made to class members on a “claims made” basis, $14 million of attorneys’ fees would be paid to plaintiffs’ counsel, and the remainder (less administrative costs) would be distributed to cy pres recipients to be chosen later by the judge from proposals submitted by the parties.  Class members who submitted documentary evidence  that they purchased a particular product and the purchase price they paid (with a receipt or other documentary evidence) would receive 20% of the price they paid.  This would also be subject to a multiplier of up to three times the amount paid, depending on how many claims were made.  Class members who demonstrated that they purchased the product but could not demonstrate the amount paid would get similar damages based on an estimated retail price.  All other class members without proof of purchase would get $5.  During the claims process, the number of claims submitted was lower than expected (likely because not many people retained proof of purchase).  Based on the claims submitted, only about $3 million would go to the class members and over $18 million would go to cy pres.  There were a number of objections to the settlement.  Ted Frank of the Center for Class Action Fairness argued the appeal on behalf of the objectors.

The Third Circuit vacated the district court’s order approving the settlement, also vacated the attorneys’ fees award, and remanded the case.  Here are a few key points from the opinion:

  • Potential Conflict of Interest:  The court explained that cy pres distributions “present a potential conflict of interest between class counsel and their clients because the inclusion of a cy pres distribution may increase a settlement fund, and with it attorneys’ fees, without increasing the direct benefit to the class.  Where a court fears counsel is conflicted, it should subject the settlement to increased scrutiny.” It seems to me that potential avenues to avoid this problem could be for fees to be sought solely on a lodestar basis, or, where fees are measured as a percentage of the settlement fund, to give greater weight to direct relief to class members (something the Third Circuit suggests).  One difficulty with a lodestar analysis, as the court notes, is that where (as in this case) class counsel appears to have actually devoted far more time to the case than their fee award would warrant on a lodestar basis, they might have an incentive to cut their own losses in a settlement. 
  • Cy Pres Typically Should Be a Small Component of a Settlement:  The court explained that “[b]arring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds.”  The court suggested that, in order for the district court to have adequate information on this subject, it may be appropriate in some cases to defer final approval until the actual distribution of the settlement is reasonably clear.  Alternatively, the settlement could be structured such that class members receiving direct payouts receive more money if the claim submission rate is lower than expected.  In the Baby Products settlement, the Third Circuit suggested that the $5 payouts could be increased, or the evidentiary threshold for receiving larger awards could be lowered (it was unclear whether, for example, photographic evidence of purchase would be accepted).  The court noted that, if there were material changes to the terms of the settlement, an additional round of notice would be required (which I would expect to involve a substantial cost).  The court expressed doubt about whether the settlement as presently constructed in the case was in the best interests of the class. 
  • Identification of Cy Pres Recipients:  The court concluded that the failure to identify the cy pres recipients in the settlement notice was not a violation of due process, but the identity of the proposed recipients would need to be made publicly available, and the class members would have to be allowed an opportunity to object.  The class members would also be entitled to appeal the district court’s selection of cy pres recipients, at least through intervention.  Given that this can potentially lead to two rounds of appeals regarding objections to a settlement, it seems to me that, in the interests of efficiency, identifying the cy pres recipients in the settlement notice can be a good idea. 
  • Attorneys’ Fees:  The Third Circuit declined to adopt a per se rule requiring district courts, in calculating attorneys’ fees based on a percentage of the settlement fund, to discount cy pres awards.  The court explained, however, that “[w]here a district court has reason to believe that counsel has not met its responsibility to seek an award that adequately prioritizes direct benefit to the class, we therefore think it appropriate to decrease the fee award.”  The court also noted the concern that class actions “are brought primarily to benefit class counsel” and that cy pres awards “can exacerbate this problem.”  The Third Circuit explained that one approach that could be taken, and which finds support in the Manual for Complex Litigation, is for the trial court to delay a ruling on attorneys’ fees until the distribution to class members is complete.  That allows the trial court to see the full picture before it decides on an award of attorneys’ fees.