Late last year, the Ninth Circuit affirmed an expansive use of cy pres remedies in class action settlements, refusing to second-guess either the parties' selection of a cy pres recipient or the district court's determination that the use of a cy pres remedy was appropriate. Last month, however, the Third Circuit set aside a settlement containing a cy pres remedy, holding that the district court based its approval of the settlement on an incomplete record.
In In re Baby Products Antitrust Litigation, the district court approved a $35.5 million settlement of consolidated antitrust class actions brought against several toy manufacturers and retailers. The settlement provided that after the payment of all claims and attorneys' fees and costs, all remaining funds would go to one or more charitable organizations proposed by the parties and selected by the court for a purpose underlying the interests of the class—i.e., cy pres recipients.
Although the parties apparently contemplated that the cy pres remedy would account for a relatively small portion of the total settlement, the opposite proved to be the case. About $14 million was to go to attorneys' fees, and of the remainder, it was projected that only about $3 million would be distributed to individual claimants, leaving a whopping $18.5 million for cy pres distribution.
The Third Circuit, holding for the first time that a cy pres remedy can be a permissible component of a class action settlement, nevertheless overturned the district court's approval. In doing so, the panel emphasized that direct distributions to the class are preferred to cy pres distributions, and held that the degree of direct benefit to the class is a necessary inquiry in evaluating a settlement.
The basis for the court's reversal, however, was not that the cy pres distribution was necessarily too high, but that the district court lacked a sufficient factual basis for approval--particularly with respect to the allocation of the funds. At the time the district court conducted its fairness hearing, the deadline for claim submissions had not yet passed, and the district court apparently overestimated the likely volume of claims. Following the conclusion of the claims period, the parties did not provide the actual allocation figures to the district court, and the district court failed to fulfill its obligation to "affirmatively seek out such information."
Interestingly, even the district court's estimate of the likely payments to class members, made before the claims deadline passed, was only $8.1 million at most—which still would have left more than $13 million for cy pres recipients. Thus, the district court approved the settlement with the expectation that once attorneys' fees and costs were deducted, a substantial majority of the portion designated for the class would go to cy pres recipients rather than class members. Yet if the district court's information had proven correct, it is hard to imagine that the Third Circuit have been satisfied with this breakdown.
The key to the opinion may lie in another piece of information the district court lacked. Under the settlement, claimants who provided proof of purchase were eligible to receive a refund of 20 percent of their purchase price. Claimants who did not provide proof of purchase were eligible to receive an award of $5. In the event settlement funds remained after payment of these claims, claimants who submitted the proof of purchase and received the 20 percent refund would obtain pro rata enhancements from the remainder, up to a maximum of three times the original award. The vast majority of claimants, however, fell into the $5 category and were not subject to an enhancement from the remainder.
In approving the settlement, the district court based its acceptance of the $5 cap on compensation for claimants without proof of purchase in part on a determination that the standard of proof required to receive the higher award was "fairly low." The Third Circuit, however, held that the disproportionately large number of claimants who did not submit proof of purchase "cast[] doubt on this assumption." In remanding, the court noted that the parties might wish to consider either increasing the $5 payment or lowering the evidentiary bar for receiving the higher award.
Despite taking great pains to couch its opinion in terms of the information considered by the district court, the Third Circuit appears to have to imposed substantive requirements on settlements containing cy pres awards. The court's obvious concern about the percentage of the settlement going to cy pres recipients, even though the district court fully expected the percentage to be significant based on the information to it available at the time, is one example. The panel's open suggestion of potential permissible modifications to the settlement agreement, while expressed in terms of voluntary action by the parties and the district court's role in evaluating the fairness of any modified settlement, all but orders the parties to revise the payout parameters.
Officially, Baby Products holds that there is no numerical requirement regarding the distribution of class action settlement proceeds between class members and cy pres recipients. Unofficially, however, practitioners in the Third Circuit can assume that any settlement including a cy pres award had better ensure that class members receive at least as much as cy pres, and probably substantially more.
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