3rd Circuit Rejects Baby Products Cy Pres Class Action Settlement

On Feb. 19, 2013, the 3rd U.S. Circuit Court of Appeals in In re Baby Products Antitrust Litigation, vacated the district court’s approval of a class action settlement that included a cy pres provision because there was not sufficient information to determine whether the settlement provided an adequate direct benefit to the class members.  The decision is available here.

A cy pres provision in a settlement typically allows any settlement funds leftover after distribution to the class members to be distributed to a third party (typically, a charity) if the third party’s activities relate to the injury suffered by the class. The settlement in In re Baby Products was for $21.5 million, but only $3 million was ultimately distributed to the class, leaving cy pres recipients with $18.5 million. Although the 3rd Circuit joined the 1st and 9th Circuits in generally approving the permissibility of cy pres provisions in class action settlements, the Court ultimately vacated the district court’s approval of the settlement—as well as the attorneys fees awarded based on it—because the parties never advised the district court that such a minimal amount would go directly to the class members.

For attorneys contemplating a cy pres provision in a settlement agreement, the 3rd Circuit’s opinion provides important guidance. For example, cy pres provisions are more likely to survive scrutiny where individual distributions are impractical or too difficult. A cy pres distribution should be a small percentage of the total settlement funds, with direct distributions to the class being the primary focus of the settlement. Further, if the district court does not receive sufficient information from the parties to make this determination, the court might withhold approval of the settlement until information is provided.