Third Circuit Makes Approval of Class Action Settlements Including Cy Pres Distributions More Difficult

In In re Baby Products Antitrust Litigation, the Third Circuit vacated a district court’s approval of a $35.5 million class action settlement, finding it unreasonable that only $3 million of the settlement fund was to be distributed to class members. This marked the first time the Third Circuit has addressed the issue of cy pres distributions in class action settlements, and will likely lead district courts to subject class action settlements involving cy pres distributions to greater scrutiny.

The Third Circuit instructed that in determining whether to approve a settlement involving a cy pres distribution, district courts should employ the same framework for assessing other aspects of class action settlements, but added that “one of the additional inquiries” where cy pres distributions are involved, is the “the degree of direct benefit provided to the class.” That inquiry involves consideration of, among other things, “the number of individual awards compared to both the number of claims and the estimated number of class members, the size of the individual awards compared to claimants’ estimated damages, and the claims process used to determine individual awards.” The court held that “[b]arring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds.”

The Third Circuit noted that “this inquiry needs to be, as much as possible, practical and not abstract.” The appeals court instructed that if the parties do not on their own initiative supply the information needed to make the necessary findings, the district court should “affirmatively seek out such information.” In order to make those findings, the Third Circuit suggested that a district court may need to “withhold final approval of a settlement until the actual distribution of funds can be estimated with reasonable accuracy.” Alternatively, the Third Circuit suggested that a court “could condition approval of a settlement on the inclusion of a mechanism for additional payouts to individual class members if the number of claimants turns out to be insufficient to deplete a significant portion of the total settlement fund.”

While the Third Circuit did not provide an exhaustive or mandatory list of methods for assessing the degree of benefit to the class where cy pres distributions are involved, the decision provides guidance to district courts in how to accomplish that task. District courts will likely apply a heightened standard to the approval of class action settlements containing cy pres distributions and engage in a more detailed examination of the amount of the settlement fund that will actually be distributed to class members. Thus, parties seeking approval of such settlements should be prepared to supply the district court with sufficient information for the district court to analyze the degree of direct benefit to the class.