In Re Baby Products Antitrust Litigation , 708 F.3d 163 ( 2013 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
Nos. 12-1165, 12-1166 & 12-1167
________________
IN RE BABY PRODUCTS ANTITRUST LITIGATION
Kevin Young, Appellant (No. 12-1165)
Clark Hampe, Appellant (No. 12-1166)
Allison Lederer, Appellant (No. 12-1167)
________________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action Nos. 2-06-cv-00242 / 2-09-cv-06151)
District Judge: Honorable Anita B. Brody
________________
Argued September 19, 2012
Before AMBRO, GREENAWAY, JR.,
and O’MALLEY, * Circuit Judges
*
Honorable Kathleen M. O’Malley, United States Court of
Appeals for the Federal Circuit, sitting by designation.
(Opinion filed: February 19, 2013)
Christopher M. Arfaa, Esquire
Littleton Joyce Ughetta Park & Kelly
150 North Radnor Chester Road
Suite F-200
Radnor, PA 19087
Theodore H. Frank, Esquire (Argued)
Center for Class Action Fairness
1718 M. Street, N.W., No. 236
Washington, DC 20036
Daniel Greenberg, Esquire
55 Fontenay Circle
Little Rock, AK 72223
Counsel for Appellant
Kevin Young
Christopher A. Bandas, Esquire
Bandas Law Firm
500 North Shoreline, Suite 1020
Corpus Christie, TX 78471
Counsel for Appellant
Clark Hampe
James H. Price, Esquire
Lacy, Price & Wagner
249 North Peters Road, Suite 101
Knoxville, TN 37923
2
Counsel for Appellant
Allison Lederer
Theodore B. Bell, Esquire
Mary Jane E. Fait, Esquire
Wolf, Haldenstein, Adler, Freeman & Herz
55 West Monroe Street, Suite 1111
Chicago, IL 60603
Steve W. Berman, Esquire
George W. Sampson, Esquire
Anthony D. Shapiro, Esquire
Ivy A. Tabbara, Esquire
Hagens Berman Sobol Shapiro
1918 Eighth Avenue, Suite 3300
Seattle, WA 98101
Thomas H. Burt, Esquire
Fred T. Isquith, Esquire
Wolf, Haldenstein, Adler, Freeman & Herz
270 Madison Avenue
New York, NY 10016
William G. Caldes, Esquire
Eugene A. Spector, Esquire (Argued)
Jeffrey L. Spector, Esquire
Spector, Roseman, Kodroff & Willis
1818 Market Street, Suite 2500
Philadelphia, PA 19103
Elizabeth A. Fegan, Esquire
Hagens Berman Sobol Shaprio
1144 West Lake Street, Suite 400
3
Oak Park, IL 60301
Counsel for Appellee
Carol M. McDonough
Harry H. Rimm, Esquire
Mark L. Weyman, Esquire (Argued)
Reed Smith
599 Lexington Avenue
New York, NY 10022
Melissa I. Rubenstein, Esquire
Reed Smith
1650 Market Street
2500 One Liberty Place
Philadelphia, PA 19103
Counsel for Appellees
Toys R Us Inc., Babies R Us Inc.,
Toys R Us Delaware Inc.
Neil E. McDonell, Esquire
Dorsey & Whitney
51 West 52nd Street
New York, NY 10019
Counsel for Appellee
Baby Bjorn AB
Alexander Maltas, Esquire
Marguerite M. Sullivan, Esquire
Edward M. Williamson, Esquire
Margaret M. Zwisler, Esquire
4
Latham & Watkins
555 11th Street, N.W., Suite 1000
Washington, DC 20004
Samuel W. Silver, Esquire
Schnader Harrison Segal & Lewis
1600 Market Street, Suite 3600
Philadelphia, PA 19103
Counsel for Appellee
Britax Child Safety Inc.
Michael J. Hahn, Esquire
Lowenstein Sandler
65 Livingston Avenue
Roseland, NJ 07068
Counsel for Appellee
Kids Line Inc.
Carolyn H. Feeney, Esquire
George G. Gordon, Esquire
Joseph A. Tate, Esquire
Dechert
2929 Arch Street
18th Floor, Cira Centre
Philadelphia, PA 19104
Counsel for Appellee
Medela Inc.
Kendall Millard, Esquire
Barnes & Thornburg
5
11 South Meridian Street, Suite 1313
Indianapolis, IN 46204
Counsel for Appellee
Peg Perego USA Inc.
David R. Martin, Esquire
Suite 3116
5200 Peachtree Road
Atlanta, GA 30341
Isaac J. Mitrani, Esquire
Mitrani Rynor & Adamsky
One Southeast Third Avenue
2200 Suntrust International Center
Miami, FL 33131
Counsel for Appellee
Regal Lager Inc.
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OPINION OF THE COURT
________________
AMBRO, Circuit Judge
We address for the first time the use of cy pres
distributions in class action settlements. 1 “The term ‘cy pres’
1
Although Judge Weis briefly discussed the desirability of cy
pres distributions in a partial concurrence and dissent, the
majority in that case did not address the issue. See In re Pet
6
is derived from the Norman French expression cy pres comme
possible, which means ‘as near as possible.’” Democratic
Cent. Comm. v. Washington Metro. Area Transit Comm’n, 84
F.3d 451, 455 n.1 (D.C. Cir. 1996). 2 When class actions are
resolved through settlement, it may be difficult to distribute
the entire settlement fund, after paying attorneys’ fees and
costs along with fund administration expenses, directly to its
intended beneficiaries—the class members. Money may
remain unclaimed if class members cannot be located, decline
to file claims, have died, or the parties have overestimated the
amount projected for distribution for some other reason. It
may also be economically or administratively infeasible to
distribute funds to class members if, for example, the cost of
distributing individually to all class members exceeds the
amount to be distributed. In these circumstances, courts have
permitted the parties to distribute to a nonparty (or
nonparties) the excess settlement funds for their next best
use—a charitable purpose reasonably approximating the
interests pursued by the class.
Food Prods. Liab. Litig., 629 F.3d 333, 363–64 (3d Cir.
2010) (Weis, J., concurring in part and dissenting in part).
2
The cy pres doctrine originated in trusts-and-estates law as a
rule of construction used to preserve testamentary charitable
gifts that otherwise would fail. “When it becomes impossible
to carry out the charitable gift as the testator intended, the
doctrine allows the ‘next best’ use of the funds to satisfy the
testator’s intent ‘as near as possible.’” Id. (quoting Natalie A.
DeJarlais, Note, The Consumer Trust Fund: A Cy Pres
Solution to Undistributed Funds in Consumer Class Actions,
38 Hastings L.J. 729, 730 (1987)).
7
The cy pres award in this case was part of a settlement
of consolidated antitrust class actions brought by several
named plaintiffs (collectively, the “Plaintiffs”) on behalf of
consumers against retailers Toys “R” Us, Inc. and Babies “R”
Us, Inc. along with several baby product manufacturers (the
retailers and manufacturers are collectively referred to as the
“Defendants”). Pursuant to that settlement, which was
approved by the District Court, all settlement funds remaining
after attorneys’ fees and costs are paid, and individual
distributions are made to claimants, would go to one or more
charitable organizations proposed by the parties and selected
by the Court. The Court indicated it would ensure the funds
are used for a purpose underlying the interests of the class.
Kevin Young, an unnamed class member who objected
to the settlement before the District Court, raises the
following three issues relating to the cy pres provision on
appeal. 3
(1) The District Court erred in approving a settlement
that would result in funds being distributed to one or more cy
3
Three of the objectors to the settlement—Young, Clark
Hampe, and Allison Lederer—have appealed, but only Young
has filed briefing. Because the underlying suits alleged
violations of the Sherman and Clayton Acts, the District
Court had subject matter jurisdiction under 28 U.S.C. §§ 1331& 1337.
Our Court has appellate jurisdiction because this is a
timely filed appeal from a final judgment. 28 U.S.C § 1291.
Although the objectors were not parties to the underlying
action, as class members who timely objected to the approval
of the settlement at a fairness hearing, they are permitted to
appeal the settlement without the need to intervene formally.
See Devlin v. Scardelletti, 536 U.S. 1, 14 (2002).
8
pres recipients in lieu of fully compensating class members
for their losses.
(2) The Court should have discounted the value of the
cy pres distribution for purposes of calculating attorneys’
fees, which were awarded on a percentage-of-recovery basis.
(3) The class notice was deficient because it did not
identify the recipients that would receive the cy pres
distributions.
Young’s overarching concern, and ours as well, is that
the settlement has resulted in a troubling and, according to
counsel for the parties, surprising allocation of the settlement
fund. Cy pres distributions, while in our view permissible,
are inferior to direct distributions to the class because they
only imperfectly serve the purpose of the underlying causes
of action—to compensate class members. Though the parties
contemplated that excess funds would be distributed to
charity after the bulk of the settlement fund was distributed to
class members through an exhaustive claims process, it
appears the actual allocation will be just the opposite.
Defendants paid $35,500,000 into a settlement fund. About
$14,000,000 will go to class counsel in attorneys’ fees and
expenses. Of the remainder, it is expected that roughly
$3,000,000 will be distributed to class members, while the
rest—approximately $18,500,000 less administrative
expenses—will be distributed to one or more cy pres
recipients.
We vacate the District Court’s approval of the
settlement because the Court was apparently unaware of the
amount of the fund that would be distributed to cy pres
beneficiaries rather than being distributed directly to the class.
On remand, the Court should consider whether this or any
alternative settlement provides sufficient direct benefit to the
9
class before giving its approval. We also vacate the
attorneys’ fees award because its approval was based on the
terms of a settlement that are no longer in effect and may be
altered on remand. Addressing Young’s argument that
attorneys’ fees should be reduced, we confirm that courts
need to consider the level of direct benefit provided to the
class in calculating attorneys’ fees. We leave it to the District
Court’s discretion to assess what effect, if any, that
consideration should have on any future fee award in this
case. As there was no error in the notice provided to the
class, we do not reverse on that basis.
I. Background
This appeal follows from two antitrust class actions
consolidated for settlement purposes. In 2006, Carol
McDonough and other named plaintiffs filed a suit in the
United States District Court for the Eastern District of
Pennsylvania alleging that Defendants conspired to set a price
floor for the sale of certain baby products, causing consumers
to pay increased prices for these products. In 2009, class
certification of that resale-price-maintenance suit was granted
and several subclasses were created based on the products
purchased and the timeframe of those purchases. Because the
District Court did not permit the subclass periods to extend
beyond the date when the case was filed, Ariel Elliott and
other named plaintiffs subsequently filed a related putative
class action. In 2011, the parties in those actions signed an
agreement consolidating and settling their lawsuits.
The Court initially approved the settlement in January
2011. Notice was sent to putative class members informing
them of their right to submit a claim, opt out, or object. In
July 2011, the Court held a fairness hearing to consider any
objections made by class members. The deadline for
submitting claims expired in August 2011. Approximately
10
four months later, the Court approved the settlement and a
fund allocation plan proposed by the parties. It also granted
class counsel’s fee request for $11,833,333.33, representing
one-third of the gross settlement amount, and $2,229,775.60
for out-of-pocket litigation expenses.
Per the settlement, Defendants deposited $35,500,000
into a settlement fund. After payment of attorneys’ fees and
expenses, the remainder of the fund was slated for
distribution to the settlement class. 4 In order to receive a cash
distribution, a claimant must demonstrate that he or she is a
member of a settlement subclass by submitting a valid, sworn,
and timely claim form.
Claimants are entitled to different levels of
compensation based on the evidence submitted. Those who
submit valid documentary proof of purchase and of the actual
price paid for a product are eligible to receive 20% of the
actual purchase price of each product purchased. Those who
do not submit documentary proof of the actual purchase price
but submit a valid proof of purchase are eligible to receive
20% of the estimated retail price, as calculated by class
counsel, of each product purchased. 5 (The 20% figure
4
The settlement class is comprised of all persons and entities
who bought certain baby products from Babies “R” Us and
Toys “R” Us during prescribed time periods dating back to
1999.
5
Under the allocation plan, valid documentary proof “may
include but is not limited to receipts, cancelled checks, credit
card statements, records from Toys ‘R’ Us or Babies ‘R’ Us,
or other records that show the Authorized Claimant purchased
the Settlement Product(s) from Toys ‘R’ Us or Babies ‘R’ Us,
and when the purchase was made.”
11
slightly exceeds the 18% average overcharge an independent
economics expert hired by class counsel estimated class
members would have paid for a baby product covered by the
settlement.) Those who do not submit any proof of purchase
are eligible to receive a payment of $5.
Claims in the first two categories of compensation—
those receiving 20% of the actual or estimated purchase
price—are subject to pro rata enhancements. The settlement
class is divided into eight different settlement subclasses,
based on the baby product purchased. If the claims awarded
do not exhaust the funds allocated to a particular settlement
subclass, these awards are enhanced by up to three times the
baseline figure, consistent with Section 4 of the Clayton Act,
15 U.S.C. § 15, which entitles private plaintiffs to receive
treble damages for violations of the antitrust laws.
The settlement terms establish an order of priority for
distributing any remaining funds. Funds in a subclass after
the initial distribution will be redistributed first to the other
settlement classes until all claims are fully satisfied in
accordance with the compensation categories and
accompanying enhancements described. If funds remain after
that redistribution and the payment of administrative costs,
they will be donated to one or more charitable
organizations—the cy pres recipients. Under the terms of the
settlement, Plaintiffs and Defendants are each permitted to
recommend up to two not-for-profit organizations to receive
the award. The District Court, however, is entrusted with the
responsibility of selecting one or more cy pres recipients that
will receive distributions.
We do not know the exact allocation of the funds that
will result from the current settlement. At the time of the
fairness hearing in July 2011, class members had submitted
approximately 41,000 claims. Because the deadline for
12
submissions was not until August 2011, more claims likely
were submitted. In response to a concern regarding whether
the $35,500,000 in the settlement fund would be sufficient to
pay counsel fees and expenses while compensating class
members under the terms of the agreement, the District Court
estimated that at most—assuming 45,000 claims, each
entitling the claimant to three times 20% of a $300 baby
product—$8,100,000 would be distributed to class members.
It appears, however, that far less will actually be distributed
to them. At oral argument, class and defense counsel
informed us that, largely because the vast majority of the
claims fell into the third category of compensation entitling
claimants to $5 payouts, class members will receive only
about $3,000,000 through the claims process.
II. Cy pres
We have not ruled on whether class action settlements
may include cy pres provisions. Courts generally have
approved cy pres distributions in two circumstances.
First, many courts allow a
settlement that directs funds to a
third party when funds are left
over after all individual claims
have been satisfied. . . . Second,
some courts allow a settlement to
require a payment only to a third
party, that is, to provide no
recovery at all directly to class
members.
American Law Institute (“ALI”), Principles of the Law of
Aggregate Litig. § 3.07, comment a (2010). We deal with the
former here.
13
The use of cy pres recipients to dispose of excess
funds—first suggested in a student comment in 1972, see
Stewart R. Shepherd, Comment, Damage Distribution in
Class Actions: The Cy Pres Remedy, 39 U. Chi. L. Rev. 448(1972)—has accelerated rapidly in recent years.
From 1974 through 2000, federal
courts granted or approved cy
pres awards to third party
charities in thirty class actions, or
an average of approximately once
per year. [From] 2001 [through
2008], federal courts granted or
approved cy pres awards in sixty-
five class actions, or an average of
roughly eight per year.
Martin H. Redish et al., Cy Pres Relief and the Pathologies of
the Modern Class Action: A Normative and Empirical
Analysis, 62 Fla. L. Rev. 617, 653 (2010).
This is unsurprising. When excess settlement funds
remain after claimants have received the distribution they are
entitled to under the terms of the settlement agreement, there
are three principal options for distributing the remaining
funds—reversion to the defendant, escheat to the state, or
distribution of the funds cy pres. 6 Among these options, cy
pres distributions have benefits over the alternative choices.
Reversion to the defendant risks undermining the deterrent
effect of class actions by rewarding defendants for the failure
6
As we discuss directly below, the parties may also agree to
make further distributions to class members (e.g., expand
eligibility for payments and/or lower the requirements for
making a successful claim).
14
of class members to collect their share of the settlement.
Escheat to the state preserves the deterrent effect of class
actions, but it benefits the community at large rather than
those harmed by the defendant’s conduct. Cy pres
distributions also preserve the deterrent effect, but (at least
theoretically) more closely tailor the distribution to the
interests of class members, including those absent members
who have not received individual distributions.
We join other courts of appeals in holding that a
district court does not abuse its discretion by approving a
class action settlement agreement that includes a cy pres
component directing the distribution of excess settlement
funds to a third party to be used for a purpose related to the
class injury. 7 See Lane v. Facebook, Inc., 696 F.3d 811, 819–
20 (9th Cir. 2012); In re Pharm. Indus. Average Wholesale
Price Litig., 588 F.3d 24, 33–36 (1st Cir. 2009); see also 4
Herbert B. Newberg et al., Newberg on Class Actions § 11:20
(4th ed. 2012); ALI, supra, § 3.07. “The claims, issues, or
defenses of a certified class may be settled, voluntarily
dismissed, or compromised only with the court’s approval.”
Fed. R. Civ. P. 23(e). That approval is warranted when the
7
In contrast with cy pres distributions agreed to by the parties
as part of a settlement, courts of appeals have greeted with
more skepticism cy pres distributions imposed by trial courts
over the objections of the parties. See, e.g., Klier v. Elf
Atochem N. Am., Inc., 658 F.3d 468, 479 (5th Cir. 2011) (en
banc) (“Where the terms of a settlement agreement are
sufficiently clear, or, more accurately, insufficient to
overcome the presumption that the settlement provides for
further distribution to class members, there is no occasion for
charitable gifts, and cy pres must remain offstage.” (footnote
omitted)). We do not deal with that situation here.
15
court finds that the settlement, taken as a whole, is “fair,
reasonable, and adequate” from the perspective of the class.
Fed. R. Civ. P. 23(e)(2). Inclusion of a cy pres provision by
itself does not render a settlement unfair, unreasonable, or
inadequate.
We caution, however, that direct distributions to the
class are preferred over cy pres distributions. The private
causes of action aggregated in this class action—as in many
others—were created by Congress to allow plaintiffs to
recover compensatory damages for their injuries. See 15
U.S.C. § 15. Cy pres distributions imperfectly serve that
purpose by substituting for that direct compensation an
indirect benefit that is at best attenuated and at worse
illusory. 8 Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781,
8
Federal Rule of Civil Procedure 23, under which this class
settlement was approved, is a procedural mechanism
permitting the aggregation of claims in federal court.
Pursuant to the Rules Enabling Act, it does not and cannot
alter the underlying substantive law being asserted. 28 U.S.C.
§ 2072. Because “a district court’s certification of a
settlement simply recognizes the parties’ deliberate decision
to bind themselves according to mutually agreed-upon terms
without engaging in any substantive adjudication of the
underlying causes of action,” Sullivan v. DB Invs., Inc., 667
F.3d 273, 312 (3d Cir. 2011), we do not believe the inclusion
of a cy pres provision in a settlement runs counter to the
Rules Enabling Act. But see Klier, 658 F.3d at 481 (Jones, J.,
concurring) (suggesting that cy pres distributions arguably
violate the Rules Enabling Act and present Article III
problems); In re Pet Food Prods. Liab. Litig., 629 F.3d 333,
362 (3d Cir. 2010) (Weis, J., concurring and dissenting)
(suggesting that excess funds should escheat to the state
16
784–85 (7th Cir. 2004). Cy pres distributions also 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. 9
To account for the inferiority of cy pres distributions,
the ALI has published guidelines limiting them to instances
where further individual distributions are infeasible. Those
guidelines provide in pertinent part:
If the settlement involves
individual distributions to class
members and funds remain after
distributions (because some class
members could not be identified
or chose not to participate), the
settlement should presumptively
provide for further distributions to
participating class members
unless the amounts involved are
too small to make individual
instead of being distributed to cy pres recipients). The Rules
Enabling Act, however, provides further support for the
proposition that courts should favor class settlements that
provide direct compensation to the class through individual
distributions.
9
As discussed in the next section, see infra Part III, it may
also be appropriate to decrease attorneys’ fees in those
circumstances.
17
distributions economically viable
or other specific reasons exist that
would make such further
distributions impossible or unfair.
ALI, supra, § 3.07(b). The ALI does not explain further what
“other specific reasons” would justify a cy pres distribution.
Although we agree with the ALI that cy pres
distributions are most appropriate where further individual
distributions are economically infeasible, we decline to hold
that cy pres distributions are only appropriate in this context.
Settlements are private contracts reflecting negotiated
compromises. Sullivan, 667 F.3d at 312. The role of a
district court is not to determine whether the settlement is the
fairest possible resolution—a task particularly ill-advised
given that the likelihood of success at trial (on which all
settlements are based) can only be estimated imperfectly.
The Court must determine whether the compromises reflected
in the settlement—including those terms relating to the
allocation of settlement funds—are fair, reasonable, and
adequate when considered from the perspective of the class as
a whole.
To assess whether a settlement containing a cy pres
provision satisfies this requirement, courts should employ the
same framework developed for assessing other aspects of
class action settlements. In Girsh v. Jepson, 521 F.2d 153 (3d
Cir. 1975), we set out nine factors that courts should consider
when deciding whether to approve a settlement. Id. at 157.
In In re Prudential Insurance Co. of America Sales Practices
Litigation, 148 F.3d 283 (3d Cir. 1998), we expanded that
analysis to include what may be termed the Prudential
considerations. Id. at 323. Unlike the Girsh factors, each of
which the district court must consider before approving a
18
class settlement, the Prudential considerations are just that,
prudential. They are permissive and non-exhaustive,
“illustrat[ing] . . . [the] additional inquiries that in many
instances will be useful for a thoroughgoing analysis of a
settlement’s terms.” See In re Pet Food, 629 F.3d at 350.
We add today that one of the additional inquiries for a
thorough analysis of settlement terms is the degree of direct
benefit provided to the class. In making this determination, a
district court may consider, 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.
Barring sufficient justification, cy pres awards should
generally represent a small percentage of total settlement
funds.
We note that this inquiry needs to be, as much as
possible, practical and not abstract. If “the parties have not”
on their own initiative “supplied the information needed” to
make the necessary findings, the court should “affirmatively
seek out such information.” In re Pet Food, 629 F.3d at 351(citation omitted). Making these findings may also require a
court to withhold final approval of a settlement until the
actual distribution of funds can be estimated with reasonable
accuracy. Alternatively, a court may urge the parties to
implement a settlement structure that attempts to maintain an
appropriate balance between payments to the class and cy
pres awards. For instance, it 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.
19
Turning to the particular cy pres distribution in this
case, Young asserts that the District Court failed to fulfill its
oversight responsibility by approving a class action settlement
containing a cy pres provision that permits the distribution of
funds to a third party without first fully compensating all
claimants. As noted above, the settlement directs a cy pres
award after claimants receive cash distributions via a three-
tiered compensation structure: claimants with valid
documentary proof of purchase and purchase price receive up
to three times 20% of the actual price of the product they
purchased; claimants with valid documentary proof of
purchase receive up to three times 20% of the estimated price;
and claimants without any valid proof receive a $5 payout.
Young does not object to the 20% figure or argue that the first
two categories of claimants will be undercompensated.
Instead, he asserts that the cy pres award is inappropriate
because the third category of claimants—those receiving a $5
payout regardless of price of the product they purchased—
will not be fully compensated for their losses.
We review a district court’s decision to approve a
settlement for abuse of discretion. Girsh, 521 F.2d at 156 &
n.7. “‘An appellate court may find an abuse of discretion
where the district court’s decision rests upon a clearly
erroneous finding of fact, an errant conclusion of law or an
improper application of law to fact.’” In re Prudential, 148
F.3d at 299 (quoting In re Gen. Motors Corp. Pick-Up Truck
Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 783 (3d Cir.
1995)). Mindful that we are dealing with a settlement, we
remain hesitant to undo an agreement that has resolved a
hard-fought, multi-year litigation. See In re Warfarin Sodium
Antitrust Litig., 391 F.3d 516, 535 (3d Cir. 2004). “Because
class actions are rife with potential conflicts of interest
between class counsel and class members,” however, “district
judges presiding over such actions are expected to give
careful scrutiny to the terms of proposed settlement in order
20
to make sure that class counsel are behaving as honest
fiduciaries for the class as a whole.” Mirfasihi, 356 F.3d at
785 (collecting cases); see also In re Gen. Motors, 55 F.3d at
785.
We vacate the District Court’s orders approving the
settlement and the fund allocation plan because it did not
have the factual basis necessary to determine whether the
settlement was fair to the entire class. Most importantly, it
did not know the amount of compensation that will be
distributed directly to the class. Removing attorneys’ fees
and expenses, approximately $21,500,000 (less costs of
administration) of the settlement were designated for the
class, but only around $3,000,000 of that amount actually will
be distributed to class members, with the remainder going to
cy pres recipients after expenses relating to the administration
of the fund are paid.
Though the claims period had concluded, counsel did
not provide this information to the Court, preventing it from
properly assessing whether the settlement was in the best
interest of the class as a whole. The Court approved the $5
cap on compensation for those without documentary proof of
their claims in part because it believed the standard of proof
required to receive a higher award was “fairly low.”
McDonough v. Toys “R” Us, Inc., 834 F. Supp. 2d 329, 352
(E.D. Pa. 2011). According to counsel, however, the vast
majority of claimants have not submitted documentary proof
entitling them to a greater award, casting doubt on this
assumption. Similarly, the Court found the $5 cap was
justified by the need to “avoid encouraging fraud.” Id. While
without doubt this is a good goal, we do not believe the Court
could have reasonably assessed whether these concerns
justified the cap without knowing the resulting allocation of
funds. Other means of preventing fraud could have been
explored.
21
Based on the information we now have, we remand for
the Court to reconsider the fairness of the settlement. The
parties may wish to alter its terms on remand to provide
greater direct benefit to the class, such as by increasing the $5
payment or lowering the evidentiary bar for receiving a
higher award. 10 After allowing them that opportunity, we ask
the Court to make the factual findings necessary to evaluate
whether the settlement provides sufficient direct benefit to the
class.
We place no absolute requirement on the amount of
direct compensation the third category of claimants must
receive. Courts of appeals have approved cy pres
distributions where all class members submitting claims have
already been fully compensated for their damages by prior
distributions. See, e.g., In re Lupron Mktg. & Sales Practices
Litig., 677 F.3d 21, 34–35 (1st Cir. 2012). A cy pres
distribution is considered appropriate in that circumstance
because additional individual distributions would
“overcompensat[e] claimant class members at the expense of
absent class members.” Id. at 35 (citing In re Pharm. Indus.,
588 F.3d at 34–36). We agree, but do not limit cy pres
distributions to instances where all claimants have received
100% of their estimated damages. As the parties explain, the
$5 payment to claimants in the third category can be seen as
compensation for a full release of their claims rather than as
an attempt to compensate them for their damages. Indeed,
provided the class as a whole received sufficient direct
benefit, it would not have been unreasonable to eliminate the
$5 category altogether and require class members to submit
documentary proof to receive any award. We do not intend to
10
Class members should be notified of any material
alterations to the settlement and permitted to object to them
before the Court approves the settlement.
22
raise the bar for obtaining approval of a class action
settlement simply because it includes a cy pres provision.
What we are concerned with in this case is that the
Court approved the settlement without being made aware that
almost all claimants would fall into the $5 compensation
category, resulting in minimal (and we doubt sufficient)
compensation going directly to class members. The baby
products at issue cost up to $300, resulting in damages, at the
estimated 18% overcharge, of over $50. Combined with the
possibility of treble damages, we doubt that this is the type of
small claims case where the potential awards were necessarily
insufficient to motivate class members to file claims. We
think it more likely that many class members did not submit
claims because they lacked the documentary proof necessary
to receive the higher awards contemplated, and the $5 award
they could receive left them apathetic. This casts doubt on
whether agreeing to a settlement with such a restrictive claims
process was in the best interest of the class. If Defendants
decline to raise the $5 cap or alter the documentary proof
requirement on remand, the Court will need to determine
whether the class received sufficient direct benefit to justify
the settlement as fair, reasonable, and adequate. Before doing
so, though, it must have the requisite factual basis.
III. Attorneys’ Fees
“In a certified class action, the court may award
reasonable attorney’s fees and nontaxable costs that are
authorized by law or by the parties’ agreement.” Fed. R. Civ.
P. 23(h). Courts generally use one of two methods for
assessing the reasonableness of attorneys’ fees—a
percentage-of-recovery method or a lodestar method. The
former “resembles a contingent fee in that it awards counsel a
variable percentage of the amount recovered for the class.” In
re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab.
23
Litig., 55 F.3d 768, 819 n.38 (3d Cir. 1995). The latter
“calculates fees by multiplying the number of hours expended
by some hourly rate appropriate for the region and for the
experience of the lawyer.” Id. at 819 n.37. Whichever
method is chosen, “we have noted previously that ‘it is
sensible for a court to use a second method of fee approval to
cross check’ its initial fee calculation.” In re Prudential Ins.
Co. of Am. Sales Practices Litig., 148 F.3d 283, 333 (3d Cir.
1998) (quoting In re Gen. Motors, 55 F.3d at 820).
The District Court—as is “generally favored in cases
involving a common fund,” id.—awarded fees on a
percentage-of-recovery basis. We have identified a number
of factors to aid courts in evaluating the reasonableness of
percentage fee awards. In re Diet Drugs Prod. Liab. Litig.,
582 F.3d 524, 541 (3d Cir. 2009) (citing Gunter v. Ridgewood
Energy Corp., 223 F.3d 190, 195 n.1 (3d Cir. 2000); In re
Prudential, 148 F.3d at 336–40). Applying these factors, the
Court approved counsel’s requested fees of $11,833,333.33
(one-third of the entire settlement fund) as reasonable. In
addition to using a percentage of recovery method, the Court
applied a lodestar method crosscheck. It calculated, at
counsel’s regular billing rates, a total lodestar of
$31,839,355.33, representing a negative lodestar multiplier of
.37 (i.e., class counsel’s fee request equaled 37 percent of
what they would have received at their regular billing rates).
We vacate the District Court’s order awarding fees and
costs because it is based on a settlement that is no longer in
effect and may be altered on remand. Although in this
circumstance we need not (and do not) resolve whether the
awarded fees were reasonable, we note that the Court did not
address an issue raised by Young we believe worthy of
discussion. He objected to the requested fees on the ground
that the Court should not consider the cy pres award as a class
benefit for purposes of calculating attorneys’ fees. On appeal,
24
Young has softened his approach, asking instead that we
require districts courts to discount—rather than to ignore
entirely—the value of cy pres distributions for purposes of
calculating percentage awards. See Young Reply Br. at 22.
Take, for example, a settlement fund whereby $20,000,000
will be distributed for cy pres purposes. Under Young’s
approach, if a court believes that the cy pres award provides
half the benefit of direct distributions, it should value the
portion of the settlement being distributed cy pres at
$10,000,000 for purposes of calculating attorneys’ fees as a
percentage of the recovery.
Although the Supreme Court has not addressed
whether attorneys’ fees should be reduced when a portion of a
settlement fund is distributed cy pres, it has confronted
essentially the same issue when calculating percentage fee
awards against a settlement fund that will partially revert to
the defendant. In Boeing Co. v. Van Gemert, 444 U.S. 472(1980), the Supreme Court confirmed the permissibility of
using the entire fund as the appropriate benchmark, at least
where each class member needed only to prove his or her
membership in the injured class to receive a distribution. 11
Id. at 480–81. Boeing, however, did not address whether a
district court abuses its discretion by taking the converse
approach, basing attorneys’ fees on only the amount of the
fund claimed by class members.
Courts of appeals have taken a similar approach when
they have addressed this issue in the cy pres context. In Six
Mexican Workers v. Arizona Citrus Growers, 904 F.2d 130111
In Boeing, the fund was created following the
determination of plaintiffs’ claims rather than pursuant to a
settlement. Id. at 474–75. We do not believe this
significantly alters the analysis.
25
(9th Cir. 1990), the District Court had calculated attorneys’
fees as a percentage of the total fund even though unclaimed
funds would be distributed to cy pres recipients. The Court of
Appeals for the Ninth Circuit, relying on Boeing, held that the
District Court did not abuse its discretion in using the total
fund amount as its benchmark. Id. at 1311. In Masters v.
Wilhelmina Model Agency, Inc., 473 F.3d 423 (2d Cir. 2007),
the Court of Appeals for the Second Circuit reviewed a
percentage-fee award based on funds claimed by class
members rather than on the entire settlement fund, some of
which would ultimately be distributed to a cy pres recipient.
Finding that the District Court abused its discretion, the
Circuit Court held that the percentage fee should have been
calculated on the basis of the total fees made available
because “[t]he entire [settlement] [f]und, and not some
portion thereof, [was] created through the efforts of counsel.”
Id. at 437. It noted, however, that a court may within its
discretion decrease the percentage of the fund awarded (rather
than the benchmark value of the settlement) in appropriate
circumstances to prevent attorneys from being improperly
enriched. Id.We think it unwise to impose, as Young requests, a
rule requiring district courts to discount attorneys’ fees when
a portion of an award will be distributed cy pres. 12 There are
a variety of reasons that settlement funds may remain even
after an exhaustive claims process—including if the class
members’ individual damages are simply too small to
motivate them to submit claims. Class counsel should not be
12
Young also asks us to hold that fee awards exceeding the
amount directly distributed to class members are
presumptively unreasonable. For substantially similar
reasons, we do not adopt such a rule.
26
penalized for these or other legitimate reasons unrelated to the
quality of representation they provided. Nor do we want to
discourage counsel from filing class actions in cases where
few claims are likely to be made but the deterrent effect of the
class action is equally valuable.
We appreciate, however, that awarding attorneys’ fees
based on the entire settlement amount rather than individual
distributions creates a potential conflict of interest between
absent class members and their counsel. “Arrangements such
as [these] . . . decouple class counsel’s financial incentives
from those of the class. . . . They potentially undermine the
underlying purposes of class actions by providing defendants
with a powerful means to enticing class counsel to settle
lawsuits in a manner detrimental to the class.” Int’l Precious
Metals Corp. v. Waters, 530 U.S. 1223, 1224 (2000) (denial
of cert.) (O’Connor, J.) (discussing a percentage fee
calculated against the entire settlement fund even though a
significant portion would revert to the defendant). Class
members are not indifferent to whether funds are distributed
to them or to cy pres recipients, and class counsel should not
be either.
Where 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 for the court to decrease the fee award.
See Masters, 473 F.3d at 437; Williams v. MGM-Pathe
Commc’ns Co., 129 F.3d 1026, 1027 (9th Cir. 1997) (stating
that although the entire common fund was the appropriate
benchmark for attorneys’ fees, the percentage of the fund
awarded may be decreased “to account for any unusual
circumstances”); In re Heartland Payment Sys., Inc.
Customer Data Sec. Breach Litig., 851 F. Supp. 2d 1040,
1077 (S.D. Tex. 2012) (“The class benefit conferred by cy
pres payments is indirect and attenuated. That makes it
27
inappropriate to value cy pres on a dollar-for-dollar basis.”);
cf. Dennis v. Kellogg Co., 697 F.3d 858, 867–68 (9th Cir.
2012) (vacating an attorneys’ fees award because the District
Court did not sufficiently scrutinize the valuation of a cy pres
distribution consisting of “$5.5. million worth” of food, and
noting that “[t]his issue is particularly critical with a cy pres
product settlement that has a tenuous relationship to the class
allegedly damaged by the conduct in question”). 13
For the reasons discussed, our approach is case by
case, providing courts discretion to determine whether to
decrease attorneys’ fees where a portion of a fund will be
distributed cy pres. The ALI has adopted a similar approach.
According to its Principles of the Law of Aggregate
Litigation, “[a]ttorneys’ fees in class actions, whether by
litigated judgment or by settlement, should be based on both
the actual value of the judgment or settlement to the class and
the value of cy pres awards . . . .” ALI, Principles of the Law
of Aggregate Litig. § 3.13. The comment to that section
clarifies, however, that “because cy pres payments . . . only
indirectly benefit the class, the court need not give such
payments the same full value for purposes of setting
attorneys’ fees as would be given to direct recoveries by the
class.” Id. § 3.13, comment a.
13
We note that, in enacting the Class Action Fairness Act,
Congress required courts to base attorneys’ fees in coupon (as
opposed to cash) settlements “on the value to class members
of the coupons that are redeemed” rather than on the face
value of the coupons. 28 U.S.C. § 1712(a). Although we do
not deal with a coupon settlement, this statutory provision
further supports the proposition that the actual benefit
provided to the class is an important consideration when
determining attorneys’ fees.
28
In this case, class counsel, and not their client, may be
the foremost beneficiaries of the settlement. Some class
actions are based on so-called negative value claims, that is,
claims that could not be brought on an individual basis
because the transaction costs of bringing an individual action
exceed the potential relief. While aggregating these claims in
a class action may have an important deterrent value, there is
a concern that those actions are brought primarily to benefit
class counsel, and awarding disproportionate class counsel
fees only incentivizes that behavior. Cy pres awards—by
ensuring that a settlement fund is sufficiently large to
command a substantial attorneys’ fee—can exacerbate this
problem. See Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781,
784–85 (7th Cir. 2004); Martin H. Redish et al., Cy Pres
Relief and the Pathologies of the Modern Class Action: A
Normative and Empirical Analysis, 62 Fla. L. Rev. 617, 621–
22, 649 (2010). Although, as noted, this class action had the
potential to compensate class members significantly, the
current distribution of settlement funds arguably
overcompensates class counsel at the expense of the class.
We recognize the difficulty a district court faces in
deciding when attorneys’ fees should be reduced on this
basis. In evaluating a fee award, it should begin by
determining with reasonable accuracy the distribution of
funds that will result from the claims process. This may
require it “to delay a final assessment of the fee award to
withhold all or a substantial part of the fee until the
distribution process is complete.” Federal Judicial Center,
Manual for Complex Litigation § 21.71 (4th ed. 2008). That
court should then, relying on the Gunter/Prudential factors
and its experience, determine whether the level of distribution
provided to the class by the settlement reflects a failure of
class counsel to represent adequately the interests of the entire
class. We note that the use of a lodestar cross-check may be
helpful, although not necessarily determinative, in making
29
this determination. 14 Having framed the relevant inquiry, we
leave the determination of the appropriate fee award to the
District Court, which is more familiar with the performance
and skill of counsel, the nature and history of the litigation,
and the merits of the lawsuits.
IV. Class Notice
After initially approving the settlement, but before
giving final approval, Federal Rule of Civil Procedure
23(e)(1) requires a district court to “direct notice in a
reasonable manner to all class members who would be bound
by the proposal.” Although the Rule provides broad
discretion to district courts with respect to the notice’s form
and content, it must satisfy the requirements of due process.
Zimmer Paper Prods., Inc. v. Berger & Montague, P.C., 758
F.2d 86, 90 (3d Cir. 1985). Generally speaking, the notice
should contain sufficient information to enable class members
to make informed decisions on whether they should take steps
to protect their rights, including objecting to the settlement or,
when relevant, opting out of the class. See Rodriguez v. West
Publ’g Corp., 563 F.3d 948, 962–63 (9th Cir. 2009); Masters,
473 F.3d at 438; Petrovic v. Amoco Oil Co., 200 F.3d 1140,
1153 (8th Cir. 1999); In re Prudential Ins. Co. of Am. Sales
Practices Litig., 148 F.3d 283, 326 (3d Cir. 1998); 3 Herbert
14
This case demonstrates why use of the lodestar is helpful
but not outcome determinative. As noted, the District Court
calculated a lodestar of $31,839,355.33 at regular billing
rates, and the fees awarded represented a negative lodestar
multiplier of .37. This suggests that class counsel would not
be overpaid for their services if compensated as requested,
but it also suggests that counsel has a significant financial
incentive to cut its losses and settle the lawsuits.
30
B. Newberg et al., Newberg on Class Actions § 8:32 (4th ed.
2012).
Young contends that the settlement notice was
inadequate because it did not identify the cy pres recipients
who will receive excess settlement funds. 15 His primary
concern is that unnamed class members will not have the
opportunity to object to the selection of the cy pres recipients,
who are intended to serve as proxies for the class members’
interests. While a valid concern, failure to identify the cy
pres recipients is not a due process violation. Class members
know there is a possibility of a cy pres award and that the
Court will select among recipients proposed by the parties at
a later date. This knowledge is adequate to allow any
interested class member to keep apprised of the cy pres
recipient selection process. We are confident the Court will
ensure the parties make their proposals publicly available and
15
Young also asserts that the settlement notice fails because it
indicates that a potentially valid proof of purchase—certain
forms of photographic evidence—is invalid. Young became
aware of that photographic evidence might be permissible at
the fairness hearing several months before the District Court
gave final approval to the settlement. Because he failed to
raise this issue before the Court, it is waived on appeal.
Franki Found. Co. v. Alger-Rau & Assocs., Inc., 513 F.2d
581, 586 (3d Cir. 1975). We are unclear, however, whether
photographic evidence actually is valid proof of purchase
under the settlement. On remand, the Court, taking into
account any changes to the settlement, should clarify the
types of evidence that are valid. If that evidence materially
differs from the evidence described as valid in the class
notice, the Court should require that a supplemental notice be
provided to the class.
31
will allow class members the opportunity to object before it
makes a selection. 16
The delayed naming of cy pres recipients presents a
more nuanced issue with respect to the opportunity of class
members to appeal the Court’s selection of cy pres recipients.
As the Court of Appeals for the First Circuit has recently
explained,
16
Courts generally require the parties to identify “a recipient
whose interests reasonably approximate those being pursued
by the class.” ALI, Principles of the Law of Aggregate Litig.
§ 3.07. In this case, the Court indicated that it would select a
cy pres recipient (from among the organizations proposed by
the parties) that satisfies this standard. “[H]aving judges
decide how to distribute cy pres awards both taxes judicial
resources and risks creating the appearance of judicial
impropriety.” In re Lupron Mktg. & Sales Practices Litig.,
677 F.3d 21, 38 (1st Cir. 2012). The judicial role is better
limited to approving cy pres recipients selected by the parties.
While we do not decide today whether approving a settlement
with the cy pres selection process envisioned by the parties in
this case is an abuse of discretion, we join other courts and
commentators in expressing our concern with district courts
selecting cy pres recipients. See id. at 38–39; Nachshin v.
AOL, LLC, 663 F.3d 1034, 1039 (9th Cir. 2011) (“[T]he
specter of judges and outside entities dealing in the
distribution and solicitation of settlement money may create
the appearance of impropriety.”); ALI, Principles of the Law
of Aggregate Litig. § 3.07(c) (“The court, when feasible,
should require the parties to identify a recipient whose
interests reasonably approximate those being pursued by the
class.”).
32
[o]nly parties to a civil action may
appeal from a final judgment. . . .
The Supreme Court has
recognized only one exception to
this rule: that “nonnamed class
members . . . who have objected
in a timely manner to approval of
the settlement at the fairness
hearing have the power to bring
an appeal without first
intervening.” . . . The question
then becomes whether Devlin [v.
Scardelletti], which created an
exception for unnamed class
members who have objected to
settlement agreements, extends to
this situation in which unnamed
class members have objected to a
cy pres distribution.
In re Lupron, 677 F.3d at 29–30 (second alteration in
original) (quoting and citing Devlin v. Scardelletti, 536 U.S.
1, 7, 14 (2002)). The First Circuit did not resolve whether
class members objecting to a cy pres distribution are
permitted to appeal without intervening, and we are unaware
of any court of appeals that has done so.
Despite this uncertainty, we believe the notice
provided to class members here satisfies the requirements of
due process. Even without a Devlin exception, to the extent
putative class members have a property interest in the
unclaimed funds and object to the cy pres recipients selected,
they may typically intervene in the lawsuit for purposes of
appealing an eventual order directing a cy pres distribution.
See Fed. R. Civ. P. 24(a)(2); see also Devlin, 536 U.S. at 20(Scalia, J., dissenting) (describing the Devlin exception as
33
unnecessary because “class members will typically meet the
requirements for intervention as of right under Federal Rule
of Civil Procedure 24, including intervention only for the
purpose of appeal, and even after the class judgment has been
entered”). We believe intervention will prove sufficient to
protect the interests of unnamed class members in appealing
the selection of cy pres recipients. And if it does not, they
may ask us to determine whether it is appropriate to create a
new Devlin exception allowing them to appeal.
V. Conclusion
We summarize our rulings.
1. We vacate the District Court’s orders approving
settlement and the fund allocation plan because
the Court did not have the necessary factual
information to determine whether the settlement
will provide sufficient direct benefit to the class.
2. We vacate the Court’s order awarding
attorneys’ fees and costs because this award
was based on the now-vacated settlement. We
confirm that the Court may, in its discretion,
reduce attorneys’ fees based on the level of
direct benefit provided to the class.
3. We do not require that a corrected notice be
sent to class members because we do not
believe that the notice provided was inadequate.
We note, however, that supplemental notice
should be provided to the class if the settlement
is materially altered on remand.
34