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Tuesday, June 25, 2024 | Back issues
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Babies R Us Price-Fixing Settlement Vacated

(CN) - The 3rd Circuit vacated a $35 million price-fixing settlement against Babies R Us because the lower 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."

The settlement, reached after five years of antitrust litigation, was intended to be distributed to consumers who bought Britax car seats, Medela breast pumps or kids lines products at fixed prices from Babies R Us.

Kevin Young, who was not a named plaintiff of the underlying class action but is a member of the class, submitted an appeal in September 2012, objecting to the District Court settlement of three issues related to the cy pres provision.

Young claimed the District Court was wrong to approve a settlement that "would result in funds being distributed to one or more cy pres recipients [instead] of fully compensating class members for their losses."

He contended the court should have discounted the cy pres distribution value for purposes of calculating attorneys' fees that were awarded on a percentage-of-recovery basis, and that the class notice improperly failed to identify cy pres distribution recipients.

Based on the Norman French cy pres comme, "as near as possible," the cy pres doctrine originated in trust-and-estates law as a rule of construction used to preserve testamentary charitable gifts that would otherwise fail. "When it becomes impossible to carry out the charitable gift as the testator intended, the doctrine allows the 'next best' use of funds to satisfy the testator's intent 'as near as possible,'" the 3rd Circuit ruled.

A three-judge panel reviewed Young's settlement appeal.

"Young's overarching concern, and ours as well, is that the settlement has resulted in a troubling and, according to the 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 expense. 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," the ruling states.

Judge Thomas L. Ambro wrote for the panel, "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" and that the "[i]nclusion of a cy pres provision by itself does not render a settlement unfair, unreasonable, or inadequate."

However, the panel wrote: "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 benefit to the class."

The 3rd Circuit estimated that at most, $8,100,000 would be distributed for 45,000 claims, giving each claimant three times 20 percent of a $300 baby product.

"It appears, however," Ambro wrote, "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."

Young found that "the cy press 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."

"Mindful that we are dealing with a settlement, we are hesitant to undo an agreement that has resolved a hard-fought, multi-year litigation," the ruling states.

But the panel vacated 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 funds are paid."

Reviewing American Law Institute guidelines to limit cy press instances where further individual distributions are infeasible, the panel concluded: "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."

The ruling states that "[b]arring sufficient justification, cy pres awards should generally represent a small percentage of total settlement funds."

The panel remanded for the court to "consider whether this or any alternative settlement provides direct benefit to the class before giving its approval."

"The Court must determine whether the compromises reflected in the settlement funds - 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," Ambro wrote.

The 3rd Circuit also vacated the attorneys' fees award, as the settlement which the fees were based on is 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," the ruling states. The panel left it to the District Court to assess the effect on any future award.

Young's claim regarding erroneous notice to the class was dismissed. A "supplemental notice, however, should be provided to the class if the settlement is materially altered on remand."

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