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Appeals Court Limits Cy Pres Class Action Settlement Awards
By Robert J. Boumis
Cy pres awards have become a popular way to distribute money from a class action lawsuit settlement, but they’ve come under scrutiny lately from critics who say they unfairly give money to charities that should be going to injured Class Members. Several high-profile consumer class action settlements have been rejected over the past year by judges who ruled the proposed cy pres distributions were unfair.
A recent decision in the Toys “R” Us class action lawsuit In Re: Baby Products Antitrust Litigation has put a limit on the use of cy pres awards in class action settlements – a decision that will set a precedent in future class action lawsuits.
What is Cy Pres?
Cy pres awards come into play in certain class action lawsuit settlement where the money obtained from a defendant cannot be feasibly distributed to those directly affected by the case. Cy pres doctrine allows the award to go to charities that would promote the interests of the people harmed by the defendants’ actions.
For example, if funds remain after Class Members have had plenty of time to claim their awards, the remainder of the settlement may go to a charity. This concept has its origins in British, specifically English and Welsh, equality law, where a charitable trust’s funds could be repurposed to a similar aim if the trust’s original goal became impossible.
Cy Pres Drawbacks
This mechanism of class action settlement distribution is coming under scrutiny, however. The crux of this scrutiny is that cy pres class action settlements could possibly deprive Class Members of their fair share of the funds. A recent court decision in the U.S. Third Circuit Court has ruled to limit the use of cy pres distribution in class action settlements.
In the case In Re: Baby Products Antitrust Litigation, it was ruled that courts need to take into account the direct benefit to Class Members. The court also ruled that it was “unwise” to require a discount of attorney’s fees when cy pres settlements are involved. This addressed the issue that attorneys are often paid a percentage of the total settlement, not just the amount that goes to Class Members. So in a cy pres settlement, attorneys may get more money even though their clients do not. The judge acknowledged this situation, and directed the district court to take this into account.
Background on the Case
In this case, the plaintiffs argued that Toys “R” Us/Babies “R” Us violated antitrust laws. It was alleged that the retailers conspired with companies like Medela, BabyBjörn, Maclaren, and others to fix their prices. The alleged conspiracy prevented competing retailers from discounting certain products, allowing Babies “R” Us to mark up merchandise. A $35 dollar class action settlement was reached.
However, of this $35 million, only $3 million went directly to the Class Members –$14 million was allocated to attorney fees, and $18.5 million went to cy pres charity distributions.
Since the vast majority of Class Members did not have sufficient proof of purchase, they were entitled to a mere $5 each. So the majority of the class action settlement money was distributed to attorneys and charities instead of the Class Members themselves. Various Class Members appealed to the Third Circuit Court to address this matter.
The Ruling
The Third Circuit Court vacated several key elements of the Babies “R” Us settlement and moved the case to district court. They first vacated the settlement, on the grounds that the court in the previous ruling was not aware of how much of how little of the money would go to Class Members. It also vacated the attorney fees on the basis that they were tied to a vacated settlement.
The judge passed the case onto district court, in order to have the issues with the settlement considered and addressed. The court also ruled that further notice should be sent to class members if an amended settlement is reached.
Time will tell how the decision in In Re: Baby Products Antitrust Litigation will affect future class action settlement distributions. Consumer advocates, however, believe it is a major step toward more fairly compensating Class Members.
Updated May 2nd, 2013
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