In Re Baby Products Antitrust Litigation

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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Nos. 12-1165, 12-1166 & 12-1167

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IN RE BABY PRODUCTS ANTITRUST LITIGATION

Kevin Young, Appellant (No. 12-1165)

Clark Hampe, Appellant (No. 12-1166)

Allison Lederer, Appellant (No. 12-1167)

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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

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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

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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 1301

11

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