Antitrust Law Daily Wrap Up, TOP STORY—3rd Cir: Settlement of Antitrust Class Action Vacated Due to Huge Cy Pres Distribution , (Feb 20, 2013)

By E. Darius Sturmer, J.D.

A federal court’s approval of a $35.5 million settlement of consumer class action claims that baby products retailers Toys “R” Us, Inc. and Babies “R” Us, Inc. and several baby products manufacturers engaged in resale price maintenance prohibited by federal antitrust law was vacated by the U.S. Court of Appeals in Philadelphia yesterday, on the basis that the court granting that approval did not have the necessary factual information to determine whether the settlement would provide sufficient direct benefit to the class (In re: Baby Products Antitrust Litigation, February 19, 2013, Ambro, T.).

An unnamed member of the plaintiff class had objected to the settlement’s approval (McDonough v. Toys “R” Us, Inc., 834 F.Supp.2d 329 (E.D.Pa. 2011), 2011-2 Trade Cases ¶77,740), on grounds surrounding the cy pres distribution of settlement funds provided for in the agreement. The objector contended that approval of the settlement would result in funds begin distributed to one or more cy pres recipients in lieu of fully compensating the class members for their losses. He also argued that the value of the cy pres distribution should have been discounted for purposes of calculating attorney fees and that the class notice was deficient because it did not identify the recipients that would receive the cy pres distributions.

While the appellate court did not think the class notice inadequate, it shared the objecting consumer’s concern that the terms of the settlement had resulted in a “troubling” allocation of the settlement fund. Of the $35,500,000 fund, about $14 million was slated to go to class counsel in attorney fees and expenses, and it was expected that of the remainder, only around $3 million would be distributed to class members before the court disbursed the rest—approximately $18.5 million less administrative expenses—to one or more cy pres recipients. Cy pres distributions, the appellate court remarked, “are inferior to direct distributions because they only imperfectly serve the purpose of the underlying causes of action—to compensate class members.”

The appellate court held that approval of the settlement was improper because the lower court was apparently unaware of the amount of the fund that would go to cy pres beneficiaries rather than directly to the class. Whereas the district court had estimated that as much as $8.1 million would be distributed to class members under the terms of the agreement, the submission requirements for compensation prevented the vast majority of the 41,000 claimants from receiving more than $5 payouts.

While the district court had not abused its discretion by approving a class action settlement agreement that included a cy pres component, the settlement taken as a whole still had to be fair, reasonable, and adequate from the perspective of the class for approval to be warranted.

Examining the case at hand, the appellate court noted that though the claims period had concluded, counsel did not provide that information to the district court, preventing it from properly assessing whether the settlement was in the best interest of the class as a whole. The court had 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.” Given how few claimants submitted the requisite documentary proof, however, this assumption appeared faulty. The court’s further justification for the $5 cap—to avoid encouraging fraud—may have been a good goal, according to the appellate court, but other means of preventing fraud could have been explored.

On remand, the district court was instructed to consider whether the agreed-upon or any alternative settlement provided sufficient direct benefit to the class before giving its approval.

The court also vacated the attorney fees award because its approval was based on the terms of a settlement that was no longer in effect and might be altered on remand.

The appellate cases are Nos. 12-1165, 12-1166, 12-1167.

Companies: Toys R Us Inc.; Baby Bjorn AB; Britax Child Safety Inc.; Kids Line Inc.; Medela Inc.; Peg Perego USA Inc.; Regal Lager Inc.

Attorneys: Christopher M. Arfaa (Littleton Joyce Ughetta Park & Kelly) for Kevin Young. Christopher A. Bandas (Bandas Law Firm) for Clark Hampe. James H. Price (Lacy, Price & Wagner) for Allison Lederer. Theodore B. Bell (Wolf, Haldenstein, Adler, Freeman & Herz) for Carol McDonough. Harry H. Rimm (Reed Smith) for Toys R Us Inc. Neil E. McDonell (Dorsey & Whitney) for Baby Bjorn AB. Alexander Maltas (Latham & Watkins) for Britax Child Safety Inc. Michael J. Hahn (Lowenstein Sandler) for Kids Line Inc. Carolyn H. Feeney (Dechert) for Medela Inc. Kendall Millard (Barnes & Thornburg) for Peg Perego USA Inc. David R. Martin for Regal Lager Inc.

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