In re Baby Products Antitrust Litigation: Third Circuit Issues Game-Changing Decision Affecting Cy Pres Funds in Claims-Made Class Action Settlements

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On February 19, 2013, the United States Court of Appeals for the Third Circuit vacated a district court order approving a class action settlement, holding that a district court must specifically determine that a claims-made settlement incorporating a cy pres fund provides sufficient direct compensation to class members before granting final approval. See In re Baby Prods. Antitrust Litig., Nos. 12-1165, 12-1166, and 12-1167, – F.3d –, 2013 WL 599662, rev’g 834 F. Supp. 2d 329 (E.D. Pa. 2011). To make such a determination, the Third Circuit reasoned, a district court typically must find that the portion of the settlement distributed cy pres represents only a “small percentage of total settlement funds.” Id. at *5.

The Third Circuit’s opinion is notable for a number of reasons, including because it represents a growing trend of circuit courts expressing skepticism about cy pres funds in class settlements. But the most significant aspect of the opinion is its practical effect on parties negotiating such settlements on a claims-made basis. By holding that the fairness of claims-made settlements depends on the value of the benefits actually claimed by class members, the Third Circuit created substantial challenges to class action defendants seeking to resolve disputes on favorable terms.

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