In a 2-1 decision, the U.S. Court of Appeals for the Sixth Circuit vacated a class action settlement approval and certification of a settlement class that treated the named plaintiffs far more favorably than the other class members. Those class members received injunctive relief that the court described as "nearly worthless" in litigation concerning allegedly defective Pampers disposable diapers.
The Sixth Circuit’s decision follows a recent trend of circuit courts reversing class action settlement approvals. These appellate decisions provide a useful framework for structuring future class action settlements that can pass appellate muster. They also compel the district courts to apply greater scrutiny to proposed class action settlement agreements during fairness hearings.
The Sixth Circuit's decision provides important guidance on the permissibility of "incentive payments" in class action settlements. Incentive payments are bonuses paid to class representatives for their role in bringing and pursuing the class action lawsuit. The Sixth Circuit observed that incentive payments representing a fraction of a class representative's damages are arguably proper, while incentive payments that make the class representatives whole or, as in this case, create a windfall, are not. The Sixth Circuit likened incentive awards to “dandelions on an unmowed lawn—present more by inattention than by design.”
In re Dry Max Pampers Litigation arose from a claim alleging that Pampers with “Dry Max technology” caused severe diaper rash in toddlers. Although an investigation revealed no connection between the diapers and the rash, the parties ultimately crafted a settlement agreement. The class was certified under Rule 23(b)(2), which allows only injunctive relief and prohibits absent class members from opting out of the settlement.
Notably, the settlement agreement provided:
An incentive award of $1,000 per child to each named plaintiff
$2.73 million in class counsel fees
A one-box refund program
Labeling and website changes
A major criticism of the settlement agreement was that it provided class members with nothing but “nearly worthless injunctive relief.” For example, the refund program was previously offered to consumers, was limited to one box per household, and required consumers to provide the original receipt and UPC code from the box. The Sixth Circuit labeled the refund program dubious because ordinary consumers do not retain Pampers receipts or boxes. The court characterized the labeling and website changes as negligible. Basic information concerning diaper rash was added to Pampers’ website and boxes. According to the Sixth Circuit, this denigrated the intelligence of the unnamed class members who ordinarily would have obtained this information from a Google search.
Another point of contention was the fee award of $2.73 million to class counsel. The procedural posture of the case did not warrant such a large fee award, according to the Sixth Circuit. Counsel did not engage in discovery or prepare a response to Proctor & Gamble’s motion to dismiss. The Sixth Circuit cautioned courts that when class counsel fees are unreasonably high, counsel may have put their own self-interests ahead of the interests of the class members.
Finally, the court held that the named plaintiffs were inadequate representatives of the class under Rule 23(a)(4). The adequacy of representation is measured by common interests with unnamed class members and a showing that class representatives will actively litigate the interests of the class through qualified counsel. Additional scrutiny is applied when the case involves a settlement class. Alignment of interests and incentives was absent here. The named plaintiffs received an award of at least $1,000, while the unnamed members received injunctive relief of very little value.