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Third Circuit victory for CCAF in Baby Products settlement

| 4 Comments


The McDonough v. Toys'R'Us settlement paid less than $3M to the class, but the attorneys collected $14M, a figure they justified by pointing to as-yet-undetermined cy pres recipients that would receive a chunk of money (the size of which hasn't been disclosed, either). Center for Class Action Fairness attorneys represented an objector unhappy with the disproportionate distribution, and, after the district court signed off on the settlement without inquiry into what the class would receive, took the case up on appeal. The Third Circuit has reversed and vacated the settlement approval:

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 class before giving its approval. ...

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 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. ...

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.

I'll update this post with any press coverage that arises. Earlier: briefing; oral argument (WMA file). The case is In re Baby Products Litigation, No. 12-1165, 1166, 1167 (3d Cir. Feb. 19, 2013).

(CCAF is not affiliated with the Manhattan Institute.)

Update: lots of people talking about the case, some of whom talked to me. [Fisher @ Forbes; Legal Intelligencer; Reuters; Washington Examiner; Litigation Daily ($) (calling me "Class Action Settlement Scourge Ted Frank," which I should print up on my business cards); WSJ Law Blog ($); Star-Ledger/Bloomberg News; Debevoise; Ballard Spahr; ABA; Findlaw; Blawgletter; UCL Practitioner; Petit (who seems mad at me, but can't bring himself to accurately represent my litigation or public-policy position); Mealey's ($); Law360 ($)]

No update to the settlement website as of February 23.

4 Comments

This seemed to me, at core, a procedural failure. The District Court approved creating a settlement fund of $35,500,000, paying out a third in attorney's fees (which itself was a mere 37% of the $31,839,355.33 lodestar, rendering the case deeply unprofitable for the plaintiff's lawyers), reimbursing counsel costs of $2,229,775.60, and then leaving the remaining >$20 million for claims, of which it was estimated that $8,100,000 would end up paying out directly and the rest would end up cy pres, but there was a large fund in case there were a lot of claims. By the time of the appeal, it turned out only about $3,000,000 was going to direct payment.

All of which leaves the head-scratching question: couldn't they have done a better job figuring out the claims at the time of approval, so they wouldn't be stuck admitting to the appellate court they grossly overestimated the payments? Of moving for reconsideration? Something? Maybe all of that was attempted. Or maybe they just didn't care.

Seems to me, though, that the fix here is pretty darn easy, and can be done without even altering the counsel fees, just jack up the amounts going to direct claimants, who are now well-known.

While we're at it, as someone who indeed purchase Britax car seats in the relevant timeframe, though not from Toys R Us, I would like to complain about the limited reach of antitrust law. The price of my seats was raised by the anticompetitive conduct as well, and yet I am left with nothing. Woe is me.

It's absolutely standard practice for class counsel to hide the fact that they've structured the settlement so that noone will actually make any claims, argue that the number of claims is irrelevant, and then fail to disclose it entirely. Or, at least, it was until this decision came down. We have other cases on appeal where the judge doesn't even bother to make a guestimate of the class recovery.

I agree that it makes no sense for antitrust law to restrict recovery to direct BRU purchasers. NB that's one of many places where I think the law is insufficiently pro-plaintiff. (On the other hand, I think the underlying resale price maintenance theory of liability in this case is economic nonsense, which is why it settled for so few cents on the dollar.)

Max, what you miss is that the defendants *wanted* the money to go to cy pres, because then it goes to their favorite charities, and the money just shifts from one accounting entry to another without real expense to the defendants. When plaintiffs agree to this, and then agree to a claims process that requires class members to file a six-page claim form to collect $5, they're hiding from the court and the class that it's not actually a $35 million settlement, but really a $17 million settlement of which they're asking for $14 million.

In Miller County, Arkansas, the state court has refused to permit discovery to find out how much class counsel actually paid class members in their previous cases. As Lester Brickman has documented, class action attorneys have kept these numbers s secret for a reason: when they can pretend that the Classmates.com settlement is a "$9.5 million" settlement, rather than a $57,000 settlement, then no one notices that the system is being run for the attorneys and not for the injured consumers.

I get why the defendants want minimal claims; among other issues, it reduces consumer awareness of their misdeeds.

Why I don't get is why the plaintiff's lawyers acquiesced, particularly in light of the objections. Seems to me that, even from a purely cynical standpoint, they'd be better of just dealing with the objections — which wouldn't have cost them a penny in fees — than letting this go up on appeal. Perhaps the defendants refused to alter the settlement, sticking the plaintiff's lawyers in a bind: blowing up a settlement that benefits some members of the class to benefit other members isn't obviously the right course, even if in retrospect it appears the whole class will do better.

My point here is that, at least in this case, it wasn't trial lawyers fees vs. client recovery, as these objections are often framed, and as is often the complaint by non-lawyers about class actions. It was something else; IMHO, the problem here originated with the defendant.

rendering the case deeply unprofitable for the plaintiff's lawyers.
I wish I could be so "unprofitable" but then IANAL.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

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Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

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