We address for the first time
the use of cy pres distributions in class action settlements. “The term ‘cy pres’ is derived from the Norman French expression cy
pres comme possible, which means ‘as near as possible.’” . . . .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.
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 cypres 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 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.
