2013 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-19-2013

In Re: Baby Products Antitrust

Precedential or Non-Precedential: Precedential

Docket No. 12-1165

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

Nos. 12-1165, 12-1166 & 12-1167

________________

IN RE BABY PRODUCTS ANTITRUST LITIGATION

Kevin Young, Appellant (No. 12-1165)

Clark Hampe, Appellant (No. 12-1166)

Allison Lederer, Appellant (No. 12-1167)

________________

Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil Action Nos. 2-06-cv-00242 / 2-09-cv-06151)

District Judge: Honorable Anita B. Brody

________________

Argued September 19, 2012

Before AMBRO, GREENAWAY, JR., 

and O’MALLEY,

*

 * Honorable Kathleen M. O’Malley, United States Court of 

Appeals for the Federal Circuit, sitting by designation.

Circuit Judges
2

(Opinion filed: February 19, 2013)

Christopher M. Arfaa, Esquire

Littleton Joyce Ughetta Park & Kelly

150 North Radnor Chester Road

Suite F-200

Radnor, PA 19087

Theodore H. Frank, Esquire (Argued)

Center for Class Action Fairness

1718 M. Street, N.W., No. 236

Washington, DC 20036

Daniel Greenberg, Esquire

55 Fontenay Circle

Little Rock, AK 72223

Counsel for Appellant

Kevin Young

Christopher A. Bandas, Esquire

Bandas Law Firm

500 North Shoreline, Suite 1020

Corpus Christie, TX 78471

Counsel for Appellant

Clark Hampe

James H. Price, Esquire

Lacy, Price & Wagner

249 North Peters Road, Suite 101

Knoxville, TN 37923
3

Counsel for Appellant

Allison Lederer

Theodore B. Bell, Esquire

Mary Jane E. Fait, Esquire

Wolf, Haldenstein, Adler, Freeman & Herz

55 West Monroe Street, Suite 1111

Chicago, IL 60603

Steve W. Berman, Esquire

George W. Sampson, Esquire

Anthony D. Shapiro, Esquire

Ivy A. Tabbara, Esquire

Hagens Berman Sobol Shapiro

1918 Eighth Avenue, Suite 3300

Seattle, WA 98101

Thomas H. Burt, Esquire

Fred T. Isquith, Esquire

Wolf, Haldenstein, Adler, Freeman & Herz

270 Madison Avenue

New York, NY 10016

William G. Caldes, Esquire

Eugene A. Spector, Esquire (Argued)

Jeffrey L. Spector, Esquire

Spector, Roseman, Kodroff & Willis

1818 Market Street, Suite 2500

Philadelphia, PA 19103

Elizabeth A. Fegan, Esquire

Hagens Berman Sobol Shaprio

1144 West Lake Street, Suite 400
4

Oak Park, IL 60301

Counsel for Appellee

Carol M. McDonough

Harry H. Rimm, Esquire

Mark L. Weyman, Esquire (Argued)

Reed Smith

599 Lexington Avenue

New York, NY 10022

Melissa I. Rubenstein, Esquire

Reed Smith

1650 Market Street

2500 One Liberty Place

Philadelphia, PA 19103

Counsel for Appellees

Toys R Us Inc., Babies R Us Inc., 

Toys R Us Delaware Inc.

Neil E. McDonell, Esquire

Dorsey & Whitney

51 West 52nd Street

New York, NY 10019

Counsel for Appellee

Baby Bjorn AB

Alexander Maltas, Esquire

Marguerite M. Sullivan, Esquire

Edward M. Williamson, Esquire

Margaret M. Zwisler, Esquire
5

Latham & Watkins

555 11th Street, N.W., Suite 1000

Washington, DC 20004

Samuel W. Silver, Esquire

Schnader Harrison Segal & Lewis

1600 Market Street, Suite 3600

Philadelphia, PA 19103

Counsel for Appellee

Britax Child Safety Inc.

Michael J. Hahn, Esquire

Lowenstein Sandler

65 Livingston Avenue

Roseland, NJ 07068

Counsel for Appellee

Kids Line Inc.

Carolyn H. Feeney, Esquire

George G. Gordon, Esquire

Joseph A. Tate, Esquire

Dechert

2929 Arch Street

18th Floor, Cira Centre

Philadelphia, PA 19104

Counsel for Appellee

Medela Inc.

Kendall Millard, Esquire

Barnes & Thornburg
6

11 South Meridian Street, Suite 1313

Indianapolis, IN 46204

Counsel for Appellee

Peg Perego USA Inc.

David R. Martin, Esquire

Suite 3116

5200 Peachtree Road

Atlanta, GA 30341

Isaac J. Mitrani, Esquire

Mitrani Rynor & Adamsky

One Southeast Third Avenue

2200 Suntrust International Center

Miami, FL 33131

Counsel for Appellee

Regal Lager Inc.

________________

OPINION OF THE COURT

________________

AMBRO, 

We address for the first time the use of cy pres

distributions in class action settlements.

Circuit Judge

1

 1 Although Judge Weis briefly discussed the desirability of cy 

pres distributions in a partial concurrence and dissent, the 

majority in that case did not address the issue. See In re Pet 

 “The term ‘cy pres’
7

is derived from the Norman French expression cy pres comme 

possible, which means ‘as near as possible.’” Democratic 

Cent. Comm. v. Washington Metro. Area Transit Comm’n, 84 

F.3d 451, 455 n.1 (D.C. Cir. 1996).2

 

Food Prods. Liab. Litig., 629 F.3d 333, 363–64 (3d Cir. 

2010) (Weis, J., concurring in part and dissenting in part).

 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. 

2 The cy pres doctrine originated in trusts-and-estates law as a 

rule of construction used to preserve testamentary charitable 

gifts that otherwise would fail. “When it becomes impossible 

to carry out the charitable gift as the testator intended, the 

doctrine allows the ‘next best’ use of the funds to satisfy the 

testator’s intent ‘as near as possible.’” Id. (quoting Natalie A. 

DeJarlais, Note, The Consumer Trust Fund: A Cy Pres 

Solution to Undistributed Funds in Consumer Class Actions, 

38 Hastings L.J. 729, 730 (1987)). 
8

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 cy 

 

 3 Three of the objectors to the settlement—Young, Clark 

Hampe, and Allison Lederer—have appealed, but only Young 

has filed briefing. Because the underlying suits alleged 

violations of the Sherman and Clayton Acts, the District 

Court had subject matter jurisdiction under 28 U.S.C. §§ 1331 

& 1337. 

Our Court has appellate jurisdiction because this is a 

timely filed appeal from a final judgment. 28 U.S.C § 1291. 

Although the objectors were not parties to the underlying 

action, as class members who timely objected to the approval 

of the settlement at a fairness hearing, they are permitted to 

appeal the settlement without the need to intervene formally. 

See Devlin v. Scardelletti, 536 U.S. 1, 14 (2002).
9

pres 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 
10

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. 

I. Background

This appeal follows from two antitrust class actions 

consolidated for settlement purposes. In 2006, Carol 

McDonough and other named plaintiffs filed a suit in the 

United States District Court for the Eastern District of 

Pennsylvania alleging that Defendants conspired to set a price 

floor for the sale of certain baby products, causing consumers 

to pay increased prices for these products. In 2009, class 

certification of that resale-price-maintenance suit was granted 

and several subclasses were created based on the products 

purchased and the timeframe of those purchases. Because the 

District Court did not permit the subclass periods to extend 

beyond the date when the case was filed, Ariel Elliott and 

other named plaintiffs subsequently filed a related putative 

class action. In 2011, the parties in those actions signed an 

agreement consolidating and settling their lawsuits. 

The Court initially approved the settlement in January 

2011. Notice was sent to putative class members informing 

them of their right to submit a claim, opt out, or object. In 

July 2011, the Court held a fairness hearing to consider any 

objections made by class members. The deadline for 

submitting claims expired in August 2011. Approximately 
11

four months later, the Court approved the settlement and a 

fund allocation plan proposed by the parties. It also granted

class counsel’s fee request for $11,833,333.33, representing 

one-third of the gross settlement amount, and $2,229,775.60 

for out-of-pocket litigation expenses.

Per the settlement, Defendants deposited $35,500,000 

into a settlement fund. After payment of attorneys’ fees and 

expenses, the remainder of the fund was slated for

distribution to the settlement class.4

Claimants are entitled to different levels of 

compensation based on the evidence submitted. Those who 

submit valid documentary proof of purchase and of the actual 

price paid for a product are eligible to receive 20% of the 

actual purchase price of each product purchased. Those who 

do not submit documentary proof of the actual purchase price 

but submit a valid proof of purchase are eligible to receive 

20% of the estimated retail price, as calculated by class 

counsel, of each product purchased.

 In order to receive a cash 

distribution, a claimant must demonstrate that he or she is a 

member of a settlement subclass by submitting a valid, sworn,

and timely claim form. 

5

 4 The settlement class is comprised of all persons and entities 

who bought certain baby products from Babies “R” Us and 

Toys “R” Us during prescribed time periods dating back to 

1999.

 (The 20% figure 

5 Under the allocation plan, valid documentary proof “may 

include but is not limited to receipts, cancelled checks, credit 

card statements, records from Toys ‘R’ Us or Babies ‘R’ Us, 

or other records that show the Authorized Claimant purchased 

the Settlement Product(s) from Toys ‘R’ Us or Babies ‘R’ Us, 

and when the purchase was made.” 
12

slightly exceeds the 18% average overcharge an independent 

economics expert hired by class counsel estimated class 

members would have paid for a baby product covered by the 

settlement.) Those who do not submit any proof of purchase 

are eligible to receive a payment of $5. 

Claims in the first two categories of compensation—

those receiving 20% of the actual or estimated purchase 

price—are subject to pro rata enhancements. The settlement 

class is divided into eight different settlement subclasses, 

based on the baby product purchased. If the claims awarded 

do not exhaust the funds allocated to a particular settlement 

subclass, these awards are enhanced by up to three times the 

baseline figure, consistent with Section 4 of the Clayton Act, 

15 U.S.C. § 15, which entitles private plaintiffs to receive

treble damages for violations of the antitrust laws. 

The settlement terms establish an order of priority for 

distributing any remaining funds. Funds in a subclass after 

the initial distribution will be redistributed first to the other 

settlement classes until all claims are fully satisfied in 

accordance with the compensation categories and 

accompanying enhancements described. If funds remain after 

that redistribution and the payment of administrative costs,

they will be donated to one or more charitable 

organizations—the cy pres recipients. Under the terms of the 

settlement, Plaintiffs and Defendants are each permitted to 

recommend up to two not-for-profit organizations to receive 

the award. The District Court, however, is entrusted with the 

responsibility of selecting one or more cy pres recipients that 

will receive distributions. 

We do not know the exact allocation of the funds that 

will result from the current settlement. At the time of the 

fairness hearing in July 2011, class members had submitted

approximately 41,000 claims. Because the deadline for 
13

submissions was not until August 2011, more claims likely 

were submitted. In response to a concern regarding whether 

the $35,500,000 in the settlement fund would be sufficient to

pay counsel fees and expenses while compensating class 

members under the terms of the agreement, the District Court 

estimated that at most—assuming 45,000 claims, each 

entitling the claimant to three times 20% of a $300 baby 

product—$8,100,000 would be distributed to class members. 

It appears, however, that far less will actually be distributed 

to them. At oral argument, class and defense counsel 

informed us that, largely because the vast majority of the 

claims fell into the third category of compensation entitling 

claimants to $5 payouts, class members will receive only 

about $3,000,000 through the claims process. 

II. Cy pres

We have not ruled on whether class action settlements

may include cy pres provisions. Courts generally have 

approved cy pres distributions in two circumstances.

First, many courts allow a 

settlement that directs funds to a 

third party when funds are left 

over after all individual claims 

have been satisfied. . . . Second, 

some courts allow a settlement to 

require a payment only to a third 

party, that is, to provide no 

recovery at all directly to class 

members. 

American Law Institute (“ALI”), Principles of the Law of 

Aggregate Litig. § 3.07, comment a (2010). We deal with the 

former here.
14

The use of cy pres recipients to dispose of excess 

funds—first suggested in a student comment in 1972, see

Stewart R. Shepherd, Comment, Damage Distribution in 

Class Actions: The Cy Pres Remedy, 39 U. Chi. L. Rev. 448 

(1972)—has accelerated rapidly in recent years.

From 1974 through 2000, federal 

courts granted or approved cy 

pres awards to third party 

charities in thirty class actions, or 

an average of approximately once 

per year. [From] 2001 [through 

2008], federal courts granted or 

approved cy pres awards in sixtyfive class actions, or an average of 

roughly eight per year.

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, 653 (2010). 

This is unsurprising. When excess settlement funds 

remain after claimants have received the distribution they are 

entitled to under the terms of the settlement agreement, there 

are three principal options for distributing the remaining 

funds—reversion to the defendant, escheat to the state, or

distribution of the funds cy pres.

6

 6 As we discuss directly below, the parties may also agree to 

make further distributions to class members (e.g., expand 

eligibility for payments and/or lower the requirements for 

making a successful claim).

 Among these options, cy 

pres distributions have benefits over the alternative choices. 

Reversion to the defendant risks undermining the deterrent 

effect of class actions by rewarding defendants for the failure 
15

of class members to collect their share of the settlement. 

Escheat to the state preserves the deterrent effect of class 

actions, but it benefits the community at large rather than 

those harmed by the defendant’s conduct. Cy pres

distributions also preserve the deterrent effect, but (at least 

theoretically) more closely tailor the distribution to the 

interests of class members, including those absent members 

who have not received individual distributions. 

We join other courts of appeals in holding that a 

district court does not abuse its discretion by approving a 

class action settlement agreement that includes a cy pres

component directing the distribution of excess settlement 

funds to a third party to be used for a purpose related to the 

class injury.7

 7 In contrast with cy pres distributions agreed to by the parties 

as part of a settlement, courts of appeals have greeted with 

more skepticism cy pres distributions imposed by trial courts 

over the objections of the parties. See, e.g., Klier v. Elf 

Atochem N. Am., Inc., 658 F.3d 468, 479 (5th Cir. 2011) (en 

banc) (“Where the terms of a settlement agreement are 

sufficiently clear, or, more accurately, insufficient to 

overcome the presumption that the settlement provides for 

further distribution to class members, there is no occasion for 

charitable gifts, and cy pres must remain offstage.” (footnote 

omitted)). We do not deal with that situation here. 

 See Lane v. Facebook, Inc., 696 F.3d 811, 819–

20 (9th Cir. 2012); In re Pharm. Indus. Average Wholesale 

Price Litig., 588 F.3d 24, 33–36 (1st Cir. 2009); see also 4 

Herbert B. Newberg et al., Newberg on Class Actions § 11:20 

(4th ed. 2012); ALI, supra, § 3.07. “The claims, issues, or 

defenses of a certified class may be settled, voluntarily 

dismissed, or compromised only with the court’s approval.” 

Fed. R. Civ. P. 23(e). That approval is warranted when the 
16

court finds that the settlement, taken as a whole, is “fair, 

reasonable, and adequate” from the perspective of the class. 

Fed. R. Civ. P. 23(e)(2). Inclusion of a cy pres provision by 

itself does not render a settlement unfair, unreasonable, or 

inadequate.

We caution, however, that direct distributions to the 

class are preferred over cy pres distributions. The private 

causes of action aggregated in this class action—as in many 

others—were created by Congress to allow plaintiffs to 

recover compensatory damages for their injuries. See 15 

U.S.C. § 15. Cy pres distributions imperfectly serve that 

purpose by substituting for that direct compensation an 

indirect benefit that is at best attenuated and at worse 

illusory.8

 8 Federal Rule of Civil Procedure 23, under which this class 

settlement was approved, is a procedural mechanism 

permitting the aggregation of claims in federal court. 

Pursuant to the Rules Enabling Act, it does not and cannot 

alter the underlying substantive law being asserted. 28 U.S.C. 

§ 2072. Because “a district court’s certification of a 

settlement simply recognizes the parties’ deliberate decision 

to bind themselves according to mutually agreed-upon terms 

without engaging in any substantive adjudication of the 

underlying causes of action,” Sullivan v. DB Invs., Inc., 667 

F.3d 273, 312 (3d Cir. 2011), we do not believe the inclusion 

of a cy pres provision in a settlement runs counter to the 

Rules Enabling Act. But see Klier, 658 F.3d at 481 (Jones, J., 

concurring) (suggesting that cy pres distributions arguably 

violate the Rules Enabling Act and present Article III 

problems); In re Pet Food Prods. Liab. Litig., 629 F.3d 333, 

362 (3d Cir. 2010) (Weis, J., concurring and dissenting) 

(suggesting that excess funds should escheat to the state 

 Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 
17

784–85 (7th Cir. 2004). Cy pres distributions also present a 

potential conflict of interest between class counsel and their 

clients because the inclusion of a cy pres distribution may 

increase a settlement fund, and with it attorneys’ fees, without 

increasing the direct benefit to the class. Where a court fears 

counsel is conflicted, it should subject the settlement to 

increased scrutiny.9

To account for the inferiority of cy pres distributions, 

the ALI has published guidelines limiting them to instances 

where further individual distributions are infeasible. Those 

guidelines provide in pertinent part:

If the settlement involves 

individual distributions to class 

members and funds remain after 

distributions (because some class 

members could not be identified 

or chose not to participate), the 

settlement should presumptively 

provide for further distributions to 

participating class members 

unless the amounts involved are 

too small to make individual 

 

instead of being distributed to cy pres recipients). The Rules 

Enabling Act, however, provides further support for the 

proposition that courts should favor class settlements that 

provide direct compensation to the class through individual 

distributions.

9 As discussed in the next section, see infra Part III, it may 

also be appropriate to decrease attorneys’ fees in those 

circumstances.
18

distributions economically viable 

or other specific reasons exist that 

would make such further 

distributions impossible or unfair.

ALI, supra, § 3.07(b). The ALI does not explain further what 

“other specific reasons” would justify a cy pres distribution. 

Although we agree with the ALI that cy pres

distributions are most appropriate where further individual 

distributions are economically infeasible, we decline to hold 

that cy pres distributions are only appropriate in this context. 

Settlements are private contracts reflecting negotiated 

compromises. Sullivan, 667 F.3d at 312. The role of a

district court is not to determine whether the settlement is the 

fairest possible resolution—a task particularly ill-advised 

given that the likelihood of success at trial (on which all 

settlements are based) can only be estimated imperfectly. 

The Court must determine whether the compromises reflected 

in the settlement—including those terms relating to the 

allocation of settlement funds—are fair, reasonable, and 

adequate when considered from the perspective of the class as 

a whole.

To assess whether a settlement containing a cy pres

provision satisfies this requirement, courts should employ the 

same framework developed for assessing other aspects of 

class action settlements. In Girsh v. Jepson, 521 F.2d 153 (3d 

Cir. 1975), we set out nine factors that courts should consider 

when deciding whether to approve a settlement. Id. at 157. 

In In re Prudential Insurance Co. of America Sales Practices

Litigation, 148 F.3d 283 (3d Cir. 1998), we expanded that 

analysis to include what may be termed the Prudential

considerations. Id. at 323. Unlike the Girsh factors, each of 

which the district court must consider before approving a 
19

class settlement, the Prudential considerations are just that, 

prudential. They are permissive and non-exhaustive, 

“illustrat[ing] . . . [the] additional inquiries that in many 

instances will be useful for a thoroughgoing analysis of a 

settlement’s terms.” See In re Pet Food, 629 F.3d at 350. 

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 note that this inquiry needs to be, as much as 

possible, practical and not abstract. If “the parties have not” 

on their own initiative “supplied the information needed” to 

make the necessary findings, the court should “affirmatively 

seek out such information.” In re Pet Food, 629 F.3d at 351 

(citation omitted). Making these findings may also require a 

court to withhold final approval of a settlement until the 

actual distribution of funds can be estimated with reasonable 

accuracy. Alternatively, a court may urge the parties to

implement a settlement structure that attempts to maintain an 

appropriate balance between payments to the class and cy 

pres awards. For instance, it could condition approval of a 

settlement on the inclusion of a mechanism for additional 

payouts to individual class members if the number of 

claimants turns out to be insufficient to deplete a significant 

portion of the total settlement fund. 
20

Turning to the particular cy pres distribution in this 

case, Young asserts that the District Court failed to fulfill its 

oversight responsibility by approving a class action settlement 

containing a cy pres provision that permits the distribution of 

funds to a third party without first fully compensating all 

claimants. As noted above, the settlement directs a cy pres

award after claimants receive cash distributions via a threetiered compensation structure: claimants with valid 

documentary proof of purchase and purchase price receive up 

to three times 20% of the actual price of the product they 

purchased; claimants with valid documentary proof of 

purchase receive up to three times 20% of the estimated price; 

and claimants without any valid proof receive a $5 payout. 

Young does not object to the 20% figure or argue that the first 

two categories of claimants will be undercompensated. 

Instead, he asserts that the cy pres award is inappropriate 

because the third category of claimants—those receiving a $5

payout regardless of price of the product they purchased—

will not be fully compensated for their losses. 

We review a district court’s decision to approve a 

settlement for abuse of discretion. Girsh, 521 F.2d at 156 & 

n.7. “‘An appellate court may find an abuse of discretion 

where the district court’s decision rests upon a clearly 

erroneous finding of fact, an errant conclusion of law or an 

improper application of law to fact.’” In re Prudential, 148 

F.3d at 299 (quoting In re Gen. Motors Corp. Pick-Up Truck 

Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 783 (3d Cir. 

1995)). Mindful that we are dealing with a settlement, we 

remain hesitant to undo an agreement that has resolved a 

hard-fought, multi-year litigation. See In re Warfarin Sodium 

Antitrust Litig., 391 F.3d 516, 535 (3d Cir. 2004). “Because 

class actions are rife with potential conflicts of interest 

between class counsel and class members,” however, “district 

judges presiding over such actions are expected to give 

careful scrutiny to the terms of proposed settlement in order 
21

to make sure that class counsel are behaving as honest 

fiduciaries for the class as a whole.” Mirfasihi, 356 F.3d at 

785 (collecting cases); see also In re Gen. Motors, 55 F.3d at 

785.

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. The Court 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.” 

McDonough v. Toys “R” Us, Inc., 834 F. Supp. 2d 329, 352 

(E.D. Pa. 2011). According to counsel, however, the vast 

majority of claimants have not submitted documentary proof 

entitling them to a greater award, casting doubt on this 

assumption. Similarly, the Court found the $5 cap was 

justified by the need to “avoid encouraging fraud.” Id. While 

without doubt this is a good goal, we do not believe the Court 

could have reasonably assessed whether these concerns 

justified the cap without knowing the resulting allocation of 

funds. Other means of preventing fraud could have been 

explored.
22

Based on the information we now have, we remand for 

the Court to reconsider the fairness of the settlement. The 

parties may wish to alter its terms on remand to provide 

greater direct benefit to the class, such as by increasing the $5 

payment or lowering the evidentiary bar for receiving a 

higher award.10

We place no absolute requirement on the amount of 

direct compensation the third category of claimants must 

receive. Courts of appeals have approved cy pres

distributions where all class members submitting claims have 

already been fully compensated for their damages by prior 

distributions. See, e.g., In re Lupron Mktg. & Sales Practices 

Litig., 677 F.3d 21, 34–35 (1st Cir. 2012). A cy pres

distribution is considered appropriate in that circumstance 

because additional individual distributions would 

“overcompensat[e] claimant class members at the expense of 

absent class members.” Id. at 35 (citing In re Pharm. Indus., 

588 F.3d at 34–36). We agree, but do not limit cy pres

distributions to instances where all claimants have received 

100% of their estimated damages. As the parties explain, the 

$5 payment to claimants in the third category can be seen as 

compensation for a full release of their claims rather than as 

an attempt to compensate them for their damages. Indeed, 

provided the class as a whole received sufficient direct 

benefit, it would not have been unreasonable to eliminate the 

$5 category altogether and require class members to submit 

documentary proof to receive any award. We do not intend to 

 After allowing them that opportunity, we ask 

the Court to make the factual findings necessary to evaluate

whether the settlement provides sufficient direct benefit to the 

class.

 10 Class members should be notified of any material 

alterations to the settlement and permitted to object to them 

before the Court approves the settlement.
23

raise the bar for obtaining approval of a class action 

settlement simply because it includes a cy pres provision.

What we are concerned with in this case is that the 

Court approved the settlement without being made aware that 

almost all claimants would fall into the $5 compensation 

category, resulting in minimal (and we doubt sufficient)

compensation going directly to class members. The baby 

products at issue cost up to $300, resulting in damages, at the 

estimated 18% overcharge, of over $50. Combined with the 

possibility of treble damages, we doubt that this is the type of 

small claims case where the potential awards were necessarily 

insufficient to motivate class members to file claims. We 

think it more likely that many class members did not submit 

claims because they lacked the documentary proof necessary 

to receive the higher awards contemplated, and the $5 award 

they could receive left them apathetic. This casts doubt on 

whether agreeing to a settlement with such a restrictive claims 

process was in the best interest of the class. If Defendants 

decline to raise the $5 cap or alter the documentary proof 

requirement on remand, the Court will need to determine 

whether the class received sufficient direct benefit to justify 

the settlement as fair, reasonable, and adequate. Before doing 

so, though, it must have the requisite factual basis.

III. Attorneys’ Fees

“In a certified class action, the court may award 

reasonable attorney’s fees and nontaxable costs that are 

authorized by law or by the parties’ agreement.” Fed. R. Civ. 

P. 23(h). Courts generally use one of two methods for 

assessing the reasonableness of attorneys’ fees—a 

percentage-of-recovery method or a lodestar method. The 

former “resembles a contingent fee in that it awards counsel a 

variable percentage of the amount recovered for the class.” In 

re Gen. Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. 
24

Litig., 55 F.3d 768, 819 n.38 (3d Cir. 1995). The latter 

“calculates fees by multiplying the number of hours expended 

by some hourly rate appropriate for the region and for the 

experience of the lawyer.” Id. at 819 n.37. Whichever 

method is chosen, “we have noted previously that ‘it is 

sensible for a court to use a second method of fee approval to 

cross check’ its initial fee calculation.” In re Prudential Ins. 

Co. of Am. Sales Practices Litig., 148 F.3d 283, 333 (3d Cir. 

1998) (quoting In re Gen. Motors, 55 F.3d at 820).

The District Court—as is “generally favored in cases 

involving a common fund,” id.—awarded fees on a 

percentage-of-recovery basis. We have identified a number 

of factors to aid courts in evaluating the reasonableness of 

percentage fee awards. In re Diet Drugs Prod. Liab. Litig., 

582 F.3d 524, 541 (3d Cir. 2009) (citing Gunter v. Ridgewood 

Energy Corp., 223 F.3d 190, 195 n.1 (3d Cir. 2000); In re 

Prudential, 148 F.3d at 336–40). Applying these factors, the 

Court approved counsel’s requested fees of $11,833,333.33

(one-third of the entire settlement fund) as reasonable. In 

addition to using a percentage of recovery method, the Court 

applied a lodestar method crosscheck. It calculated, at 

counsel’s regular billing rates, a total lodestar of 

$31,839,355.33, representing a negative lodestar multiplier of 

.37 (i.e., class counsel’s fee request equaled 37 percent of 

what they would have received at their regular billing rates). 

We vacate the District Court’s order awarding fees and 

costs because it is based on a settlement that is no longer in 

effect and may be altered on remand. Although in this 

circumstance we need not (and do not) resolve whether the 

awarded fees were reasonable, we note that the Court did not 

address an issue raised by Young we believe worthy of 

discussion. He objected to the requested fees on the ground 

that the Court should not consider the cy pres award as a class 

benefit for purposes of calculating attorneys’ fees. On appeal, 
25

Young has softened his approach, asking instead that we 

require districts courts to discount—rather than to ignore 

entirely—the value of cy pres distributions for purposes of 

calculating percentage awards. See Young Reply Br. at 22. 

Take, for example, a settlement fund whereby $20,000,000 

will be distributed for cy pres purposes. Under Young’s 

approach, if a court believes that the cy pres award provides 

half the benefit of direct distributions, it should value the 

portion of the settlement being distributed cy pres at 

$10,000,000 for purposes of calculating attorneys’ fees as a 

percentage of the recovery.

Although the Supreme Court has not addressed 

whether attorneys’ fees should be reduced when a portion of a 

settlement fund is distributed cy pres, it has confronted 

essentially the same issue when calculating percentage fee 

awards against a settlement fund that will partially revert to 

the defendant. In Boeing Co. v. Van Gemert, 444 U.S. 472

(1980), the Supreme Court confirmed the permissibility of

using the entire fund as the appropriate benchmark, at least 

where each class member needed only to prove his or her

membership in the injured class to receive a distribution.

11

Courts of appeals have taken a similar approach when 

they have addressed this issue in the cy pres context. In Six 

Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301

Id. at 480–81. Boeing, however, did not address whether a 

district court abuses its discretion by taking the converse 

approach, basing attorneys’ fees on only the amount of the 

fund claimed by class members. 

 11 In Boeing, the fund was created following the 

determination of plaintiffs’ claims rather than pursuant to a 

settlement. Id. at 474–75. We do not believe this 

significantly alters the analysis.
26

(9th Cir. 1990), the District Court had calculated attorneys’ 

fees as a percentage of the total fund even though unclaimed 

funds would be distributed to cy pres recipients. The Court of 

Appeals for the Ninth Circuit, relying on Boeing, held that the

District Court did not abuse its discretion in using the total 

fund amount as its benchmark. Id. at 1311. In Masters v. 

Wilhelmina Model Agency, Inc., 473 F.3d 423 (2d Cir. 2007), 

the Court of Appeals for the Second Circuit reviewed a 

percentage-fee award based on funds claimed by class 

members rather than on the entire settlement fund, some of 

which would ultimately be distributed to a cy pres recipient.

Finding that the District Court abused its discretion, the 

Circuit Court held that the percentage fee should have been 

calculated on the basis of the total fees made available 

because “[t]he entire [settlement] [f]und, and not some 

portion thereof, [was] created through the efforts of counsel.” 

Id. at 437. It noted, however, that a court may within its 

discretion decrease the percentage of the fund awarded (rather 

than the benchmark value of the settlement) in appropriate 

circumstances to prevent attorneys from being improperly 

enriched. Id.

We think it unwise to impose, as Young requests, a 

rule requiring district courts to discount attorneys’ fees when 

a portion of an award will be distributed cy pres.

12

 12 Young also asks us to hold that fee awards exceeding the 

amount directly distributed to class members are 

presumptively unreasonable. For substantially similar 

reasons, we do not adopt such a rule. 

 There are 

a variety of reasons that settlement funds may remain even 

after an exhaustive claims process—including if the class 

members’ individual damages are simply too small to 

motivate them to submit claims. Class counsel should not be 
27

penalized for these or other legitimate reasons unrelated to the 

quality of representation they provided. Nor do we want to 

discourage counsel from filing class actions in cases where 

few claims are likely to be made but the deterrent effect of the 

class action is equally valuable. 

We appreciate, however, that awarding attorneys’ fees 

based on the entire settlement amount rather than individual 

distributions creates a potential conflict of interest between 

absent class members and their counsel. “Arrangements such 

as [these] . . . decouple class counsel’s financial incentives 

from those of the class. . . . They potentially undermine the 

underlying purposes of class actions by providing defendants 

with a powerful means to enticing class counsel to settle 

lawsuits in a manner detrimental to the class.” Int’l Precious 

Metals Corp. v. Waters, 530 U.S. 1223, 1224 (2000) (denial 

of cert.) (O’Connor, J.) (discussing a percentage fee 

calculated against the entire settlement fund even though a 

significant portion would revert to the defendant). Class 

members are not indifferent to whether funds are distributed

to them or to cy pres recipients, and class counsel should not 

be either. 

Where a district court has reason to believe that 

counsel has not met its responsibility to seek an award that 

adequately prioritizes direct benefit to the class, we therefore 

think it appropriate for the court to decrease the fee award. 

See Masters, 473 F.3d at 437; Williams v. MGM-Pathe 

Commc’ns Co., 129 F.3d 1026, 1027 (9th Cir. 1997) (stating

that although the entire common fund was the appropriate 

benchmark for attorneys’ fees, the percentage of the fund

awarded may be decreased “to account for any unusual 

circumstances”); In re Heartland Payment Sys., Inc. 

Customer Data Sec. Breach Litig., 851 F. Supp. 2d 1040, 

1077 (S.D. Tex. 2012) (“The class benefit conferred by cy 

pres payments is indirect and attenuated. That makes it 
28

inappropriate to value cy pres on a dollar-for-dollar basis.”); 

cf. Dennis v. Kellogg Co., 697 F.3d 858, 867–68 (9th Cir. 

2012) (vacating an attorneys’ fees award because the District 

Court did not sufficiently scrutinize the valuation of a cy pres

distribution consisting of “$5.5. million worth” of food, and 

noting that “[t]his issue is particularly critical with a cy pres 

product settlement that has a tenuous relationship to the class 

allegedly damaged by the conduct in question”).13

For the reasons discussed, our approach is case by 

case, providing courts discretion to determine whether to 

decrease attorneys’ fees where a portion of a fund will be 

distributed cy pres. The ALI has adopted a similar approach. 

According to its Principles of the Law of Aggregate 

Litigation, “[a]ttorneys’ fees in class actions, whether by 

litigated judgment or by settlement, should be based on both 

the actual value of the judgment or settlement to the class and 

the value of cy pres awards . . . .” ALI, Principles of the Law 

of Aggregate Litig. § 3.13. The comment to that section

clarifies, however, that “because cy pres payments . . . only 

indirectly benefit the class, the court need not give such 

payments the same full value for purposes of setting 

attorneys’ fees as would be given to direct recoveries by the 

class.” Id. § 3.13, comment a. 

 

 13 We note that, in enacting the Class Action Fairness Act, 

Congress required courts to base attorneys’ fees in coupon (as 

opposed to cash) settlements “on the value to class members 

of the coupons that are redeemed” rather than on the face 

value of the coupons. 28 U.S.C. § 1712(a). Although we do 

not deal with a coupon settlement, this statutory provision 

further supports the proposition that the actual benefit 

provided to the class is an important consideration when 

determining attorneys’ fees.
29

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.

We recognize the difficulty a district court faces in 

deciding when attorneys’ fees should be reduced on this 

basis. In evaluating a fee award, it should begin by

determining with reasonable accuracy the distribution of 

funds that will result from the claims process. This may 

require it “to delay a final assessment of the fee award to 

withhold all or a substantial part of the fee until the 

distribution process is complete.” Federal Judicial Center, 

Manual for Complex Litigation § 21.71 (4th ed. 2008). That

court should then, relying on the Gunter/Prudential factors 

and its experience, determine whether the level of distribution 

provided to the class by the settlement reflects a failure of 

class counsel to represent adequately the interests of the entire 

class. We note that the use of a lodestar cross-check may be 

helpful, although not necessarily determinative, in making 
30

this determination.

14

IV. Class Notice

 Having framed the relevant inquiry, we 

leave the determination of the appropriate fee award to the 

District Court, which is more familiar with the performance 

and skill of counsel, the nature and history of the litigation, 

and the merits of the lawsuits. 

After initially approving the settlement, but before

giving final approval, Federal Rule of Civil Procedure

23(e)(1) requires a district court to “direct notice in a 

reasonable manner to all class members who would be bound 

by the proposal.” Although the Rule provides broad 

discretion to district courts with respect to the notice’s form 

and content, it must satisfy the requirements of due process. 

Zimmer Paper Prods., Inc. v. Berger & Montague, P.C., 758 

F.2d 86, 90 (3d Cir. 1985). Generally speaking, the notice

should contain sufficient information to enable class members 

to make informed decisions on whether they should take steps 

to protect their rights, including objecting to the settlement or, 

when relevant, opting out of the class. See Rodriguez v. West 

Publ’g Corp., 563 F.3d 948, 962–63 (9th Cir. 2009); Masters, 

473 F.3d at 438; Petrovic v. Amoco Oil Co., 200 F.3d 1140, 

1153 (8th Cir. 1999); In re Prudential Ins. Co. of Am. Sales 

Practices Litig., 148 F.3d 283, 326 (3d Cir. 1998); 3 Herbert 

 14 This case demonstrates why use of the lodestar is helpful 

but not outcome determinative. As noted, the District Court 

calculated a lodestar of $31,839,355.33 at regular billing 

rates, and the fees awarded represented a negative lodestar 

multiplier of .37. This suggests that class counsel would not 

be overpaid for their services if compensated as requested, 

but it also suggests that counsel has a significant financial 

incentive to cut its losses and settle the lawsuits.
31

B. Newberg et al., Newberg on Class Actions § 8:32 (4th ed. 

2012).

Young contends that the settlement notice was 

inadequate because it did not identify the cy pres recipients 

who will receive excess settlement funds.15

 15 Young also asserts that the settlement notice fails because it

indicates that a potentially valid proof of purchase—certain 

forms of photographic evidence—is invalid. Young became 

aware of that photographic evidence might be permissible at 

the fairness hearing several months before the District Court 

gave final approval to the settlement. Because he failed to 

raise this issue before the Court, it is waived on appeal.

Franki Found. Co. v. Alger-Rau & Assocs., Inc., 513 F.2d 

581, 586 (3d Cir. 1975). We are unclear, however, whether 

photographic evidence actually is valid proof of purchase 

under the settlement. On remand, the Court, taking into 

account any changes to the settlement, should clarify the 

types of evidence that are valid. If that evidence materially 

differs from the evidence described as valid in the class 

notice, the Court should require that a supplemental notice be 

provided to the class.

 His primary 

concern is that unnamed class members will not have the 

opportunity to object to the selection of the cy pres recipients, 

who are intended to serve as proxies for the class members’ 

interests. While a valid concern, failure to identify the cy 

pres recipients is not a due process violation. Class members 

know there is a possibility of a cy pres award and that the 

Court will select among recipients proposed by the parties at 

a later date. This knowledge is adequate to allow any 

interested class member to keep apprised of the cy pres

recipient selection process. We are confident the Court will

ensure the parties make their proposals publicly available and 
32

will allow class members the opportunity to object before it 

makes a selection.

16

The delayed naming of cy pres recipients presents a 

more nuanced issue with respect to the opportunity of class 

members to appeal the Court’s selection of cy pres recipients. 

As the Court of Appeals for the First Circuit has recently 

explained, 

 16 Courts generally require the parties to identify “a recipient 

whose interests reasonably approximate those being pursued 

by the class.” ALI, Principles of the Law of Aggregate Litig. 

§ 3.07. In this case, the Court indicated that it would select a 

cy pres recipient (from among the organizations proposed by 

the parties) that satisfies this standard. “[H]aving judges 

decide how to distribute cy pres awards both taxes judicial 

resources and risks creating the appearance of judicial 

impropriety.” In re Lupron Mktg. & Sales Practices Litig., 

677 F.3d 21, 38 (1st Cir. 2012). The judicial role is better 

limited to approving cy pres recipients selected by the parties. 

While we do not decide today whether approving a settlement 

with the cy pres selection process envisioned by the parties in 

this case is an abuse of discretion, we join other courts and 

commentators in expressing our concern with district courts 

selecting cy pres recipients. See id. at 38–39; Nachshin v. 

AOL, LLC, 663 F.3d 1034, 1039 (9th Cir. 2011) (“[T]he 

specter of judges and outside entities dealing in the 

distribution and solicitation of settlement money may create 

the appearance of impropriety.”); ALI, Principles of the Law 

of Aggregate Litig. § 3.07(c) (“The court, when feasible, 

should require the parties to identify a recipient whose 

interests reasonably approximate those being pursued by the 

class.”).
33

[o]nly parties to a civil action may 

appeal from a final judgment. . . . 

The Supreme Court has 

recognized only one exception to 

this rule: that “nonnamed class 

members . . . who have objected 

in a timely manner to approval of 

the settlement at the fairness 

hearing have the power to bring 

an appeal without first 

intervening.” . . . The question 

then becomes whether Devlin [v. 

Scardelletti], which created an 

exception for unnamed class 

members who have objected to 

settlement agreements, extends to 

this situation in which unnamed 

class members have objected to a 

cy pres distribution. 

In re Lupron, 677 F.3d at 29–30 (second alteration in 

original) (quoting and citing Devlin v. Scardelletti, 536 U.S. 

1, 7, 14 (2002)). The First Circuit did not resolve whether 

class members objecting to a cy pres distribution are 

permitted to appeal without intervening, and we are unaware 

of any court of appeals that has done so.

Despite this uncertainty, we believe the notice 

provided to class members here satisfies the requirements of 

due process. Even without a Devlin exception, to the extent 

putative class members have a property interest in the 

unclaimed funds and object to the cy pres recipients selected, 

they may typically intervene in the lawsuit for purposes of 

appealing an eventual order directing a cy pres distribution. 

See Fed. R. Civ. P. 24(a)(2); see also Devlin, 536 U.S. at 20

(Scalia, J., dissenting) (describing the Devlin exception as 
34

unnecessary because “class members will typically meet the 

requirements for intervention as of right under Federal Rule 

of Civil Procedure 24, including intervention only for the 

purpose of appeal, and even after the class judgment has been 

entered”). We believe intervention will prove sufficient to 

protect the interests of unnamed class members in appealing 

the selection of cy pres recipients. And if it does not, they 

may ask us to determine whether it is appropriate to create a 

new Devlin exception allowing them to appeal. 

V. Conclusion

We summarize our rulings.

1. We vacate the District Court’s orders approving 

settlement and the fund allocation plan because 

the Court did not have the necessary factual 

information to determine whether the settlement 

will provide sufficient direct benefit to the class.

2. We vacate the Court’s order awarding 

attorneys’ fees and costs because this award 

was based on the now-vacated settlement. We 

confirm that the Court may, in its discretion, 

reduce attorneys’ fees based on the level of 

direct benefit provided to the class. 

3. We do not require that a corrected notice be 

sent to class members because we do not 

believe that the notice provided was inadequate. 

We note, however, that supplemental notice 

should be provided to the class if the settlement 

is materially altered on remand.