On February 19, 2013, the US Court of Appeals for the Third Circuit issued an opinion in In re Baby Products Antitrust Litigation vacating the district court's approval of a class settlement that included a cy pres provision. A cy pres provision in a settlement typically provides that settlement funds that remain after distribution to class members may be distributed to third parties for a purpose related to the class injury. Here, the Third Circuit held that the district court did not have sufficient information to determine whether the settlement gave the class enough of a direct benefit, as opposed to the indirect benefit that flows from a cy pres distribution, to warrant approval under Federal Rule of Civil Procedure 23.

Before In re Baby Products, the Third Circuit had not ruled on whether class action settlements may include cy pres provisions. It joined the First and Ninth Circuits in ruling that cy pres provisions in class action settlements are permissible. However, the Third Circuit also gave several points of guidance regarding these settlements. The court found that:

In this case, the Third Circuit vacated the district court's approval of the settlement because the parties did not make the district court aware that the structure of the settlement would result in minimal compensation going directly to class members. The parties estimated to the Third Circuit that class members would receive only $3 million while cy pres recipients would receive $18.5 million. The Third Circuit remanded the case to the district court for it to consider the fairness of the settlement given the relatively small direct benefit to the class.

Because it vacated the settlement, the Third Circuit also vacated the attorney's fees based on that settlement. The Third Circuit directed the district court on remand to consider the amount of attorney's fees in light of the size of the direct benefit to the class. However, the court also held that district courts need not reduce attorney's fees whenever cy pres recipients get some of the settlement funds. The Third Circuit concluded that there are a variety of reasons why there may be excess funds after distributions to class members, and class counsel should not automatically be penalized for matters beyond their control. However, where counsel has not provided adequate representation to the class, it is appropriate to decrease the fee award.

Finally, the Third Circuit rejected the appellant's argument that the settlement notice to class members violated due process because it did not identify the cy pres recipients.

In re Baby Products teaches that attorneys considering a cy pres provision in a class action settlement must ensure that it is a small percentage of the settlement fund. Direct distributions to the class members should be the focus of the settlement. Cy pres provisions are best used when further individual distributions to class members are economically infeasible. Finally, any attorney's fees provision in a settlement should be based largely on the direct benefit to the class, to ensure that counsel are adequately representing the class members' interests.