Sometimes it makes financial sense to settle meritless class actions, even when you know you could win if you pressed on through discovery, trial and appeal. But how you do so -- and precisely what peace you are buying -- often can be tricky subjects. Procter & Gamble recently proposed an interesting settlement of a BS class action in In re Dry Max Pampers Litig., Case No. 1:10-cv-00301 TSB (S.D. Ohio).
In the Spring of 2010, a number of class actions and individual actions were filed by parents who used Pampers' "Dry Max" diapers on their infants. These diapers had a super-absorbent gel core. The parents claimed that the gel caused severe diaper rash and burns on their infants. Bloggers, Facebook pages, and other social media whipped parents into a frenzy. The CPSC and Health Canada started an investigation. A multi-district litigation was formed in the Southern District of Ohio before Judge Timothy Black, a recent Obama appointee. A public relations storm ensued.
But in September, both the CPSC and Health Canada announced that they could find no connection between Dry Max diapers and infants' development of diaper rash, giving Pampers a clean bill of health.
But what to do with the lawsuits? P&G moved to dismiss and, at the same time, moved to strike the class allegations. Diaper rash, of course, is a common malady with many known causes, and the facts surrounding individual infants' diaper rash will differ substantially.
Plaintiffs' counsel waived the white flag. They clearly had no case -- and no class action -- but presumably wanted to preserve their ability to obtain some sort of fee. The court stayed the calendar so the parties could mediate with former federal judge Layn Phillips. And a unique settlement was born.
To begin with, the proposed settlement is a 23(b)(2) settlement with no opt out rights. All people who used Dry Max diapers on their children will be bound by the settlement.
What would they get?
1. For 2 years, P&G will put on its Pampers labels a sentence referring customers to its website or an 800 number for information on "choosing the right Pampers product for your baby, preventing diaper leaks, diaper rash, and potty training." Settlement Agreement at 18.
2. For 2 years, P&G will include on its website two paragraphs of instructions to see a doctor if diaper rash persists or is accompanied by fever, pus, or boils, along with a link to the Mayo Clinic's website and the American Academy of Pediatrics' website. Id. at 19.
3. Cy pres relief -- P&G will spend a total of $300,000 over two years funding programs for medical schools related to infant skin health, and will spend a total of $100,000 over two years on an infant skin health program with the American Academy of Pediatrics.
4. Money-back guarantee -- P&G will reinstate its money-back guarantee program for one year. The program can have the same proof of purchase requirements that it had prior to its discontinuance.
And what would they give up?
1. All equitable claims -- Class members release all equitable claims, known or unknown, including "all equitable claims for any damages or injuries." They are barred from using a class action device in asserting any claim for relief that could have been brought in the lawsuits prior to settlement. (Given that the lawsuits broadly alleged claims for personal injury, consumer fraud, violation of consumer protection statutes, etc., absent class members effectively are barred from using a class action device on any claim.) Class members would preserve the right to file individual lawsuits for personal injury or actual damages caused by Dry Max diapers, however.
In sum, for releasing equitable claims and giving up the right to a class action, class members would receive the right to make unlimited claims against a money-back guarantee during one year and obtain information on diaper rash.
In this respect, the settlement is an ingenious post-transaction way to prevent class actions without the use of a pre-transaction arbitration agreement such as the one used in AT&T Mobility v. Concepcion. It remains to be seen whether the Supreme Court's anticipated decision in Smith v. Bayer Corp. will impose constitutional limits on barring absent class members from filing other class actions in a way that might impact this Pampers settlement.
Interestingly, P&G's participation in the settlement appears to be based on an issue that may (or may not) be decided by the Supreme Court in Wal-Mart v. Dukes: when damages are incidental to monetary relief in a Rule 23(b)(2) class action. The settlement agreement states:
Procter & Gamble's agreement to seek a Settlement Class under Federal Rule of Civil Procedure 23(b)(2) is based on the belief that any monetary damages sought by Plaintiffs (other than individual claims as a result of personal injury or actual damage), which are not released claims pursuant to Section VIII(D), are properly viewed as merely incidental to the Injunctive Relief.
Settlement Agreement at 12. It remains to be seen whether the opinion in Dukes may alter that fundamental assumption.
Four other aspects of this proposed settlement bear noting. First, this is an all-Internet notice plan. The parties correctly note that, because this is an injunctive relief class, individual notice is not constitutionally required. So they have proposed a notice plan that relies on a press release, hyperlinks on the parties' websites, and a settlement website that would carry the long- and short-form notices. See Settlement Agreement at 13-14.
Second, P&G agrees to pay up to $2.73 million in attorneys' fees, costs, and expenses, to be divvied up among the plaintiffs' firms by Lead Class Counsel.
Third, the representative plaintiffs would receive $1,000 "per affected child for each Plaintiff." (It eludes me how this is compensation for time and effort spent as litigants, rather than a per-child compensation.)
Fourth, rather than having the court retain jurisdiction to enforce the agreement, the Settlement Agreement provides that all disputes are to be handled by mediation and, if that doesn't work, by final, binding, non-appealable arbitration. Settlement Agreement at 28. The parties' independent mediator, Layn Phillips, is selected as their first choice. The backup approach is to agree on another neutral or, if the parties cannot agree, they will approach Layn Phillips or the court and ask for the appointment of one.
The proposed Dry Max Diaper Settlement is a creative approach to the age-old problem of how to settle meritless class actions. Stay tuned for developments in the preliminary approval and fairness hearing processes regarding this settlement.