Characterizing a settlement agreement between Procter & Gamble and a class of parents alleging Pampers Dry Max diapers caused severe diaper rash as “nothing but nearly worthless injunctive relief,” the 6th U.S. Circuit Court of Appeals threw out the deal.

Pampers released the new Dry Max diapers in March 2010 with its “Dry Max technology.” Two months later the Consumer Product Safety Commission began investigating the diapers after parents complained the diapers tended to cause a severe diaper rash. A dozen consumer class actions followed.

However, the Commission completed its study in August 2010 and concluded – based on a review of 4,700 incident reports – that no connection existed between the incidents of diaper rash and the Dry Max product. Procter & Gamble moved to dismiss the suits and the parties began to negotiate a settlement.

Before the class filed a response to the dismissal motion and before any formal discovery occurred, the parties reached a deal. According to the terms, the class would be certified pursuant to Federal Rule of Civil Procedure 23(b)(2), under which absent class members could not opt out of the deal. The settlement entitled class members to a refund of one box per household over a 38-month period if they presented the original receipt and UPC code from a Pampers box. Procter & Gamble also agreed to add a single sentence to its box labels for a two-year period suggesting that consumers “consult Pampers.com or call 1-800-Pampers” for “more information on common diapers questions.” Over the same two-year period, the company also said it would add information about diaper rash to its Web site, like a recommendation to “See your child’s doctor if severe symptoms like ‘pus or weeping discharge’ develop.”

In addition, named plaintiffs would receive incentive awards of $1,000 per affected child and Procter & Gamble would make a total of $400,000 in donations. Most significantly, class counsel was set to receive $2.73 million. Over the objections of multiple class members, a federal court approved the settlement.

In a stinging rebuke to the parties and the court below, the 6th Circuit reversed.

“On the one hand, the settlement agreement awards class counsel a fee of $2.73 million – this, in a case where counsel did not take a single deposition, serve a single request for written discovery, or even file a response to P&G’s motion to dismiss,” the court wrote. “On the other hand, the agreement provides unnamed class members a medley of injunctive relief.”

The value of that medley was questionable at best, the court determined. The labeling and Web site changes “amount to little more than an advertisement for Pampers,” the three-judge panel said. The information on Pampers.com offers only “negligible” value, and “we would denigrate the intelligence of ordinary consumers (and thus unnamed class members) if we concluded that – absent this suggestion from P&G – they would have little idea to ‘see [their] child’s doctor’ if their child’s rash was accompanied by a fever or boils or ‘pus or weeping discharge.’ And we would denigrate their intelligence still further if we concluded that the value of this suggestion was so great to ordinary consumers as to be commensurate with a fee award of $2.73 million.”

Simply because Procter & Gamble wasn’t thrilled about including language about diaper rash on its boxes did not make the statement more valuable, the panel noted.

The deal is “premised upon a fictive world, where harried parents of young children clip and retain Pampers UPC codes for years on end, [and] where parents lack the sense (absent intervention by P&G) to call a doctor when their infant displays symptoms like boils and weeping discharge, where those same parents care as acutely as P&G does about every square centimeter of a Pampers box, and where parents regard Pampers.com, rather than Google, as their portal for important information about their children’s health. The relief that this settlement provides to unnamed class members is illusory. But one fact about this settlement is concrete and indisputable: $2.73 million is $2.73 million,” the court said.

Concluding that the deal gave preferential treatment to class counsel while only perfunctory relief to unnamed class members, the court vacated approval of the settlement.

A dissenting judge argued the court applied the incorrect standard for approval of a class action settlement, adding that although “the relief offered to the unnamed class members may not be worth much, their claims appear to be worth even less,” given the results of the investigation by the Commission. “In the absence of this settlement, class members would almost certainly have gotten nothing. . . . Thus the concern that plaintiffs’ counsel ‘bargained away’ some valuable ‘interest’ is misplaced.”

To read the decision in In re: Dry Max Pampers Litigation, click here.

Why it matters: The case illustrates why class action settlements require judicial approval, the 6th Circuit said. Because such deals affect not only the interests of the parties and counsel but the interests of unnamed class members as well, “there is always the danger that the parties and counsel will bargain away the interests of unnamed class members in order to maximize their own.” The panel cited the recent 9th Circuit decision in Dennis v. Kellogg, in which the court similarly set aside a $10.6 million settlement in a consumer class action alleging Kellogg made false claims that its Frosted Mini-Wheats cereal could improve cognitive development. That decision focused on the “excessive” attorneys’ fees as well as a questionable $5.5 million cy pres payment. Lawyers should be prepared for close scrutiny of class action settlement deals, particularly those with sizable class counsel fees and limited recovery for the class.