The company, founded by influencer Huda Kattan, was accused of including substances banned by the US Food and Drug Administration (FDA) in its Neon Obsessions eyeshadow palettes.
After a number of pigments in the product were found to have eye irritating and staining properties, the brand was required to include a warning label, noting that the product was not suitable for the eye area.
However, according to the lawsuit filed by consumers, the warning label, along with a list of the prohibited ingredients, was concealed and the Neon Obsessions was advertised the same way as Huda Beauty's other eyeshadow palettes.
The campaign imagery for Neon Obsessions also included images of brand founder Huda Kattan wearing the shades as eyeshadow.
The settlement will see the beauty company pay out $1.93 million (£1.6 million) on top of $1.2 million (£997,900) in legal fees for the plaintiffs who filed the suit.
On top of that, consumers who purchased any of the three Neon Obsessions palettes can return them for a full refund of the original retail price.
The Neon Obsessions palettes are no longer being manufactured by Hude Beauty. The products have been taken off shelves across the US and are listed as 'out of stock' across UK beauty retailers like Boots, Selfridges, and Cult Beauty.
Huda Beauty was launched in Dubai in 2013, following the success of Huda Kattan's YouTube channel under the same name.
It began with a false eyelash line, and eventually expanded into foundations, baking powders, eyeshadows, lipsticks, skincare, and fragrances.
The beauty blogger turned makeup mogul stepped down as CEO of the make-up brand in 2018, announcing Nathalie Kristo has the new lead. However, Huda is still heavily involved in the business, but focuses more on the creative side of things.
In 2020, Huda was named by Forbes as one of America's Richest Self-Made Women, and was estimated to make at least $250 million (£207.8 million) through Huda Beauty in annual sales.
Today, Huda Beauty boasts over 50 million Instagram followers and 4.13 million YouTube subscribers, and Kattan is estimated to be worth $510 million (£424 million).
Following the recall of the company's Neon Obsessions eyeshadow line, they released a two new palettes called Colour Block Obsessions.