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Dennis v. Kellogg Co. - 697 F.3d 858 (9th Cir. 2012)

Rule:

Not just any worthy recipient can qualify as an appropriate cy pres beneficiary. To avoid the many nascent dangers to the fairness of the distribution process, there must be a driving nexus between the plaintiff class and the cy pres beneficiaries. A cy pres award must be guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members, and must not benefit a group too remote from the plaintiff class. Thus, in addition to asking whether the class settlement, taken as a whole, is fair, reasonable, and adequate to all concerned, a court must also determine whether the distribution of the approved class settlement complies with the standards governing cy pres awards.

Facts:

In January 2008, Kellogg Co., the maker of Frosted Mini-Wheats cereal, began a marketing campaign that claimed the cereal was scientifically proven to improve children's cognitive functions for several hours after breakfast. Pursuant to Kellogg’s advertisements, Harry Dennis filed suit in August 2009 against Kellogg in the United States District Court for the Southern District of California, alleging violations of that state's Unfair Competition Law (UCL) and asserting a claim of unjust enrichment. Sometime prior to January 2010, Dennis’ counsel and the counsel of a certain Jon Koz, who drafted a class action complaint against Kellogg, discovered they were involved in similar activities and decided to join forces. Because informal settlement attempts were unsuccessful, counsel for the consumers and for Kellogg participated in a day-long mediation session with Martin Quinn of JAMS, a well-established alternative dispute resolution firm. As a result of this mediation session and numerous other settlement discussions, the parties agreed, in principle, to settle the case. Meanwhile, after the district court’s notification that the Dennis’ lawsuit would be dismissed, Koz and Dennis immediately filed a joint amended class action complaint wherein they asserted that Kellogg's marketing claims regarding the effect of Frosted Mini-Wheats on children's attentiveness were false, that the study upon which these results were based did not support the company's claims, and that the study was not scientifically valid. Dennis and Koz asserted unjust enrichment claims under the UCL and California's Consumer Legal Remedies Act (CLRA), and claims under "similar laws of other states." Over the next three months, the parties continued to work out the details of their settlement. Ultimately, they agreed to settle the case. However, two class members objected to the settlement: Stephanie Berg and Omar Rivero. Berg and Rivero argued that the settlement's use of cy pres relief was improper, and that the cy pres distributions would benefit class counsel and Kellogg, but not the class members as the cy pres distributions were too remote from the class members and were not sufficiently related to their UCL and CLRA claims.  The district court approved the class settlement and dismissed the case with prejudice. 

Issue:

Did the district court properly approve the class settlement and dismiss the case with prejudice?

Answer:

No.

Conclusion:

According to the appellate court, the district court did not apply the correct legal standards governing cy pres distributions and thus, it abused its discretion in approving the settlement. The settlement neither identified the ultimate recipients of the product and cash cy pres awards nor set forth any limiting restriction on the recipients, other than characterizing them as charities that fed the indigent. Moreover, to the extent that the court could meaningfully review such distributions where the recipients were not identified, the cy pres portions of the settlement were not sufficiently related to the plaintiff class or to the class's underlying false advertising claims. The court ruled that any charity to receive a portion of the cy pres distributions was to be one that fed the indigent. That noble goal, however, had little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved. The court held that appropriate cy pres recipients would not have been charities that fed the needy, rather they would have been groups dedicated to protecting consumers from false advertising. The court further held that the $5.5 million valuation the parties attached to the cy pres distribution was, at best, questionable. The court reversed the district court's approval of the settlement, vacated the judgment, and remanded for further proceedings consistent with the court's opinion.

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