In a recent decision, the Ninth Circuit refused to approve a $10.6 million settlement in a class action accusing Kellogg Co. of falsely advertising the benefits of its Frosted Mini-Wheats cereal [Dennis v. Kellogg Co., No. 11-55674, 9th Cir., enhanced version available to lexis.com subscribers]. The Ninth Circuit rejected the settlement - which would have created a $2.75 million fund for class members, would have donated specific food items worth $5.5 million to charities that feed the indigent and would have given $2 million to the plaintiffs' lawyers - because it found that the suggested charitable donation had no connection to the suit's claims and it believed that the attorneys' fees were excessive to the point where the settlement was possibly "driven by fees."
In 2009, a consumer filed a complaint claiming that Kellogg falsely marketed its Frosted Mini-Wheats cereal as scientifically proven to increase children's cognitive functions. In 2010, shortly after filing the action, plaintiff's counsel, counsel for a prospective plaintiff and Kellogg's attorneys reached a settlement. Kellogg agreed to establish a $2.75 million fund for distribution to class members on a claims-made basis. Class members submitting claims would receive $5 per box of cereal purchased, up to a maximum of $15. Any remaining funds would be donated to charitable organizations whose goals were to "feed the indigent." These charities would be selected by the parties and approved by the court in accordance with the cy pres doctrine, which allows unclaimed portions of class action settlements to be donated to a charity that serves class members' interests. In addition, Kellogg agreed to distribute Kellogg foods worth $5.5 million to charities that feed the poor. Lastly, Kellogg agreed to pay class attorneys' fees and costs of an amount not to exceed $2 million.
Two class members objected to the settlement, contending that it did not comply with the cy pres doctrine and that the proposed attorneys' fee award was excessive. The District Court for the Southern District of California approved the settlement over the two class members' objections, including the full amount of attorneys' fees sought by plaintiff's counsel. Class objectors appealed, contending that the District Court abused its discretion in approving the settlement.
The cy pres doctrine
On July 16, the Ninth Circuit Court of Appeal found that the settlement's donation did not qualify under the cy pres doctrine because the charities chosen did not bear any nexus to the plaintiff's false advertising claims. The court explained that "appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising."
As for the attorneys' fees, the court found the $2 million award unreasonable. In determining the unreasonableness of the fees, the court considered that the parties moved for settlement shortly after the filing of the action, the settlement only marginally benefited the class and class counsel's financing and investment in the action were limited. The court focused on the fact that the settlement yielded little for the class members - at most $15 each - yet class counsel received $2 million for 944.5 hours of work or roughly $2,100 per hour. This $2,100 rate, the court explained, was more than "even the most highly sought after attorneys charge." The court further found this rate unreasonable because it was 4.3 times the amount class counsel would have been entitled to if they were working at their ordinary rate.
The Ninth Circuit's decision in this case is a reminder to parties who enter into class settlements that federal courts will not simply rubber stamp those settlements. When counsel negotiate class settlements, they should carefully assess whether those settlements will be subject to attack - and the resulting rigorous approval process. Counsel drafting settlements that include cy pres provisions should assess whether the charities chosen have a sufficient nexus to the facts alleged in the complaint. Similarly, this case signals that courts are likely carefully to assess proposed attorneys' fees awards, especially with settlements reached before significant litigation has taken place.
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