Ninth Circuit Nixes Settlement of Frosted Mini-Wheats® False Ad Claims
The Ninth Circuit Court of Appeals has found the proposed cy pres distribution
inappropriate and unacceptably vague and the attorney’s fees unreasonable
in a settlement of class claims that the Kellogg Co. violated consumer protection
laws by advertising its Frosted Mini-Wheats® cereal as a product that
was clinically shown to improve children’s attentiveness by nearly 20 percent.
Dennis v. Kellogg Co., Nos. 11-55674, -55706 (9th Cir., decided July 13,
2012). Additional information about the case appears in Issues 368 and 392
of this Update. The company’s settlement of related false-advertising charges
filed by the Federal Trade Commission is discussed in Issue 301 of this Update.
Under the agreement, class members could recover up to a maximum of $15,
and any remaining funds would be donated to “charities chosen by the parties
and approved by the Court pursuant to the cy pres doctrine.” According to the
court, about $800,000 had been requested by class members who submitted
claims before the claims period closed. Kellogg agreed to distribute, also
under the cy pres doctrine, $5.5 million “worth” of specific company food
items “to charities that feed the indigent.” The agreement also required that
the company refrain from making the offending assertions for three years,
although it would be allowed to claim that “[c]linical studies have shown that
kids who eat a filling breakfast like Frosted Mini-Wheats have an 11% better
attentiveness in school than kids who skip breakfast.” The settlement provided
class counsel with $2 million in fees and costs.
The court found that the cy pres distribution to charities had no relation to the class or “the concerns embodied in consumer protection laws. . . . At oral argument, Kellogg’s counsel frequently asserted that donating food to charities who feed the indigent relates to the underlying class claims because this case is about ‘the nutritional value of food.’ With respect, that is simply not true, and saying it repeatedly does not make it so. . . . The gravamen of this lawsuit is that Kellogg advertised that its cereal did improve attentiveness. Those alleged misrepresentations are what provided the plaintiffs with a cause of action. . . . Thus, 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.”
Thus, the court was compelled to vacate the judgment approving the settlement and remand for further proceedings. While noting that the parties will be free to negotiate a new settlement or proceed with litigation, the court indicated that other parts of the settlement are also unacceptably vague. The court questioned the value of $5.5 million “worth” of food, asking how it will be valued. “Is it valued at Kellogg’s cost? At wholesale value? At retail?” The court also noted that the settlement does not specify how Kellogg will account for the cy pres distributions. “Can Kellogg use the value of the distributions as tax deductions because they will go to charity? . . . [W]ill the cy pres distributions be in addition to that which Kellogg has already obligated itself to donate, or can Kellogg use previously budgeted funds or surplus production to offset its settlement obligations.”
The court further said that it would have vacated the settlement because
the $2 million fee award was unreasonable. In this regard, the court stated,
“The settlement yields little for the plaintiff class. As discussed above, there is
no reasonable certainty that the cy pres distributions as currently structured
will benefit the class. The injunctive relief, prohibiting Kellogg from using the
20% attentiveness advertisements, lasts only three years. And class members,
assuming they were aware of the litigation and submitted claims, will each
receive the paltry sum of $5, $10, or $15.” The court calculated under the
lodestar method that the award is about 4.3 times the lodestar amount, which
the court characterized as “quite high, particularly in a case that was not
heavily litigated.” And if the cy pres distribution is removed from the equation,
the fee award becomes 38.9 percent of the remaining fund value, “well above
our presumptive benchmark.”
As to the attorney’s fees, the court also observed, “let us not forget that the $2
million fee award breaks out to just over $2,100 per hour. Not even the most
highly sought after attorneys charge such rates to their clients. Class counsel
contends that the requested fees are reasonable because counsel have
continued to represent the class on appeal and will do so throughout the
administration of the settlement. But one reason why those counsel had to
defend this appeal is because they negotiated a deficient settlement agreement.
We do not believe it appropriate to reward counsel for failing to follow
our cy pres precedent.”
