Tuesday, July 17, 2012

9th Circuit rejects settlement for wrong cy pres beneficiaries and excessive fees

Dennis v. Kellogg Co., --- F.3d ----, 2012 WL 2870128 (9th Cir.)
The court of appeals rejected a class action settlement that included distributions of money and food to unidentified charities, had $2 million in fees, and offered class members at most $15 (which doesn’t seem like a necessarily too-small number when you consider the product, but read on!).  First, the cy pres distribution was insufficiently specified/related to the plaintiff class and its false advertising claims.  Second, the attorneys’ fees were excessive.
In 2008, Kellogg began making claims that its Frosted Mini-Wheats cereal was scientifically proven to improve children’s cognitive functions, e.g, “Does your child need to pay more attention in school?... A recent clinical study showed that a whole grain and fiber-filled breakfast of Frosted Mini-Wheats® helps improve children’s attentiveness by nearly 20%” and “An independent research group conducted a series of standardized, cognitive tests on children ages 8 to 12 who ate either a breakfast of Frosted Mini-Wheats® cereal or water. The result? The children who ate a breakfast of Frosted Mini-Wheats® cereal had a nearly 20% improvement in attentiveness.”
These claims were false and misleading.  The court’s opinion doesn’t mention the FTC action, though obviously that was a spur to the follow-on class litigation.  Class counsel went to mediation with Kellogg and agreed, in principle, to settle a multistate class action.  Kellogg agreed to a $2.75 million fund.  Class members submitting claims would receive $5 per box purchased, up to $15.  (The claims period has closed, and apparently the total submitted claims were about $800,000.)  Remaining funds would be donated to “charities chosen by the parties and approved by the Court pursuant to the cy pres doctrine.”  In addition, also following cy pres, Kellogg aggreed to distribute $5.5 million “worth” of specific Kellogg food items to charities that feed the indigent, but the settlement didn’t specify the recipients or indicate how the food would be valued.  Kellogg also agreed to refrain from claiming that Frosted Mini-Wheats was clinically proven to improve attentiveness, but was 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.”  (Better than Kellogg did with the FTC!)  Finally, Kellogg agreed to pay attorneys’ fees and costs of up to $2 million.  With notice and administrative costs approximated at $391,500, the parties valued the settlement at $10,641,500.
The district court certified the class, preliminarily approved the settlement, and approved class notice, published in Parents magazine and other sources, including 375 websites.  The district court approved the final settlement as fair and reasonable despite the objections; objectors appealed.
Appellate review of settlements is usually limited, but where class counsel negotiates a settlement pre-certification, courts must be vigilant for signs that class counsel allowed self-interest to infect the negotiations.  The district court must comprehensively explore the factors and give reasoned responses to nonfrivolous objections.
Cy pres allows settlements to be redirected when proof of individual claims would be too burdensome or distribution of damages too costly.  Still, it must retain some connection to the plaintiff class and the underlying claims to be the “next best” distribution to giving the funds to class members.  There must be a “driving nexus” between the class and the cy pres beneficiaries, which is determined by looking at the objectives of the underlying statute and the interests of silent class members.  The settlement here failed to satisfy those standards.  The UCL/CLRA are designed to protect consumers; feeding poor people has little or nothing to do with the purposes of the underlying lawsuit or the plaintiff class involved.
Kellogg’s counsel argued that the donations were related to the underlying class claims because the case was about “the nutritional value of food.”  That wasn’t true.  The complaint didn’t allege that the cereal was unhealthy or lacked nutritional value.  It alleged false advertising.  “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.”  (Public Citizen? The Institute for Public RepresentationChangeLab Solutions?)  It wasn’t enough to provide charities to be identified at a later date, even with court approval then: the whole settlement needed to be reviewed.  Cy pres distributions raise particular dangers of self-interest and whim.  “This record leaves open the distinct possibility that the asserted $5.5 million value of the cy pres award will only be of serendipitous value to the class purportedly protected by the settlement.”
The whole settlement had to go in one piece, though the parties could negotiate a new settlement or litigate.  If they settled, they’d need to clear up other vague aspects, such as how the $5.5 million “worth” of food would be valued (at oral argument, Kellogg’s counsel said wholesale, but the settlement didn’t specify), how Kellogg would account for it (in terms of tax deductions), and whether there would be any measure of “additionality” given that Kellogg already donates food and money to charities: “can Kellogg use previously budgeted funds or surplus production to offset its settlement obligations? Again, the settlement is silent, and we have only Kellogg's statements as to its future intentions.”
The attorneys’ fees were a separate problem: they were unreasonable, granting counsel a disproportionate share of the settlement compared to the benefit to the class.  Though 25% of a common fund is the benchmark in the 9th Circuit, not every fee award under 25% is necessarily reasonable.  Where that’s too much, courts should use the lodestar method, beginning with hours expended multiplied by a reasonable rate, then applying a risk multiplier based on factors like the length of the proceedings and the risk involved.  “Considering that (1) the parties moved for settlement approval only three months after class counsel filed the amended complaint, (2) the settlement results in vaporous benefit to the class members and is flawed at its core, and (3) class counsel's financing of the litigation and investment of time were rather limited, we hold that the district court's reasonableness finding is implausible.”
Short proceedings don’t always require lower fees, and counsel must be allowed a premium over normal hourly rates for winning contingency cases.  But the most important factor here, at this juncture, were the “results achieved for the class and the lawyers' limited investment of time and money.”  Given the cy pres awards, there was no reasonable certainty that the distributions would benefit the class (which suggests that picking a better cy pres recipient would change this calculation).  The injunctive relief would last 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.”  (Now, that objection doesn’t make much sense: class actions are for small claims, which for the same reasons are less likely to be closely tracked by members of the class.)
By contrast, $2 million was “extremely generous to counsel,” even accepting the valuation of the common fund as over $10 million.  “At the time the plaintiffs moved for settlement approval, class counsel had spent 944.5 hours working on the case. If the case had been litigated on an hourly basis at the attorneys' ordinary and uncontested rates, the total fees would have come to $459,203. The requested award, however, is about 4.3 times this lodestar amount.”  That was “quite high, particularly in a case that was not heavily litigated.”  Given the minimal investment and minimal relief, the award wasn’t reasonable.  The court also doubted the fund was really worth $10 million.  Plus, $2 million was over $2100 per hour.  “Not even the most highly sought after attorneys charge such rates to their clients.”  The fact that the attorneys also worked on the appeal didn’t help, since the appeal was their fault for negotiating such a flawed settlement.  “If and when the issue of fees is again before the district court, the court shall consider all of the circumstances of the case as they exist at that time, including time wasted in preparing a stillborn settlement, in finally determining a reasonable award of attorneys’ fees.”

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