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 Representation? ChangeLab 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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