Dennis v. Kellogg Co.: Ninth Circuit Issues Decision on Cy Pres Beneficiaries, Class Counsel's Attorney Fees

In Dennis v. Kellogg Company, --- F.3d --- (9th Cir. 7/13/12), the plaintiffs sued Kellogg's for false advertising related to its "Frosted Mini Wheats" cereal. The parties eventually settled the case, and the settlement included the following terms:

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 funds remaining would not revert to Kellogg but would instead be donated to “charities chosen by the parties and approved by the Court pursuant to the cy pres doctrine.” 

Kellogg agreed to distribute, also pursuant to the cy pres doctrine, $5.5 million “worth” of specific Kellogg food items to charities that feed the indigent. The settlement does not specify the recipient charities, nor does it indicate how this $5.5 million in food will be valued — at cost, wholesale, retail, or by some other measure. 

Kellogg agreed that for three years, it would “refrain from using in its advertising and on its labeling for the Product any assertion to the effect that ‘eating a bowl of Kellogg’s® Frosted Mini-Wheats cereal for breakfast is clinically shown to improve attentiveness by nearly 20%.’ ” Kellogg would still 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.”  

Kellogg agreed to pay class counsel’s attorneys’ fees and costs “not to exceed a total of $2 million.” Class counsel eventually requested the full $2 million in fees and costs.  

The plaintiffs agreed to release all claims arising out of the challenged advertising.

The trial court (S.D.Cal., Judge Irma E. Gonzalez) approved the settlement over objections as to the cy pres distributions and the attorney fees.  The objectors appealed, and the Ninth Circuit reversed. 

First, the trial court erred in approving the cy pres beneficiary.  Although the record did not identify the particular cy pres beneficiary, it did state that the beneficiary would use the cy pres award to feed the indigent. This goal, though noble, had “little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved.”  The action alleged false advertising, and an appropriate beneficiary would be one that is "dedicated to protecting consumers from, or redressing injuries caused by, false advertising."  

Second, the trial court erred in approving Kellogg's agreement to distribute $5.5 million “worth” of food without knowing the answers to a number of questions, including how the $5.5 million was to be valued. 

Finally, the trial court erred in awarding $2 million in fees to class counsel: 

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. 

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.  

In comparison, the $2 million award is extremely generous to counsel — even if we were to accept their assertion that the value of the common fund is $10.64 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. Although under the parties’ valuation the award is below the 25% benchmark, a lodestar multiplier of 4.3 is quite high, particularly in a case that was not heavily litigated. Because the attorneys’ investment was so minimal — as was the relief they claim to have obtained for the class — the lodestar cross-check leads us to the inescapable conclusion that the $2 million award is not reasonable. Cf. Fischel v. Equitable Life Assurance Soc’y of U.S., 307 F.3d 997, 1008 (9th Cir. 2002) (lodestar multiplier of 1.5 was not unreasonably low given that the case settled early); Vizcaino, 290 F.3d at 1050-51 (lodestar cross-check of a 3.65 multiplier was not unreasonably high given that litigation extended over eleven years). Rather, it “yield[s] windfall profits for class counsel in light of the hours spent on the case.” 

I wonder if we would have seen a different result on the attorney fee issue if the parties had done a better job of nailing down the terms of the settlement.  The opinion is available here.