In Dennis v. Kellogg Company, No. 11-55674 & No. 11-55706, 2012 U.S. App. LEXIS 18576 (9th Cir. Sept. 4, 2012), the Ninth Circuit Court of Appeals reversed the district court’s approval of a class action settlement because the terms of the settlement did not meet the legal standards for cy pres distribution. In particular, the settlement did not (1) sufficiently relate the cy pres distributions to the plaintiff class or the class’s underlying legal claims; (2) identify the ultimate recipients of the cy pres awards; and (3) set forth any limiting restrictions on those recipients or the awards they would receive. Id. at *3.
In January 2008, Defendant Kellogg Company (“Kellogg”) began a marketing campaign claiming that its Frosted Mini-Wheats cereal was scientifically proven to improve children’s cognitive functions for several hours after breakfast. Id. at *3-*4. In these consolidated class actions, the plaintiffs asserted that Kellogg’s marketing claims were false and not supported by the studies Kellogg cited. Id. at *6. Plaintiffs sued Kellogg for claims under California’s Unfair Competition Law (“UCL”), the Consumer Legal Remedies Act (“CLRA”), and “similar laws of other states.” Id.
Before class certification, the parties reached a settlement that established a $2.75 million settlement fund for distribution to class members on a claims-made basis, with any remaining funds donated to unidentified charities. Id. Kellogg also agreed to distribute, pursuant to the cy pres doctrine, $5.5 million “worth” of Kellogg food items to charities that feed the indigent. Id. at *7. The settlement did not specify the charities nor indicate how the $5.5 million would be valued – at cost, wholesale, retail, or by some other measure. Id. Kellogg agreed to alter its advertising, and the plaintiffs agreed to release all claims arising out of the challenged advertising. Id. Finally, Kellogg agreed to pay class counsel’s attorney’s fees and costs of $2 million. Id. The parties valued the settlement at about $10.6 million. Id. at *8.
The district court certified the settlement class, which was defined as all persons or entities who purchased Kellogg’s Frosted Mini-Wheats during the settlement class period, and granted preliminary approval of the settlement. Id. Two class members objected to the settlement, arguing that the settlement’s use of cy pres relief was improper because “the only relationship between this lawsuit and feeding the indigent is that they both involve food in some way” and there was no way for the class members to know how their funds might be used and by whom. Id. at *8-*9. The objectors also challenged the attorneys’ fees as excessive. Id. at *9. The district court approved the class settlement without ever addressing the objectors’ concerns over cy pres relief. Id.
The Ninth Circuit Court of Appeals reversed the district court’s order granting approval of the settlement. Id. at *23. Relying on the standards and analysis set forth in Nachshin v. AOL, LLC, 663 F.3d 1034 (9th Cir. 2011), and Six Mexican Workers v. Ariz. Citrus Growers, 904 F.2d 1301 (9th Cir. 1990), the Ninth Circuit held that the cy pres awards in the settlement had little or nothing to do with the concerns embodied in the consumer protection laws upon which the lawsuits were based, i.e., UCL, CLRA, etc. Id. at *17. The Ninth Circuit stated that while donating food to charities is a noble goal, the appropriate cy pres recipients are organizations dedicated to protecting consumers from false advertising. Id. at *18.
The Ninth Circuit further found that a serious deficiency of the settlement agreement was the vague phrasing of “$5.5 million worth” of food. Id. at *20. For instance, how “$5.5 million worth” of food was valued – at wholesale value or retail, or even in terms of funds Kellogg had previously committed and budgeted to donate to charity – could affect whether the $2 million attorneys’ fees are excessive. Id. at *22.
Since the Ninth Circuit did not have the authority to strike down only the cy pres portions of the settlement, the Court of Appeals reversed approval of the entire settlement and remanded the case for further proceedings. Id. at *23.