Note to class action lawyers: When doling out settlement funds to charities as part of a cy pres award, specify the recipients and choose them carefully.
That was the message the 9th Circuit delivered Friday in a decision striking down a settlement plaintiffs’ lawyers reached with cereal maker Kellogg Co over the benefits of Frosted Mini-Wheats. The decision is the latest in a string of recent cases from the 1st, 5th and 9th circuits to question whether class funds that are not distributed to the plaintiffs are going to charities that serve the interests of class members.
The plaintiffs sued in 2009, taking Kellogg to task for its claim that the breakfast cereal was clinically shown to improve children’s attentiveness by 20 percent. The parties settled within three months, with Kellogg agreeing to provide $2.75 million for consumer refunds (up to $15 per customer), a $5.5 million charitable food donation and a promise to stop making similar claims for three years.
When two class members represented by the Law Offices of Darrell Palmer and the Bandas Law Firm objected to the settlement and then appealed its confirmation, the 9th Circuit grabbed the opportunity to elaborate on the standard for cy pres it set in November in a class action against AOL. A three-judge appellate panel tossed the settlement, concluding that for one thing, the cy pres donation was too vague because it said awards to charities that feed the indigent would be chosen later. Food banks were also the wrong recipients, the court concluded, given that the lawsuit involved claims of deceptive advertising, not food deprivation.
“The only relationship between this lawsuit and feeding the indigent is that they both involve food in some way,” Judge Stephen Trott wrote for a panel that also included Judge Sidney Thomas and Judge Kevin Duffy of the Southern District of New York, who was sitting by designation. Any charitable donation should have gone to consumer protection groups that combat false advertising, the appeals court concluded.
The court cited its rejection of the cy pres award in the AOL case, which called for $110,000 to go to charities unrelated to the concerns of its customers, who had sued over promotional messages included in their emails. The decision also comes after a 5th Circuit ruling in September, which held that $830,000 in leftover settlement funds from a case against Elf Atochem should go to class members, not charities.
Class counsel Timothy Blood of Blood Hurst & O’Reardon defended the connection between the Kellogg food donation and the lawsuit, which dealt with claims about the nutritional value of a food directed at children. “We felt it was important to provide food products to the indigent because most of the indigent are children,” he told On the Case, adding that the court’s decision would lead to settlements that were less beneficial to society at large. Kellogg counsel Kenneth Lee of Jenner & Block did not immediately respond to requests for comment. The company declined to comment on the litigation.
Darrell Palmer, a lawyer for the objectors, welcomed the decision as a sign that federal appeals courts are scrutinizing whether cy pres awards have a relationship to the underlying claims. Palmer noted that the 9th Circuit panel included a New York federal judge. “I’m hoping (the ruling) might resonate with the 2nd Circuit,” Palmer said. “Judges often think of the 9th Circuit as liberal.”
In addition to a problem with the intended recipients, the court also found the $2 million set aside for plaintiffs’ attorney fees was excessive. Based on hours worked, lawyers for the class were charging $2,100 per hour — more than even “the most highly sought-after attorneys,” the court found. Class counsel Blood disputed that number, claiming it didn’t take into account work performed over the course of two years.