Over the last year or so, several circuits have reversed the approval of class action settlements, particularly where they found problems with cy pres awards and attorneys’ fee awards.  (For a quick snapshot of recent trends in this area, skim through the Class Action Settlements page of my blog.)  The courts of appeals have emphasized that ideally a cy pres award should identify the charity or charities to which it will be distributed and the rationale for why such an award would be likely to reach members of the class or achieve the purposes of the class action lawsuit.  Courts of appeals have also increasingly scrutinized the appropriateness of attorneys’ fees awards in comparison to the relief provided to class members.  The Ninth Circuit’s recent decision in Dennis v. Kellogg Company, No. 11-55674, 2012 U.S. App. LEXIS 14385 (9th Cir. July 13, 2012) has continued this trend.

Dennis was a false advertising case claiming that Kellogg falsely advertised that Frosted Mini-Wheats cereal “was scientifically proven to improve children’s cognitive functions for several hours after breakfast.”  Id. at *3.  Kellogg apparently had done a study showing that children who ate this cereal were 20% more attentive than children who drank water and ate no breakfast.  (I won’t opine on this particular cereal, but it does not sound like rocket science to me to conclude that kids who eat a healthy breakfast are more attentive than those who don’t.)  The plaintiffs alleged that the study was not scientifically valid and the claims about it were false.  A settlement was reached under which Kellogg agreed to pay up to $2.75 million to class members who submitted claims, who would receive $5 for each box of cereal, up to a maximum of $15.  Any remaining funds not claimed by class members would be donated to unspecified charities to be chosen by the parties and approved by the court.  Kellogg also agreed separately to distribute $5.5 million worth of food to charities that feed the indigent, to modify its advertising for three years, and to pay attorneys’ fees of up to $2 million.  The class members submitted claims worth only approximately $800,000, and the remainder of the $2.75 million was to be distributed to charities that feed the indigent.  The district court awarded the full $2 million in attorneys’ fees.

Cy Pres Award

The Ninth Circuit found that the cy pres award was an abuse of discretion because there was not a sufficient connection between charities that feed the indigent and the class members, or between these charities and the general purposes of the lawsuit.  The court explained that:

At oral argument, Kellogg’s counsel frequently asserted that donating food to charities who feed the indigent relates to the underlying class claims because this case is about “the nutritional value of food.” With respect, that is simply not true, and saying it repeatedly does not make it so. The complaint nowhere alleged that the cereal was unhealthy or lacked nutritional value. And no law allows a consumer to sue a company for selling cereal that does not improve attentiveness. The gravamen of this lawsuit is that Kellogg advertised that its cereal did improve attentiveness. Those alleged misrepresentations are what provided the plaintiffs with a cause of action under the UCL and the CLRA, not the nutritional value of Frosted Mini-Wheats. 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.

Id. at *16.  The Ninth Circuit also found problematic the provision for distribution of $5.5 million “worth” of food to charities without specifying how the food would be valued (i.e., at cost, wholesale or retail price), or whether this would be in addition to Kellogg’s other regular charitable giving.       

Dennis and other recent appellate decisions make clear that in negotiating a class settlement, a cy pres provision should not be an afterthought to be addressed later.  To avoid potential problems down the road, in negotiating the settlement agreement both sides should pay careful attention to how any potential cy pres award will be distributed, with specificity, and whether that distribution will be effective in reaching members of the putative class and/or in achieving the purposes of the class action suit.  Unless this is sufficiently addressed at the outset, there is some risk that the parties will have to go through an appeal of the settlement and then, as in Dennis, have to start the settlement process again in the district court.  This can be costly, and substantially delay finality.

Attorneys’ Fees

The Ninth Circuit also struck down the attorneys’ fees award as excessive, explaining that:

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.

. . .

Finally, let us not forget that the $2 million fee award breaks out to just over $2,100 per hour. Not even the most highly sought after attorneys charge such rates to their clients.

Id. at *24-26.

The days may be coming to an end when plaintiffs’ lawyers can reap multimillion dollar attorneys’ fees awards for performing relatively minimal work in a class action that settles at an early stage.  Often plaintiffs’ lawyers will not discuss attorneys’ fees until an agreement has been reached on class relief.  Defendants may be better off in some cases by not agreeing to a specific amount of fees and instead leaving the fee award up to the court, or agreeing only to a cap on what the court could award, without any agreement not to oppose the fee request.  In settlement negotiations, and in preparation for a fairness hearing, defendants also may want to insist on seeing the time entries of plaintiffs’ counsel in order to be able to evaluate better how a court might view a fee request (and certainly if they are opposing the amount of the fee request).