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). 

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Photo of Wystan Ackerman Wystan Ackerman

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you…

I am a partner at the law firm of Robinson+Cole in Hartford, Connecticut, USA.  My contact information is on the contact page of my blog.  I really enjoy receiving questions, comments, suggestions and even criticism from readers.  So please e-mail me if you have something to say.  For those looking for my detailed law firm bio, click here.  If you want a more light-hearted and hopefully more interesting summary, read on:

People often ask about my unusual first name, Wystan.  It’s pronounced WISS-ten.  It’s not Winston.  There is no “n” in the middle.  It comes from my father’s favorite poet, W.H. (Wystan Hugh) Auden.  I’ve grown to like the fact that because my name is unusual people tend to remember it better, even if they don’t pronounce it right (and there is no need for anyone to use my last name because I’m always the only Wystan).

I grew up in Deep River, Connecticut, a small town on the west side of the Connecticut River in the south central part of the state.  I’ve always had strong interests in history, politics and baseball.  My heroes growing up were Abraham Lincoln and Wade Boggs (at that time the third baseman for the Boston Red Sox).  I think it was my early fascination with Lincoln that drove me to practice law.  I went to high school at The Williams School in New London, Connecticut, where I edited the school newspaper, played baseball, and was primarily responsible for the installation of a flag pole near the school entrance (it seemed like every other school had one but until my class raised the money and bought one at my urging, Williams had no flag pole).  As a high school senior, my interest in history and politics led me to score high enough on a test of those subjects to be chosen as one of Connecticut’s two delegates to the U.S. Senate Youth Program, which further solidified my interest in law and government.  One of my mentors at Williams was of the view that there were far too many lawyers and I should find something more useful to do, but if I really had to be a lawyer there was always room for one more.  I eventually decided to be that “one more.”  I went on to Bowdoin College, where I wrote for the Bowdoin Orient and majored in government, but took a lot of math classes because I found college math interesting and challenging.  I then went to Columbia Law School, where I was lucky enough to be selected as one of the minions who spent their time fastidiously cite-checking and Blue booking hundred-plus-page articles in the Columbia Law Review.  I also interned in the chambers of then-Judge Sonia Sotomayor when she was a relatively new judge on the Second Circuit, my only connection to someone who now has one-ninth of the last word on what constitutes the law of our land.  I graduated from Columbia in 2001, then worked at Skadden Arps in Boston before returning to Connecticut and joining Robinson+Cole, one of the largest Connecticut-based law firms.  At the end of 2008, I was elected a partner at Robinson+Cole.

I’ve worked on class actions since the start of my career at Skadden.  Being in the insurance capital of Hartford, we have a national insurance litigation practice and I was fortunate to have the opportunity to work on some prominent class actions arising from the 2004 hurricanes in Florida and later Hurricane Katrina, including cases involving the applicability of the flood exclusion, statutes known as valued policy laws, and various other issues.  My interest and experience in class actions gradually led me to focus on that area.

In Connecticut courts I’ve defended various kinds of class actions that go beyond insurance, including cases involving products liability, securities, financial services and consumer contracts.

My insurance class action practice usually takes me outside of Connecticut.  I’ve had the pleasure of working on cases in various federal and state courts and collaborating with great lawyers across the country.  While class actions are an increasingly large part of my practice, I don’t do exclusively class action work.  The rest of my practice involves litigating insurance coverage cases, often at the appellate level.  That also frequently takes me outside of Connecticut.  A highlight of my career thus far was working on Standard Fire Ins. Co. v. Knowles, the U.S. Supreme Court’s first Class Action Fairness Act case.  I was Counsel of Record for Standard Fire on the cert petition, and had the pleasure of working with Ted Boutrous on the merits briefing and oral argument.

I started this blog because writing is one of my favorite things to do and I enjoy following developments in class action law, writing about them and engaging in discussion with others who have an in interest in this area.  It’s a welcome break from day-to-day practice, keeps me current, broadens my network and results in some new business.

When I’m not at my desk or flying around the country trying to save insurance companies from the plaintiffs’ bar, or attending a conference on class actions or insurance litigation (for more on those, see the Seminars/Programs page of this blog), I often can be found playing or reading with my young daughter, helping my wife with her real estate and mortgage businesses, reading a book about history or politics, or watching the Boston Red Sox (I managed to find bleacher seats for Game 2 of the 2004 World Series when Curt Schilling pitched with the bloody sock).  When the weather is good I also love to take the ferry to Block Island, Rhode Island and ride a bike or walk the trails there. If you go, I highly recommend the Clay Head Trail.