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
"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.
(Reporting by Terry Baynes)
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