July 21, 2012
Hold onto your hats: On July 13, the Ninth Circuit Court of Appeals issued a great decision. That’s right, the legendary Ninth — one of the nation’s most-overturned appeals courts — has for once rendered a decision well within the legal mainstream. And it was a decision that saved Frosted Mini-Wheats!
In Dennis v. Kellogg Company, the three-judge panel came down hard against settlements of foolish class action lawsuits. These lawsuits against American businesses provide nothing of value other than excessive fees for extortionate lawyers.
The Kellogg Company was the target of a class action lawsuit filed by California resident Harry Dennis over its marketing campaign for Frosted Mini-Wheats. Dennis claimed that Kellogg’s advertising, which said that clinical studies showed that a breakfast of Frosted Mini-Wheats helped improve children’s attentiveness by 20 percent, was “false advertising.” (As the father of three, I have no doubt that eating any breakfast will help improve children’s attentiveness over skipping breakfast—especially if it is “frosted” with sugar!)
Kellogg decided to settle the silly case for its nuisance value, agreeing to:
1) Pay the ambulance-chasing (or, in this case, cereal-chasing) attorneys $2.4 million in fees and “costs”;
2) Set up a $2.75 million fund for consumers “injured” by the ad campaign, from which they could receive $5 per box of Frosted Mini-Wheats purchased, up to a maximum of $15;
3) Provide $5.5 million “worth” of Kellogg food products to unidentified charities feeding the indigent, what is called a cy pres award in legal terminology.
Kellogg also agreed to refrain for three years from claiming that its cereal improved attentiveness by 20 percent, though it would be allowed to claim that clinical studies “have shown that kids who eat a filling breakfast like Frosted Mini-Wheats have an 11% better attentiveness in school than kids who skip breakfast.” So this entire lawsuit, worth more than $10 million, including $2 million in attorneys’ fees, was based on a dispute over a possible nine percent differential in improved attentiveness of 8-12 year olds.
Two ordinary citizens among the affected class (consumers of Mini-Wheats) objected to the settlement. They argued that the attorneys’ fees were excessive and that the cy pres award was improper because “the only relationship between this lawsuit and feeding the indigent is that they both involve food in some way.”
Fortunately, the Ninth Circuit panel agreed with the objectors. When Judge Stephen Trott threw out the proposed settlement, he pointed out that the $2 million award of attorneys fees would have resulted in the lawyers earning an outrageous $2,100 per hour for this juvenile lawsuit: “Not even the most highly sought after attorneys charge such rates to their clients.”
Further, the court noted, the settlement granted the attorneys a “disproportionate distribution of the settlement” compared to the benefits provided to the class of plaintiffs. The$2 million to $15 ratio made that a pretty easy decision. The ruling is sure to improve the attentiveness of plaintiffs’ lawyers.
The fact that a lower court approved this lopsided settlement illustrates the problems that exist with federal judges who will rubber-stamp almost any settlement to get rid of a case on their docket, no matter how unfair and harebrained it is. This settlement in particular resulted in a “vaporous benefit” to consumers and was “flawed at its core,” according to the Ninth Circuit.
The court also found that the cy pres award violated Ninth Circuit rules. Cy press awards are made “where the proof of individual claims would be burdensome or distribution of damages costly.” However, it must qualify as “the next best distribution” to giving the funds directly to class members. So there must be a “driving nexus between the plaintiff class and the cy pres beneficiaries.” This proposed award to unnamed charities had nothing to do with the underlying lawsuit even though the plaintiffs’ lawyers amusingly claimed that donating food to charities related to the underlying class claims because the case was about “the nutritional value of food.” As the court concluded, that was “simply not true,” since the case against Kellogg made no claims that Frosted Mini-Wheats were “unhealthy or lacked nutritional value.” It was about supposed misrepresentation on just how much the cereal improved attentiveness.
These types of cy press awards have become a favorite vehicle for the tort bar to finance and award their favorite charities and advocacy groups. Cy press awards should be eliminated almost entirely. If the members of a class of plaintiffs who have supposedly been injured cannot be identified or their damages are so slight that the cost of notifying them of a settlement or providing them with damages far outweighs the injury, the courts should not approve a settlement of funds to organizations unrelated to the lawsuit. They should dismiss the case. Cy pres awards are constantly abused and should be very rarely, if ever, approved.
Dennis v. Kellogg Company exemplifies the type of wasteful class action lawsuits that are continually being filed against American businesses in what amounts to legally sanctioned extortion. No wonder we have the most expensive and wasteful tort system in the industrialized world. It imposes huge and unnecessary costs on the entrepreneurs both large and small (not to mention their shareholders) who are the backbone of our economy.
Hans A. von Spakovsky is a Senior Legal Fellow at the Heritage Foundation (www.heritage.org) and a former commissioner on the Federal Election Commission.
First appeared in PJ Media