DENNIS v. KELLOGG CO. Nos. 11-55674, 11-55706.
697 F.3d 858 (2012)
Harry DENNIS; Jon Koz, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, Stephanie Berg, Objector-Appellant, v. KELLOGG COMPANY, a Delaware corporation, Defendant-Appellee. Harry Dennis; Jon Koz, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees, Omar Rivero, Objector-Appellant, v. Kellogg Company, a Delaware corporation, Defendant-Appellee.
United States Court of Appeals, Ninth Circuit.
Filed September 4, 2012.
Kenneth K. Lee, Jenner & Block LLP, Los Angeles, CA, and Richard P. Steinken, Jenner & Block LLP, Chicago, IL, for the defendant-appellee.
Before: Stephen S. Trott and Sidney R. Thomas, Circuit Judges, and Kevin Thomas Duffy, District Judge.
The Opinion filed July 13, 2012, slip op. 8109, and appearing at
With the Opinion withdrawn, the Plaintiffs-Appellees' petition for rehearing and petition for rehearing en banc are moot. The parties may file a petition for rehearing or a petition for rehearing en banc regarding the Opinion filed concurrently with this Order.
TROTT, Circuit Judge:
Most cases in our judicial system never make it to trial. Litigants often find it advantageous to secure a resolution more quickly by settling the case and negotiating a result the parties can tolerate, even though neither side can call it a total win. Normally, that is the end of the story, and the parties walk away — not entirely happy, but not entirely unhappy either.
In a class action, however, any settlement must be approved by the court to ensure that class counsel and the named plaintiffs do not place their own interests above those of the absent class members. In this false advertising case, we confront a class action settlement, negotiated prior to class certification, that includes cy pres distributions of money and food to unidentified charities. It also includes $2 million in attorneys' fees while offering class members a sum of (at most) $15.
After carefully reviewing the class settlement, we conclude that it must be set aside. The district court did not apply the correct legal standards governing cy pres distributions and thus abused its discretion in approving the settlement. The settlement neither identifies the ultimate recipients of the product and cash cy pres awards nor sets forth any limiting restriction on those recipients, other than characterizing them as charities that feed the indigent. To the extent that we can meaningfully review such distributions where the parties fail to identify the recipients, we hold that both cy pres portions of the settlement are not sufficiently related to the plaintiff class or to the class's underlying false advertising claims. Moreover, the $5.5 million valuation the parties attach to the product cy pres distribution is, at best, questionable. We therefore reverse the district court's approval of the settlement, vacate the judgment and the award of attorneys' fees, and remand for further proceedings consistent with this opinion.
In January 2008, Kellogg Co., the maker of Frosted Mini-Wheats cereal, began a
According to a declaration submitted by lead counsel for the plaintiff class, counsel began investigating these marketing claims and, in April and May 2009, drafted a class action complaint on behalf of Ohio resident Jon Koz, alleging violations of Ohio consumer protection laws. Around the same time, another law firm was investigating the same marketing claims on behalf of California resident Harry Dennis. Although Mr. Koz never filed his Ohio complaint, Mr. Dennis filed suit in August 2009 against Kellogg in the United States District Court for the Southern District of California, alleging violations of that state's Unfair Competition Law (UCL) and asserting a claim of unjust enrichment.
Sometime prior to January 2010, counsel for Koz and counsel for Dennis discovered they were involved in similar activities and decided to join forces. Because informal settlement attempts were unsuccessful, counsel for the consumers and for Kellogg participated in a day-long mediation session with Martin Quinn of JAMS, a well-established alternative dispute resolution firm. As a result of this mediation session and numerous other settlement discussions, the parties agreed, in principle, to settle the case.
Meanwhile, the Dennis lawsuit had been gathering dust. On June 22, 2010, the district court notified the parties of its intent to dismiss the case for lack of prosecution. Koz and Dennis immediately filed a joint amended class action complaint.
In their amended complaint, the named plaintiffs ("Plaintiffs") asserted that Kellogg's marketing claims regarding the effect of Frosted Mini-Wheats on children's attentiveness were false, that the study upon which these results were based did not support the company's claims, and that the study was not scientifically valid. The Plaintiffs asserted unjust enrichment, claims under the UCL and California's Consumer Legal Remedies Act (CLRA), and claims under "similar laws of other states."
Over the next three months, the parties continued to work out the details of their settlement. Ultimately, they agreed to settle the case on the following terms:
Together with notice and administrative costs approximated at $391,500, the parties value the settlement, or the constructive common fund, at $10,641,500.
The claims period has now closed. Although there is nothing in the record to indicate how many class members submitted claims, class counsel represented at oral argument that the claims submitted total approximately $800,000.
On the Plaintiffs' motion, the district court certified the class — defined as "[a]ll persons or entities in the United States who purchased the Product" during the settlement class period — granted preliminary approval of the settlement, and approved the proposed class notice. Because Kellogg sells its products to wholesalers, not directly to consumers, there was no way to identify each member of the class. Therefore, the class notice was published in Parents magazine and other "targeted sources based on market research about consumers who purchased the products," including 375 websites.
Two class members objected to the settlement: Stephanie Berg and Omar Rivero (Objectors). As relevant to this appeal, the Objectors argued that the settlement's use of cy pres relief was improper because "the only relationship between this lawsuit and feeding the indigent is that they both involve food in some way." They argued also that the cy pres distributions would benefit class counsel and Kellogg, but not the class members, because class members "have no idea how their funds might be used or in whose hands their monies will end up." Finally, the Objectors argued that the attorneys' fees — which represented approximately 19% of a common fund allegedly worth over $10.64 million — were excessive. The district court approved the class settlement and dismissed the case with prejudice. In doing so, however, the court did not address the Objectors' argument
The Objectors timely appealed.
STANDARD OF REVIEW
The settlement of a class action must be fair, adequate, and reasonable. Fed.R.Civ.P. 23(e)(2). "We review a district court's approval of a proposed class action settlement, including a proposed cy pres settlement distribution, for abuse of discretion. A court abuses its discretion when it fails to apply the correct legal standard or bases its decision on unreasonable findings of fact." Nachshin v. AOL, LLC,
Appellate review of a settlement agreement is generally "extremely limited." Hanlon v. Chrysler Corp.,
Cy Pres Distributions of Food and Unclaimed Funds
As a preliminary matter, Plaintiffs argue that we must refrain from addressing the validity of the cy pres doctrine with respect to the cash settlement fund. They assert that this issue will not be ripe until it is determined that available cash remains in that fund after the claims process has concluded. They rely on Rodriguez v. West Publishing Corp.,
First, the deadline here for the submission of claims was June 3, 2011, a date long since past. The Declaration dated October 10, 2011 of Lance P. Blair, the claims administrator, advised the district court that money "will remain in the settlement fund for a cy pres distribution after the payment of all claims."
Second, as noted earlier, Plaintiffs' counsel represented during oral argument that the claims submitted totaled roughly $800,000, leaving almost $2 million in the settlement fund for cy pres distribution, plus any accumulated interest.
Cy pres is shorthand for the old equitable doctrine "cy près comme possible" — French for "as near as possible." Although the doctrine originated in the area of wills as a way to effectuate the testator's intent in making charitable gifts, federal courts now frequently apply it in the settlement of class actions "`where the proof of individual claims would be burdensome or distribution of damages costly.'" Nachshin, 663 F.3d at 1038 (quoting Six Mexican Workers v. Ariz. Citrus Growers,
Not just any worthy recipient can qualify as an appropriate cy pres beneficiary. To avoid the "many nascent dangers to the fairness of the distribution process," we require that there be "a driving nexus between the plaintiff class and the cy pres beneficiaries." Nachshin, 663 F.3d at 1038. A cy pres award must be "guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members," id. at 1039, and must not benefit a group "too remote from the plaintiff class," Six Mexican Workers, 904 F.2d at 1308. Thus, in addition to asking "whether the class settlement, taken as a whole, is fair, reasonable, and adequate to all concerned," we must also determine "whether the distribution of the approved class settlement complies with our standards governing cy pres awards." Nachshin, 663 F.3d at 1040 (internal quotation marks omitted).
A review of our relevant precedent reveals that the settlement here fails to satisfy those standards. In Six Mexican Workers v. Arizona Citrus Growers, a class of undocumented Mexican farm workers sued various companies for violations of the Farm Labor Contractor Registration Act. 904 F.2d at 1303. After a bench trial, the district court found the defendants liable for over $1.8 million, which we later reduced to $850,000, in statutory damages. Id. at 1303-04, 1310. The district court identified the Inter-American Fund, which provided humanitarian aid in Mexico, as the cy pres recipient of any unclaimed funds. Id. at 1304.
We held that the cy pres distribution was an abuse of discretion because there was "no reasonable certainty" that any class member would benefit from it, even though the money would go "to areas where the class members may live." Id. at 1308. The choice of charity and its relation to the class members and class claims — or lack thereof — figured heavily in our analysis. The purpose of the statute was to compensate victims of unscrupulous employers and to deter future violations, but the Inter-American Fund was "not an organization with a substantial record of service nor [was] it limited in its choice of projects," and any distribution would therefore have required court supervision "to ensure that the funds [were] distributed in accordance with the goals of the remedy." Id. at 1309. Because "the district court's application[of the cy pres doctrine] was inadequate to serve the goals of the statute and protect the interests of the
We recently came to a similar conclusion in Nachshin v. AOL, LLC. In that case, AOL was accused of violating a number of statutes, including the UCL and the CLRA, by wrongfully inserting commercial footers into the plaintiffs' outgoing emails. 663 F.3d at 1036. Because damages would be small and distribution to the class prohibitively expensive, AOL agreed, as part of a class settlement, to make substantial donations to three charities: the Legal Aid Foundation of Los Angeles, the Federal Judicial Center Foundation, and the Los Angeles and Santa Monica chapters of the Boys and Girls Club of America. Id. at 1037.
We held that the cy pres distribution "fail[ed] to target the plaintiff class, because it d[id] not account for the broad geographic distribution of the class." Id. at 1040. The class included over 66 million AOL users across the country, but two-thirds of the donations were slated for Los Angeles charities. Further, although the donation to the Federal Judicial Center Foundation "at least conceivably benefit[ed] a national organization," the Foundation "ha[d] no apparent relation to the objectives of the underlying statutes, and it [wa]s not clear how this organization would benefit the plaintiff class." Id. We noted, however, that it would not be difficult for the parties to come up with an appropriate charity if they wished to do so:
Id. at 1041. In approving the cy pres distribution to charities that had no relation to the class or to the underlying claims, the district court "applied the incorrect legal standard" and abused its discretion. Id. at 1040.
The cy pres awards in the settlement here are likewise divorced from the concerns embodied in consumer protection laws such as the UCL and the CLRA. As California courts have stated, "[t]he UCL is designed to preserve fair competition among business competitors and protect the public from nefarious and unscrupulous business practices," Wells v. One2One Learning Found., 116 Cal.App.4th 515,
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
Our concerns are not placated by the settlement provision that the charities will be identified at a later date and approved by the court — a decision from which the Objectors might again appeal. Our standards of review governing pre-certification settlement agreements require that we carefully review the entire settlement, paying special attention to "terms of the agreement contain[ing] convincing indications that the incentives favoring pursuit of self-interest rather than the class's interests in fact influenced the outcome of the negotiations." Staton v. Boeing Co.,
On remand, the parties are free to negotiate a new settlement or proceed with litigation. If they again decide to settle, they must correct the additional serious deficiencies we find in this settlement agreement. Not only does the settlement fail to identify the cy pres recipients of the unclaimed money and food, but it is unacceptably vague and possibly misleading in other areas as well.
The settlement states only that Kellogg will donate "$5.5 million worth" of food. (emphasis added). But the settlement document gives no hint as to how that $5.5 million will be valued. Is it valued at Kellogg's cost? At wholesale value? At retail? The exact answer to this question has important ramifications relating to the accurate valuation of the constructive common fund and thereby the reasonableness of attorneys' fees. Kellogg stated at oral argument and in its briefs to the district court that it will value the food donation at wholesale, but the only legally-enforceable document — the settlement — says nothing of the sort. Additionally, the settlement fails to include any restrictions on how Kellogg accounts for the cy pres distributions. Can Kellogg use the value of the distributions as tax deductions because they will go to charity? And given that Kellogg already donates both food and money to charities every year — which is unquestionably an admirable act — will
Moreover, Plaintiffs' counsel tells us that settlements like this serve the purposes of "restitutionary disgorgement and deterrence." If the product cy pres distribution is form over substance and not worth nearly as much to Kellogg as the settlement claims, then these goals are not served. To the contrary, the settlement is a paper tiger.
This deficiency raises in turn serious issues about the alleged dollar value of the product cy pres award, an important number used to measure the appropriateness of attorneys' fees. For example, if the alleged $5.5 million value of the product cy pres distribution turns out on close examination to be an illusion and is subtracted from the alleged $10.64 million value of the common fund, the dollar value of the settlement fund plummets to $5.14 million, and the $2 million attorneys' fees award becomes 38.9% of the total, which is clearly excessive under our guidelines. This possibility gives us an additional reason to be vigilant regarding the particulars of this class action settlement: is it all that it appears to be? Are the assigned numbers real, or not? This issue is particularly critical with a cy pres product settlement that has a tenuous relationship to the class allegedly damaged by the conduct in question. The issue of the valuation of this aspect of a settlement must be examined with great care to eliminate the possibility that it serves only the "self-interests" of the attorneys and the parties, and not the class, by assigning a dollar number to the fund that is fictitious.
Neither class counsel nor Kellogg offers any credible reason for the mysteries in the current settlement. To approve this settlement despite its opacity would be to abdicate our responsibility to be "particularly vigilant" of pre-certification class action settlements. In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d at 947.
For the foregoing reasons, we conclude that the district court did not apply the correct legal standards for cy pres distributions as set forth in Six Mexican Workers and Nachshin. Therefore, the approval of the settlement was an abuse of discretion.
We do not have the authority to strike down only the cy pres portions of the settlement. "It is the settlement taken as a whole, rather than the individual component parts, that must be examined for overall fairness," and we cannot "delete, modify or substitute certain provisions. The settlement must stand or fall in its entirety." Hanlon, 150 F.3d at 1026 (internal quotation marks omitted). See also Jeff D. v. Andrus,
Class counsel and Kellogg ask us for the impossible — a verdict before the trial. They essentially say, "Just trust us. Uphold the settlement now, and we'll tell you what it is later." But that is not how appellate review works. The settlement provides no assurance that the charities to whom the money and food will be distributed will bear any nexus to the plaintiff class or to their false advertising claims and therefore violates our well-established standards governing cy pres awards. Moreover, the true value of the product cy pres initiative has yet to be determined, making it impossible to assess, and thus evaluate, the true value of the common fund.
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