By Lauren Murphree, a 2012 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.
The Ninth Circuit recently handed down a strongly worded opinion that may signal a positive trend in so-called “consumer protection” class action lawsuits. Judges across the country appear less willing to rubber-stamp large class action settlements, and their adherence to the rule of law should certainly be applauded.
In Dennis v. Kellogg Co., the rejected settlement agreement would have provided $2.75 million for distribution to the class (up to a whopping $15 per member), $5.5 million “worth” of Kellog items to feed the indigent per the cy pres doctrine, $2 million in attorney’s fees, and an agreement to stop advertising that Kellog’s Frosted Mini-Wheats improved attentiveness by nearly 20% (the marketing claim that provoked the lawsuit in the first place) for the next three years. By the court’s calculations, the attorney’s fees amount to a staggering hourly rate of $2,100. While counsel for the class defended those fees in light of the time spent on the case, drafting the settlement, and litigating the appeal, the Ninth Circuit wasn’t buying it: “one reason why those counsel had to defend this appeal is because they negotiated a deficient settlement agreement.”
Federal Rule of Civil Procedure Rule 23(e)(2) requires a court to review proposed settlements for fairness, reasonableness, and adequacy. On appeal, settlements are reviewed for abuse of discretion. A line of precedent in the Ninth Circuit, however, allows for heightened scrutiny “where, as here, class counsel negotiates a settlement before the class is even certified.” The heightened scrutiny prevents frivolous lawsuits designed to pad attorney’s wallets instead of protecting large classes of consumers as they hold themselves out to do.
The agreement also failed to adhere to the Ninth Circuit’s cy pres standard, but the three-judge panel was quick to note that even had that standard had been satisfied here, the attorney’s fees were excessive enough to kill the deal on their own. Writing for the panel, Judge Trott also admonished the agreement for its ambiguity, noting that what was essentially a promise to donate money to feed the poor was not even specific enough to analyze under Rule 23.
The decision is another blow to class action attorneys nationwide, as similar opinions have recently come out of the Third, Fifth, and Ninth Circuits. The Ninth Circuit relied heavily on its previous decisions in Nachshin v. AOL and In re Bluetooth Headset Products Liability Litigation, and just last year the Fifth Circuit rejected a settlement for misuse of the cy pres doctrine in Klier v. Elf Atochem North America, Inc.while the Third Circuit rejected a settlement that effectively froze out a class of over a million while doling out over $9 million in attorney’s fees in Dewey v. Volkswagenthis May. Unfortunately, agreements like those in the Ben & Jerry’s and Nutella settlements continue to slip through the cracks, but tort reformers may find solace in knowing that disproportionate settlements may no longer enjoy the blind rubber-stamping they used to.