Antitrust Law Daily Wrap Up, ADVERTISING—SDCal: Preliminary Approval Granted to Settlement Resolving Challenge to Frosted Mini-Wheats Advertising, (May 6, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in San Diego has granted preliminary approval to a proposed settlement of claims against Kellogg Company regarding allegedly false and unsubstantiated claims concerning the health characteristics of its Frosted Mini-Wheats cereal, although the court expressed concerns regarding a decline in value from a settlement vacated by the Ninth Circuit and about potentially excessive attorney fees (Dennis v. Kellogg Co., May 3, 2013, Gonzalez, I.).

Kellogg Company manufactures Frosted Mini-Wheats cereal products. A putative class of purchasers alleged that Kellogg’s advertising for the cereal made false and unsubstantiated claims that the cereal was scientifically proven to improve children’s cognitive functions for several hours after breakfast.

On April 5, 2011, the parties entered into a settlement, approved by the court, under which Kellogg would establish a $2.75 million fund for distribution to class members; establish, pursuant to the cy pres doctrine, a $5.5 million fund to distribute food products to charities to feed the indigent; refrain from making the challenged representations in advertising for three years; and pay approximately $2 million in attorneys’ fees and administration costs. On September 4, 2012, however, the Ninth Circuit reversed the court’s settlement order, concluding that the cy pres award had "little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved."

On remand, the parties negotiated a revised settlement under which Kellogg would establish a $4 million fund for distribution to class members, with any remaining balance to be distributed, pursuant to the cy pres doctrine, among the Consumers Union, the Consumer Watchdog, and the Center for Science in the Public Interest, and Kellogg would refrain from making the challenged representations in advertising for three years. With attorney fees of up to 25% and $550,000 in notice and administration costs taken out, the class would receive approximately $2-2.5 million.

Class certification. The court began its review of the settlement for preliminary approval by granting preliminary certification of the proposed settlement class. The putative class would contain hundreds of thousands of cereal purchasers, making joinder likely impracticable and satisfying numerosity. The class would permit resolution of a central class-wide issue, "whether the challenged cereal advertising is or is not misleading," meeting the commonality requirement. The class representatives’ "claims and defenses appear[ed] completely co-extensive with those of the putative class," satisfying typicality. The counsel possessed "ample experience," and the record did not contain any "sure conflicts of interest," thus preliminarily meeting the adequacy of representation requirement, although the court expressed its concern about the decline in the value of the settlement without a corresponding decline in the amount of attorneys’ fees requested.

Moreover, objective questions regarding "(1) the falsity of [Kellogg’s] advertising claims; and (2) whether reasonable consumers would be deceived thereby" were questions of fact common to the class that would predominate over questions affecting individual class members. Finally, the small amounts of each individual claim made class treatment apparently "not only a superior, but perhaps the exclusive, method for adjudicating" the consumers’ claims.

Fairness. The court then proceeded to address the fairness of the proposed settlement, explaining that it must "ensure that it is fair, adequate, and free of collusion," but noting that when considering whether to grant preliminary approval a court must only find that it fell within "the range of possible approval." Here, the court concluded that the settlement fell within that range, observing that it was reached after arms-length negotiation by experienced counsel and after considerable litigation and discovery, and that it provided "considerable cash recovery and injunctive relief." Moreover, the cy pres recipients were appropriate under the Ninth Circuit’s ruling.

However, the court noted that certain aspects of the settlement gave it "pause." The court observed that an original $10.5 million dollar settlement, including $2 million in attorneys’ fees and administration costs, had been vacated by the Ninth Circuit for determination of an appropriate cy pres recipient, but that the revised settlement amounted to only $4 million, with $1.5-2 million reserved for attorney’s fees and claims administration. The court found these amounts "especially troubling given the Ninth Circuit’s previous admonishments to the parties over both illusory dollar values and excessive attorneys’ fees." Although the court concluded that the settlement fell within the range of possible approval, it requested the parties "to fully address these concerns in their final approval briefing and at the final approval hearing."

The case is No. 09-CV-1786-IEG (WMC).

Attorneys: Andrew S. Friedman (Bonnett, Fairbourn, Friedman & Balint, PC) for Harry Dennis. Brent Caslin (Jenner & Block LLP) for Kellogg Co.

Companies: Kellogg Co.

Cases: Advertising StateUnfairTradePractices CaliforniaNews