A federal appeals court has rejected a class action settlement over alleged false advertising of a breakfast cereal, ruling that a plan to contribute some of the payout to charity bore no relation to the case and that the plaintiffs’ attorney fee award was excessively generous.

The U.S. Court of Appeals for the Ninth Circuit on July 13 reversed the trial judge who’d approved the settlement between Kellogg Co. and a nationwide class of consumers who alleged false advertising of its Frosted Mini-Wheats cereal. Citing its 2011 decision in In re Bluetooth Headsets Litigation, the three-judge panel ruled that the settlement did not survive the heightened scrutiny that should be applied to class action settlements.

“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,” Senior Judge Stephen Trott wrote. “Moreover, the attorneys’ fees are impermissibly high considering what the defective settlement provides the class.”

The ruling in Dennis v. Kellogg Co. was the latest in which the Ninth Circuit has struck down a class action settlement based on excessive attorney fees or fear of collusion between counsel who crafted the deal.

“There is a lot of case law on attorneys fees out there: Bluetooth, and now this case, are certainly adding to that body of case law,” said plaintiffs counsel Timothy Blood, managing partner of Blood, Hurst & O’Reardon in San Diego. He said he was not sure whether he would seek rehearing before the Ninth Circuit.

Kellogg’s attorney, Kenneth Lee, a partner in the Los Angeles office of Jenner & Block, did not return a call for comment. A lawyer for the objectors, Darrell Palmer, of the Law Offices of Darrell Palmer in Solana Beach, Calif., said the ruling “carries a lot of weight” since there “are a lot of very important implications about the case.”

“We’re very happy to see that published decision,” he said.

The Ninth Circuit ruled on Aug. 19 in the Bluetooth case that U.S. District Judge Dale Fischer, in approving a settlement over alleged hearing loss against headset manufacturer Motorola Inc., failed to adequately test whether the $800,000 in attorney fees were excessive, particularly since the plaintiffs received no economic recovery other than $12,000 allocated to nine class representatives. On remand, Fischer has yet to rule on the new estimate of $1.3 million in attorney fees.

According to the Kellogg’s opinion, the company launched an advertising campaign in 2008 claiming that a scientific study had demonstrated that children who ate Frosted Mini-Wheats cereal for breakfast improved their attentiveness by 20 percent. The suit, originally filed in 2009, brought false advertising claims under California’s Unfair Competition Law and Consumer Legal Remedies Act. The class comprises consumers nationwide who purchased Frosted Mini-Wheats between Jan. 28, 2008, and Oct. 1, 2009.

Under the settlement, approved last year by U.S. District Judge Irma Gonzalez in Los Angeles, Kellogg’s agreed to halt the advertising claims and set up a $2.75 million fund for class members, who could receive $5 for each future box of cereal purchased up to $15. Any money unclaimed by class members would go to “charities chosen by the parties and approved by the Court pursuant to the cy pres doctrine,” although neither side identified the specific recipients. Kellogg’s agreed to distribute another $5.5 million in food items to unnamed charities that feed the indigent. The cy press doctrine, from the French for “as close as possible,” allows the donation to related charities of excess money from legal settlements.

Kellogg’s agreed to pay more than $2 million in attorney fees, valued at 19 percent of the settlement’s value, which the parties estimated to be more than $10.5 million.

Two objectors appealed. The Ninth Circuit found that the cy pres provisions bore no resemblance to the claims in the case, which were about false advertising to consumers, not food for the indigent. The court cited its own precedents in Six Mexican Workers v. Arizona Citrus Growers, issued in 1990, and Nachshin v. AOL LLC, issued on Nov. 21. Both rulings struck down settlements because no nexus existed between the cy pres provisions and the class members.

“The gravamen of this lawsuit is that Kellogg advertised that its cereal did improve attentiveness,” Trott wrote. “Thus, appropriate cy pres recipients are not charities that feed the needy, but organizations dedicated to protecting consumers from, or redressing injuries caused by, false advertising.”

Trott added that the settlement failed to explain how the $5.5 million worth of food would be valued and how Kellogg’s intended to make those charitable distributions.

Blood, the plaintiffs attorney, called the court’s conclusion about the cy pres provision “troubling.”

“It’s really, I think, the narrowest reading of the cy pres doctrine of any appellate-level case in the country,” he said. “We thought an appropriate cy pres recipient for part of this settlement would be providing nutritious foods to groups that feed the indigent, because most of the indigent population in the United States is children. Under existing precedent, that certainly seems to have been appropriate and well supported. And instead, what the court has done is, it’s divorced the cy pres doctrine from the subject matter of the lawsuit and really tied it to the claims.”

As for the fees, the court cited its Bluetooth decision in finding the request unreasonable, particularly given the number of hours and amount of money spent by plaintiffs counsel in light of what class members would receive.

“The settlement yields little for the plaintiff class,” Trott wrote. “In comparison, the $2 million award is extremely generous to counsel — even if we were to accept their assertion that the value of the common fund is $10.64 million.”

Excluding the $5.5 million in guaranteed cy pres payments, the fee award would come out to 38.9 percent of the value of the settlement, Trott continued. “This figure,” he wrote, “is well above our presumptive benchmark, making the unreasonableness of the fee award all the more blatant.”

Had the case been litigated on an hourly basis, the fees would have totaled $459,203, Trott wrote, so a $2 million fee award would translate to $2,100 per hour. “Not even the most highly sought after attorneys charge such rates to their clients,” he wrote.

Blood called the court’s estimate or $2,100 per hour “flatly wrong.”

“That’s what the number would have been if the litigation stopped at the trial court level — and even that number wouldn’t even have included all the proceedings in the trial court, so it eliminates some work done during the trial court proceeding and obviously the work on appeal,” he said.

In addition to Blood Hurst, plaintiffs firms that sought a share of the fees in the case included Phoenix-based Bonnett, Fairbourn, Friedman & Balint; Whatley Drake & Kallas in New York; and Ohio’s Piscitelli Law Firm and Climaco, Wilcox, Peca, Tarantino & Garofoli Co.

Contact Amanda Bronstad at abronstad@alm.com.