For a second time, Kellogg has reached a settlement with consumers who challenged advertising claims that Frosted Mini-Wheats cereal could improve children’s cognitive function and memory retention. The claims include “Does your child need to pay more attention in school? . . . A recent clinical study showed that a whole grain and fiber-filled breakfast of Frosted Mini-Wheats helps improve children’s attentiveness by nearly 20%.”

The national class action followed multiple actions by the Federal Trade Commission regarding the company’s advertising that settled for $10.6 million. That deal provided a $2.75 million payout to class members, a $5.5 million donation to charity, and $2 million in class counsel fees.

On appeal from class objectors, however, the 9th U.S. Circuit Court of Appeals reversed approval of the agreement. The panel cited concerns about the charitable distribution portion of the settlement and the “excessive” class counsel fees. The court ruled that the charitable donation was not “sufficiently related” to the plaintiff class or to the class’s underlying false advertising claims, as it “neither identifies the ultimate recipients . . . nor sets forth any limiting restriction on those recipients.”

The parties regrouped and presented a revised agreement to the district court. For the second attempt, Kellogg agreed to provide a $4 million cash fund for distribution to class members who could receive reimbursement of $5 per box up to a maximum of $15 per class member. Remaining monies would be distributed equally to cy pres recipients Consumers Union, Consumer Watchdog, and the Center for Science in the Public Interest.

However, claims notice and administration costs would be reduced by $550,000 and attorneys’ fees reduced up to 25 percent, including costs. The parties estimated the cash value to the class would total between $2 million to $2.5 million.

Kellogg also promised to refrain from using the challenged advertisements for a three-year period.

U.S. District Court Judge Irma E. Gonzalez granted preliminary approval to the deal. But she expressed concern that “as between the original settlement and the revised settlement proposed here, the value to absent class members decreased dramatically while the requested attorneys’ fees and incentive awards appear unaffected.” She cautioned the parties that “left unresolved, these concerns could result in a finding of inadequacy.”

To read the court’s order granting preliminary approval of the settlement in Dennis v. Kellogg, click here.

Why it matters: The second time may not be the charm for the settlement deal. While the court noted that cy pres recipients were each “well-established and well-regarded consumer protection organizations” that would “suffice” under the 9th Circuit’s prescriptions, “several aspects of the settlement give the court pause,” most notably the reduction in the cash value of the settlement fund. “How did mere identification of proper cy pres recipients result in such a severe drop in the value of the class’s claims? How is it that the value to the class dropped approximately 75 percent, while requested attorney’s fees appear nearly constant?” Judge Gonzalez asked. “These concerns are especially troubling given the 9th Circuit’s previous admonishments to the parties over both illusory dollar values and excessive attorney’s fees.”