The 9th Circuit recently set aside the $10.6 million settlement in a consumer class action in which the plaintiffs alleged that Kellogg made false claims that its Frosted Mini-Wheats cereal could improve children’s cognitive development.

A class of plaintiffs filed suit in 2009 in which they challenged certain misleading statements like “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 parties reached a settlement totaling $10.6 million. Kellogg agreed to establish a $2.75 million fund for distribution to class members (claims could be made for $5 per box of cereal, up to $15), donate $5.5 million worth of products to charity, pay $2 million class counsel fees, and refrain from certain ad claims for a period of three years.

Despite a federal court judge’s approval, the 9th Circuit tossed the settlement on appeal from objectors.

The charitable distribution “neither identifies the ultimate recipients . . . nor sets forth any limiting restriction on those recipients,” the court said, ruling that the cy pres portion of the settlement was not “sufficiently related” to the plaintiff class or to the class’s underlying false advertising claims.

A cy pres award must qualify as “the next best distribution” to giving the funds directly to the class members, the panel explained. Although it called the $5.5 million payment designated to feeding the indigent a “noble goal,” it “has ‘little or nothing to do with the purposes of the underlying lawsuit or the class of plaintiffs involved,’” the court said. “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.”

Further, the settlement terms failed to specify how the $5.5 million of food would be valued. Wholesale value? At retail? Could Kellogg also use the value of the distribution as a tax deduction because it was going to charity? And would the fund be in addition to an existing Kellogg donation or could it come from previously budgeted funds? Lacking answers to these questions, the court called the settlement “unacceptably vague.”

The settlement also failed to pass muster given the “excessive” attorneys’ fees, the panel said, which amounted to $2,100 per hour. “The settlement yields little for the plaintiff class,” the court concluded. “In comparison, the $2 million award is extremely generous to counsel.”

Vacating approval of the settlement, the court remanded the case to the district court.

To read the opinion in Dennis v. Kellogg Co., click here.

Why it matters: This case demonstrates how courts are applying greater review and scrutiny to proposed class action settlements. With regard to the cy pres donation, the court repeatedly emphasized that the terms of such a provision must have a sufficient nexus to the underlying claims of the plaintiffs. Despite Kellogg’s argument that cy pres relief was proper because it involved “the nutritional value of food,” the court disagreed. “The gravamen of this lawsuit is that Kellogg advertised that its cereal did improve attentiveness. Those alleged misrepresentations are what provided the plaintiffs with a cause of action under [false advertising laws], not the nutritional value of Frosted Mini-Wheats. 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,” the court said.