Hadley v. Kellogg Sales Company

Background

Stephen Hadley, Melody DiGregorio, Eric Fishon, Kerry Austin, and Nafeesha Madyun brought a proposed class action against Kellogg Sales Company. They alleged violations of California and New York law based on allegedly misleading statements on Kellogg food-product packaging. The proposed settlement class would have included people in the United States who, between August 29, 2012, and October 21, 2019, bought certain Kellogg products for household use and not for resale or distribution. The products included Raisin Bran, Krave, Frosted Mini-Wheats, Smart Start, Crunchy Nut, and Nutri-Grain Bars.

The motion sought preliminary approval of a settlement before final approval. Under Federal Rule of Civil Procedure 23, a court must determine that a class settlement is fundamentally fair, adequate, and reasonable. The court explained that a settlement negotiated before a class is certified requires especially careful review for unfairness, conflicts of interest, or collusion.

Reasons for Denial

The court identified five independent problems:

1. Overbroad release. The proposed release covered claims arising from or related to the products and conduct alleged in the case, including claims that could have been brought in other proceedings. The court held that Ninth Circuit precedent permits a settlement to release only claims based on the same factual basis as the claims being settled. The parties therefore needed to narrow the release.

2. Unclear class certification. The court could not determine whether the proposed settlement class met Federal Rule of Civil Procedure 23(b)(3)’s predominance requirement. That requirement asks whether common issues are sufficiently important compared with individual issues. The proposed settlement class was much broader than the subclasses previously considered by the court: it included purchasers who may have bought product packages that did not contain the challenged statements, as well as additional sizes and varieties whose packaging varied during the class period. The court noted that it had previously granted in part and denied in part an earlier class-certification motion, including denying certification of the Nutri-Grain subclass because class-wide exposure to the challenged phrase could not be inferred. The parties did not adequately reconcile that earlier ruling with the broader settlement class.

3. Insufficient information about reversion. The settlement proposed an $8,250,000 voucher component. Each voucher would expire after four months, after which Kellogg would have no obligation to make the payment. The court treated this as a reversionary feature and found that the motion did not estimate how much value would revert to Kellogg or explain why the reversion was appropriate. The parties would need to provide that information in any later motion.

4. Inadequate notice materials. The proposed claim, opt-out, and notice forms contained multiple inconsistencies and omissions. For example, the opt-out form suggested that opting out would exclude a person from participating in the entire lawsuit, while the settlement agreement said it would exclude the person only from the settlement. The materials also gave inconsistent instructions about filing and serving objections and about appearing at the final approval hearing. The claim form presented vouchers as having twice the initial dollar value of the cash option, although the parties’ own calculations indicated that the cash could ultimately be worth more. Other omissions included the $12,000,000 cash component, some requested costs, and a clear identification of the individual plaintiffs. The court concluded that these defects made the proposed notice misleading and inadequate.

5. Vouchers treated as coupons under the Class Action Fairness Act. The court concluded that the vouchers were coupons under the Class Action Fairness Act because they could be used only for a limited list of Kellogg products, expired after four months, had to be used in one transaction, and could be combined only as retailers allowed. Because the proposed attorney-fee request included compensation attributable to the vouchers, federal law required that portion of the fee award to be based on the value of vouchers actually redeemed. The proposed settlement contemplated seeking fees before the vouchers were distributed and before their redemption value could be determined. The court identified possible ways the parties could address this issue, including separating the fee request or changing the settlement so the redemption rate could be determined before final judgment.

Disposition

The court concluded that, based on the current filings, it could not determine that the proposed settlement was fundamentally fair, adequate, and reasonable. Judge Lucy H. Koh therefore denied without prejudice the plaintiffs’ motion for preliminary approval of the class settlement. The order did not grant preliminary approval of the settlement.