FYI: SCOTUS Vacates Class Action Settlement Citing Spokeo

The Supreme Court of the United States recently vacated the U.S. Court of Appeals for the Ninth Circuit's approval of a class action settlement against a prominent technology company claiming violations of the Stored Communications Act, , 18 U.S.C. § 2701, et seq. (SCA).

 

In so doing, the Supreme Court concluded that significant questions regarding the class plaintiffs' Article III standing had not yet been adequately considered by the lower courts following its ruling in Spokeo v. Robins, 578 U.S. ___ , and remanded for consideration of whether any of the named plaintiffs has alleged SCA violations that are sufficiently concrete and particularized to support standing in federal court.

 

A copy of the opinion is available at:  Link to Opinion

 

Three named plaintiffs ("Plaintiffs") filed a putative class action lawsuit against a leading, multinational technology company ("Tech Company") alleging violations of the Stored Communications Act, 18 U.S.C. § 2701, et seq. ("SCA")

 

The complaints alleged that when a user clicked a hyperlink from the Tech Company's search engine, that the Tech Company transmitted the user's search terms to the server that hosted the selected webpage.

 

Plaintiff 1 challenged the use of these so-called "referral headers" by filing a complaint on behalf of herself and a putative class of the Tech Company's search engine's users who clicked resulting links within a certain time period, alleging that the practice violated various state laws and the SCA's provisions which prohibit "a person or entity providing an electronic communication service to the public" from "knowingly divulg[ing] to any person or entity the contents of a communication while in electronic storage by that service." §2702(a)(1). 

 

As you may recall, the SCA creates a private right of action that entitles any "person aggrieved by any violation" to "recover from the person or entity, other than the United States, which engaged in that violation such relief as may be appropriate." §2707(a).

 

The Tech Company's motion to dismiss Plaintiff 1's original complaint was granted, with leave to amend, as the district court reasoned that Plaintiff 1 had "failed to plead facts sufficient to support a claim for violation of her statutory rights" — i.e., "that she clicked on a link from the [Tech Company's] search page."

 

The Tech Company also moved to dismiss Plaintiff 1's amended complaint, and the motion was granted as to her state law claims, but denied as to the SCA claims.  Citing its opinion in Edwards v. First American Corp., the district court concluded that Plaintiff 1 had standing under Article II because: (i) the SCA created a right to be free from the unlawful disclosure of certain communications and; (ii) she alleged a concrete and particularized injury, in that the SCA violation was based upon a search she conducted.  Edwards v. First American Corp., 610 F.3d 514 (9th Cir. 2010) (Article III injury exists whenever a statute gives an individual a statutory cause of action and the plaintiff claims that the defendant violated the statute).

 

After the district court entered its ruling on the Tech Company's motion to dismiss Plaintiff 1's first amended complaint, the SCOTUS granted cert on the Ninth Circuit's opinion in Edwards, in order to address whether an alleged statutory violation alone can support standing.  Meanwhile Plaintiff 1 filed a second amended complaint in trial court which added a second named plaintiff ("Plaintiff 2").  With Edwards on review before the Supreme Court, the Tech Company again moved to dismiss the latest complaint, arguing that the named plaintiffs lacked standing to bring their SCA claims because they failed to allege facts establishing a cognizable injury.  Eventually, Edwards was dismissed by the SCOTUS as improvidently granted and the Tech Company withdrew its argument that Plaintiff 1 lacked standing for the SCA claims.

 

The putative class action was consolidated with a similar complaint and the parties negotiated a class-wide settlement, wherein the Tech Company agreed to pay $8.5 Million, and required it to include certain disclosures about referrer headers on three of its webpages in order to continue its practice of transmitting its users' search terms. 

 

No funds would be distributed to absent class members, but instead to six cy pres recipients selected by the parties to "promote public awareness and education, and/or to support research, development, and initiatives, related to protecting privacy on the Internet."  Over the objections of five class members, who argued that cy pres relief was not justified nor appropriate under Rule 23(e), the district court granted final approval of the settlement.  Two of those five class members appealed to the Ninth Circuit.

 

Following briefing, but before entry of an opinion on appeal, the SCOTUS issued its opinion in Spokeo, Inc. v. Robins, which held that Article III standing requires a concrete injury even in the context of a statutory violation, and rejected the Ninth Circuit's decision the under review in Edwards that the injury-in-fact requirement is automatically satisfied whenever a statute grants a person a statutory right.  Spokeo, Inc. v. Robins, 578 U. S. ___ (2016).

 

Although the Tech Company notified the Ninth Circuit of the SCOTUS' opinion in Spokeo, a divided panel affirmed the trial court's approval of the class settlement. The SCOTUS then granted cert to decide whether a class action settlement that provides a cy pres award but no direct relief to class members satisfies the requirement that a settlement binding class members be "fair, reasonable, and adequate." Fed. Rule Civ. Proc. 23(e)(2).

 

In briefing before the SCOTUS, the Solicitor General filed an amicus brief urging the Court to vacate and remand the case for the lower courts to address standing, arguing that a substantial open question remained as to whether any named plaintiff in the class action actually had standing in district court.

 

The SCOTUS acknowledged its obligation "to assure ourselves of litigants'' standing under Article III," which extends to court approval of class action settlements. DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 340 (2006) (internal quotations omitted).  Moreover, unlike individual actions, in a class action the "claims, issues, or defenses of a certified class—or a class proposed to be certified for purposes of settlement—may be settled, voluntarily dismissed, or compromised only with the court's approval." Fed. Rule Civ. Proc. 23(e). A court is powerless to approve a proposed class settlement if it lacks jurisdiction over the dispute, and federal courts lack jurisdiction if no named plaintiff has standing. Simon v. Eastern Ky. Welfare Rights Organization, 426 U.S. 26, 40, n. 20 (1976).

 

Noting that its opinion in Spokeo abrogated the Ninth Circuit's ruling in Edwards — the case relied upon to determine Plaintiff 1's standing under the SCA — the SCOTUS observed that neither the district court, nor Ninth Circuit had analyzed whether any named plaintiff alleged SCA violations that were sufficiently concrete and particularized to support standing, and ordered supplemental briefing on this issue.

 

Upon review of the supplemental briefs filed by the parties and Solicitor General, the SCOTUS concluded that the courts below should address the new legal and factual issues presented, which were not raised in the underlying briefing or at oral argument.  Cutter v. Wilkinson, 544 U.S. 709, 718, n. 7 (2005) (The Supreme Court is "a court of review, not of first view").

 

Accordingly, the matter was vacated and remanded for the below courts to address the Plaintiffs' standing in light of Spokeo.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

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Email: rwutscher@MauriceWutscher.com

 

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FYI: 1st Cir Rejects Challenges to Arbitration of Putative Class Action

The U.S. Court of Appeals for the First Circuit ("First Circuit") recently affirmed dismissal of a putative class action lawsuit that challenged the company's arbitration clause.

 

The Court rejected the named plaintiff's primary argument that the arbitration clause's arbitration-fee-splitting arrangement was unconscionable and unenforceable, because the trial court was allowed to consider the defendant's offer to pay for the full costs of arbitration, thus rendering the clause enforceable under Massachusetts' Wage Act, because the potential costs of arbitration were less than the cost of potential recovery.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2014, the rideshare drive plaintiff ("Driver") registered to become a driver for a prominent rideshare company ("Rideshare Company") through its mobile application (the "App").  Registration through the App required acceptance of the Rideshare Company's terms of service agreement ("TOS Agreement").  The complete TOS Agreement was provided below the initial sixteen lines of text, which users could scroll through, but were not required to before accepting. 

 

The TOS Agreement provided an explanation that the Rideshare Company could modify the TOS Agreement, along with an Arbitration Clause, provided under a bold, capitalized heading entitled "Agreement to Arbitrate All Disputes and Legal Claims" (the "Arbitration Clause"). 

 

The Arbitration Clause contained standard terms requiring that any legal disputes or claims arising out of, or related to the TOS Agreement that could not be resolved informally would be submitted to binding arbitration, subject to the American Arbitration Association's Commercial Arbitration Rules, and that any such claim "must be brought in your individual capacity, and not as a plaintiff or class member in any purported class, collective, or representative proceeding."

 

The Driver accepted the TOS Agreement on three separate occasions, and the parties agree that the TOS Agreement in effect on October 11, 2014 controlled.

 

The Driver filed suit in state court on behalf of a class of the Rideshare Company's Massachusetts drivers, alleging that the Rideshare Company violated the Massachusetts Wage Act by classifying drivers as independent contractors, rather than employees, and by requiring drivers to bear expenses such as gas and auto maintenance.  The Rideshare Company removed the action to federal court, and moved to dismiss the complaint and to compel individual arbitration under the Federal Arbitration Act ("FAA").

 

The Driver opposed the Rideshare Company's motion to dismiss arguing that no valid contract to arbitrate had been formed under Massachusetts law, which supplies the principles for determining the validity, revocability and enforceability of written arbitration provisions in contracts.  9 U.S.C. § 2; Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996). 

 

Moreover, the Driver argued that any such agreement was unenforceable under the FAA's savings clause because (i) its class-waiver provision violates the right to engage in concerted action granted by the National Labor Relations Act (NLRA), and (ii) the Arbitration Clause's requirement that AAA Commercial Rules govern initial arbitration costs -- $7,500 to be split by the parties -- was unaffordably high for the Rideshare Company's drivers like himself, and thus unconscionably oppressive. 

 

Over the Driver's objections, the district court granted the Rideshare Company's motion to dismiss in favor of individual arbitration.  The instant appeal ensued.

 

The Driver's initial brief on appeal focused on the argument that the Arbitration Clause violated the NLRA.  Before the Rideshare Company filed its answer brief, the appeal was stayed in light of the Supreme Court's decision to grant cert in Lewis v. Epic Systems Corp., 823 F.3d 1147 (7th Cir. 2016), 137 S. Ct. 809 (mem.) (2017), to decide whether class-action waivers in employment arbitration agreements violate the NLRA.  Meanwhile, while the appeal was stayed, this Court decided Cullinane v. Uber Technologies, Inc., 893 F.3d 53 (1st Cir. 2018), which held that no valid agreement to arbitrate had been formed under Massachusetts law between a different rideshare company and customers who registered on the other rideshare company's mobile-phone application. Id. at 64.

 

In May 2018, the Supreme Court of the United States issued its opinion in Epic Systems Corp v. Lewis, which held that class and collective action bars in employment arbitration agreements were not incompatible with the NLRA, and thus enforceable under the FAA.  Accordingly, the stay in the instant appeal was lifted, and the parties stipulated that the Arbitration Clause did not violate the NLRA, and the Driver was permitted to file a supplemental initial brief to consider the First Circuit's ruling in Cullinane that no agreement to arbitrate had been formed.

 

However, the First Circuit's analysis primarily noted that the Driver waived his contract-formation argument by failing to argue it in his initial, opening brief, and rejected the Driver's arguments that the unusual briefing schedule did not constitute "exceptional circumstances" to excuse waiver.  Sparkle Hill, Inc. v. Interstate Mat Corp., 788 F.3d 25, 29 (1st Cir. 2015); Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1571 (1st Cir. 1994). 

 

Accordingly, the First Circuit's analysis focused upon the Driver's argument that the Arbitration Clause was unconscionable. 

 

To show unconscionability under Massachusetts law, one must prove "both substantive unconscionability (that the terms are oppressive to one party) and procedural unconscionability (that the circumstances surrounding the formation of the contract show that the aggrieved party had no meaningful choice and was subject to unfair surprise)." Machado v. System4 LLC (Machado II), 28 N.E.3d 401, 414 (Mass. 2015). 

 

Moreover, in Massachusetts, an arbitration-fee-splitting arrangement is not substantively unconscionable when the arbitration fees a plaintiff would owe amount to less than the damages the plaintiff claims.  Machado v. System4 LLC (Machado I), 989 N.E.2d 464, 471 (Mass. 2013)

 

Here, the First Circuit noted that because the Rideshare Company offered to pay all fees for an arbitration, the Driver faced $0 in arbitration fees — an amount lower than his estimated potential recovery of "about $1,000."  The Driver argued that the offer to pay for arbitration should not be considered, because unconscionability is determined at the time of contracting. 

 

The First Circuit rejected the Driver's argument, citing Massachusetts' case-specific approach to evaluate fee sharing arrangements, which allows courts to consider claims and potential recovery which are unknowable at the time of contracting, along with other facts developed during litigation, such as the Rideshare Company's offer to pay.  Machado; Machado II; see also McInnes v. LPL Financial, LLC, 994 N.E.2d 790 (Mass. 2013).  This approach is also similar to federal courts' evaluation of arbitration fees involving federal statutory claims, wherein offers to cover costs of arbitration have held such clauses as valid and enforceable.  See, e.g., Muriithi v. Shuttle Express, Inc., 712 F.3d 173, 183 n.10 (4th Cir. 2013); Ragone v. Atl. Video at Manhattan Ctr., 595 F.3d 115, 125 (2d Cir. 2010); Large v. Conseco Finance Servicing Corp., 292 F.3d 49 (1st Cir. 2002). 

 

The Appellate Court similarly rejected the Driver's argument that a cost-splitting provision would deter potential litigants from seeking to vindicate their statutory rights, concluding that doing so would conflict with the Massachusetts Supreme Judicial Court's case-by-case approach, which looks not at the contract in the abstract nor at other potential litigants but at the individual claimant.

 

Lastly, the Driver's argument that the TOS Agreement's provision allowing the Rideshare Company to modify its terms upon notice and acceptance was substantively unconscionable was rejected because the provision is not unilateral as Driver claims, and requires the Rideshare Company to provide notice to its users, that must be accepted by its drivers.

 

Thus, the First Circuit concluded that the arbitration clause was not substantively unconscionable and was thus enforceable.  Accordingly, the trial court's Order granting the Rideshare Company's motion to dismiss the Driver's putative class action complaint and ordering arbitration of the Driver's claims in his individual capacity was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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