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Two New Cyber Cases You Need to Know


The Court grants cert in a pair of data privacy class actions, including one personally involving you (yes, you). Here's a preview.

1 First, No. 3

The Supreme Court has added two data privacy class actions to next fall’s docket. Lamps Plus, Inc. v. Varela concerns a threshold issue, when plaintiffs can proceed as a class in arbitration. Frank v. Gaos concerns an ultimate issue, securing court approval of a class settlement (and not just any settlement — but one in which you yourself are a class member, assuming that you've used Google).

The Court appears poised to rule against the classes in both cases. Let's take a closer look.

Lamps Plus, Inc. v. Varela

When an arbitration agreement does not expressly address class arbitration, does the silence mean that class arbitration is permitted? Or prohibited?

Prohibited, answered a five-justice majority in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. 662 (2010). “This is so,” the majority reasoned, “because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator.”

The majority's holding was defensible under the particular facts of Stolt-Nielsen, which involved two sophisticated business entities, the international shipping company Stolt-Nielsen and distributor AnimalFeeds International. AnimalFeeds proffered the contract that would govern the parties relationship, including the arbitration clause. AnimalFeeds also conceded that the arbitration clause did not address class arbitration and further conceded that "when a contract is silent on an issue there’s been no agreement that has been reached on that issue." AnimalFeeds nevertheless sought to subject Stolt-Nielsen to class arbitration — an attempt the five-justice majority of the Supreme Court rejected.

Stolt-Nielsen may be correctly decided, if read narrowly. But extracting a categorical rule that silence always means class arbitration is prohibited is untenable.

For most contracts (adhesive form contracts), such a rule is simply wrong. It's wrong under traditional contract law doctrine, which construes ambiguity against the drafter of the adhesive form contract. And it would be wrong under contemporary law and economics analysis, since that drafter is the least cost avoider.

Unsurprisingly, some lower courts have therefore sought to read Stolt-Nielsen narrowly. One example is Lamps Plus, Inc. v. Varela, one of the last decisions of the late Judge Stephen Reinhardt.

The case arose out of a phishing attack on Lamps Plus, which compromised 1,300 employees’ personal information. An employee brought a class action against the company in federal court.

The form arbitration clause at issue did not expressly mention class arbitration, and the company moved to compel individual arbitration.

A split panel of the Ninth Circuit (Reinhardt & Wardlaw) found the clause ambiguous and permitted class arbitration to proceed. Parsing the clause’s language, the majority reasoned that although the clause “does not expressly refer to class arbitration,” this “is not the ‘silence’ contemplated in Stolt-Nielsen.”

Judge Fernandez dissented, describing the majority’s holding as a “palpable evasion of Stolt-Nielsen.”

The Court will now weigh in on the reach of Stolt-Nielsen. And if the Court's trend in this area continues (see, e.g., AT&T Mobility v. Concepcion), five justices are likely to agree with Judge Fernandez and further narrow the ability of plaintiffs to join together as a class in arbitration.

Frank v. Gaos

When large classes of people suffer small, difficult to quantify damages, can the parties settle by distributing the settlement fund to charities?

In Frank v. Gaos, the Court will take up this question. And the answer will depend on the propriety of transplanting that old chestnut, cy pres, into class action settlements.

An equitable doctrine, cy pres began in trusts and estates law as a way to effectuate the testator’s intent in making charitable gifts when the original charitable purpose could not be fulfilled.

More recently, cy pres has been used by courts in class action settlements “to distribute unclaimed or non-distributable portions of a class action settlement fund to the ‘next best’ class of beneficiaries for the indirect benefit of the class.”

Five years ago, Chief Justice Roberts signaled his openness to evaluating the propriety of cy pres settlements in data privacy class actions. Agreeing with the denial of cert in Marek v. Lane, the chief wrote that he had “fundamental concerns surrounding the use of such remedies in class action litigation,” adding “In a suitable case, this Court may need to clarify the limits on the use of such remedies.” And with Frank v. Gaos, the Court has found its vehicle to address the issue.

The case arose out of Google’s practice of sharing users’ search terms with other websites. Class actions were filed on behalf of the 129 million Americans who used Google search between 2006 and 2014. (Yes, loyal reader who has made it this far in the post, this doubtless includes you too.)

The parties agreed to a cy pres-only settlement in which Google would pay $8.5 million: $3.2 million in attorneys’ fees (plus modest incentive awards to the three named plaintiffs and administration costs), with remaining $5.3 million allocated to six cy pres recipients who agreed to use the funds to promote Internet privacy protections.

Ted Frank, an attorney who regularly challenges class action settlements, objected to the proposed settlement. The district court overruled the objection; the Ninth Circuit affirmed. The Court will now weigh in.

The plaintiff bar’s interests in the outcome are self-evident. Potential data privacy defendants’ interests are less so — eliminating the cy pres-only settlements may reduce incentives to bring these types of cases, but also increase the uncertainty and costs of resolving them. The public’s interests, of course, will be contested. So too will be how the Court will resolve the question — though the chief's signals in Marek appear to be a key clue. Stay tuned for how the Court does decide the case, and for the next installment of 1 First.

About 1 First

The U.S. Supreme Court is located at 1 First Street, NW, Washington DC. This blog, 1 First, will offer periodic observations about the Court, the questions it takes up, and the answers it provides.

About the Author

Tom Cummins is the founder of Potomac Litigation. He litigates complex cases, including class actions, in state and federal courts.

His recent briefs to the U.S. Supreme Court are available here and here, and the Court's decisions on those cases are available here and here.

His scholarship about the U.S. Supreme Court has been featured on SCOTUSBlog. A sampling is available here and here.