November 7, 2017
This update provides an overview of key class action developments during the third quarter of 2017 (July through September):
Several of our prior updates (including our 2013 and 2014 year-end updates) have focused on the heightened scrutiny that courts have applied to class settlements in recent years. Sometimes, that scrutiny goes beyond finding an element of unfairness in the settlement—it can also reveal that the underlying lawsuit never should have made it out of the starting gate.
For instance, our third quarter 2016 update covered the Seventh Circuit’s decision in In re Walgreen Co. Stockholder Litigation, 832 F.3d 718 (7th Cir. 2016), in which the court vacated the approval of a disclosure-only settlement of a class action challenging a merger. Judge Posner’s opinion concluded with a strong warning to the class plaintiffs’ bar: “the class action that yields fees for class counsel and nothing for the class . . . is no better than a racket. It must end. No class action settlement that yields zero benefits for the class should be approved, and a class action that seeks only worthless benefits for the class should be dismissed out of hand.” Id. at 721, 723–24.
This past quarter, the Seventh Circuit and Ninth Circuit addressed the propriety of class settlements in cases of questionable merit. Although the outcomes differed (the Seventh Circuit vacated a settlement while the Ninth Circuit affirmed settlement approval), the dubiousness of the underlying claims factored heavily in the analyses in both cases.
The plaintiff in In re Subway Footlong Sandwich Marketing & Sales Practices Litigation, 869 F.3d 551 (7th Cir. 2017), “purchased a Subway Footlong sandwich and, for reasons unknown, decided to measure it.” Id. at 553. When the sandwich came in at only 11 inches, he took a photo and posted it on Facebook, and “a minor social-media sensation was born.” Id. Within days, “the American class-action bar rushed to court,” but “[i]n their haste to file suit,” these “lawyers neglected to consider whether the claims had any merit.” Id. According to the Seventh Circuit, “They did not.” Id.
As the court described it, even if a few sandwiches fall short due to “natural—and unpreventable—vagaries in the baking process,” no class member is actually getting any less bread, because “all of Subway’s raw dough sticks weigh exactly the same, so the rare sandwich roll that fails to bake to a full 12 inches actually contains no less bread than any other.” Id. at 554. Under the circumstances, there was no hope of certifying a damages class under Rule 23(b)(3), because individual hearings would be needed to determine whether a class member’s sandwich actually was under 12 inches, and “most people consumed their sandwiches without first measuring them.” Id. Moreover, the Seventh Circuit noted that “[p]roof of injury was nigh impossible because no customer whose sandwich roll actually failed to measure up received any less food because of the shortfall.” Id.
Nonetheless, “[r]ather than drop the suit as meritless,” class counsel focused on certifying an injunction class under Rule 23(b)(2). Id. The district court eventually approved a class settlement in which Subway agreed to injunctive relief designed to ensure, to the extent practicable, that sandwiches would be at least 12 inches long. Class plaintiffs would get $500 incentive awards, and class counsel would receive $525,000 in fees. Id. at 554–55.
Relying heavily on its decision in Walgreens, the Seventh Circuit found the Subway settlement to be “utterly worthless,” and vacated it. Id. at 557. As the court explained, “before the settlement there was a small chance that Subway would sell the class member a sandwich that was slightly shorter than advertised, but that sandwich would provide no less food than any other,” and even “[a]fter the settlement—despite the new measuring tools, protocols, and inspections—there’s still the same small chance.” Id. at 556–57. The parties pointed out that a class member could seek contempt to enforce the injunction, but the Seventh Circuit was unmoved: “Contempt as a remedy to enforce a worthless settlement is itself worthless. Zero plus zero equals zero.” Id. at 557.
Therefore, as in Walgreens, the Seventh Circuit emphasized that the lawsuit itself—not just the settlement—was baseless, and should have been “‘dismissed out of hand.'” Id. (quoting Walgreens, 832 F.3d at 724).
This past quarter, the Ninth Circuit also addressed the settlement of a class action that rested on flimsy merits grounds, but instead of rejecting the settlement and ordering the case dismissed—as the Seventh Circuit did in Subway—the Ninth Circuit took a different course. It approved the settlement, even though it provided no direct benefit to any of the 129-million class members, in part because of the “shakiness of the plaintiffs’ claims.” In re Google Referrer Header Privacy Litig., 869 F.3d 737, 742 (9th Cir. 2017).
The plaintiffs in this case claimed that Google violated users’ privacy when it disclosed their search terms to third-party websites. This occurs as a “consequence of the browser architecture”: a user’s search terms generate a unique URL, which by default is then reported to third parties as the last webpage viewed before clicking through to a third-party website. Id. at 740.
The parties reached a classwide settlement, which provided for additional disclosures on how search terms are shared with third parties—and an $8.5 million settlement fund, of which $3.2 million was set aside for attorneys’ fees and costs, with the remainder going to six cy pres recipients, and no direct compensation to the class. Id.
The Ninth Circuit affirmed the “cy pres-only settlement,” even though such settlements are the “exception, not the rule,” in part because of the “shakiness of the plaintiffs’ claims.” Id. at 741–42. Cy pres-only settlements may be appropriate, the court explained, where each class members’ individual recovery would have been de minimis, making direct monetary payments “infeasible.” Id. at 743. The court rejected the suggestion that class members could have been compensated through a “random lottery distribution,” or by offering “$5 to $10 per claimant on the assumption that few class members will make claims.” Id. at 742 (quotation marks omitted). The court also explained that its review of orders approving class action settlements is not focused on whether “there may be ‘possible’ alternatives” but instead on “whether the district court discharged its obligation to assure that the settlement is ‘fair, adequate, and free from collusion.'” Id. (quotation marks and citation omitted).
The Ninth Circuit also rejected objections based on the preexisting relationships between counsel for Google, on the one hand, and the cy pres recipients, on the other. “Given that, over time, major players such as Google may be involved in more than one cy pres settlement, it is not an abuse of discretion for a court to bless a strong nexus between the cy pres recipient and the interests of the class over a desire to diversify the pick via novel beneficiaries that are less relevant or less qualified.” Id. at 746. Judge Wallace, however, in his dissenting opinion criticized that conclusion, stating that “the fact alone that 47% of the settlement fund is being donated to the alma maters of class counsel raises an issue which, in fairness, the district court should have pursued further.” Id. at 748 (Wallace, J., dissenting).
As we observed in the first and second quarters of this year, the federal courts of appeals have struggled to consistently apply the Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), which clarified that Article III requires plaintiffs to establish a “concrete injury even in the context of a statutory violation.” Id. at 1549. That trend continued into the third quarter, with courts reaching divergent conclusions on this important issue.
Most significantly, the Ninth Circuit in August 2017 decided Spokeo on remand and applied the Supreme Court’s guidance. The court held that the plaintiff had standing to pursue his putative class claim based on a procedural violation of the federal Fair Credit Reporting Act (“FCRA”), despite the fact that the alleged harm to him was based on disclosure of information that was better than the true facts and was arguably not harmful. Robins v. Spokeo, Inc., 867 F.3d 1108, 1118 (9th Cir. 2017). Before the Supreme Court took the case, the Ninth Circuit had held that the plaintiff’s allegation of a violation of FCRA was sufficient to satisfy Article III, but the Supreme Court vacated that decision because the Ninth Circuit did not consider whether the harm resulting from the particular procedural violations alleged was sufficiently concrete. Spokeo, 136 S. Ct. at 1550. The Supreme Court acknowledged that “intangible” injuries—like the procedural violations of the FCRA at issue in Spokeo—may be sufficiently concrete when the violation has caused “real,” as opposed to “abstract” or purely legal harm to the plaintiff. Id. at 1548–49. The Supreme Court thus remanded to the Ninth Circuit for it to assess whether this test was met in Spokeo. Id. at 1550.
On remand, the Ninth Circuit again concluded that the plaintiff had alleged an injury in fact sufficient to satisfy Article III. The court emphasized that Congress enacted the FCRA provisions at issue to protect concrete interests in avoiding the harm associated with the transmission of inaccurate information in consumer reports. Spokeo, 867 F.3d at 1114. The court also noted that the “interests that [the] FCRA protects also resemble other reputational and privacy interests that have long been protected in the law.” Id. And the court ultimately concluded that the alleged procedural violation asserted by the plaintiff “raise[d] a real risk of harm to the concrete interests that [the] FCRA protects,” because the specific inaccuracies complained of—among other things, regarding plaintiff’s “age, marital status, educational background, and employment history”—were of the “type that may be important to employers or others making use of a consumer report.” Id. at 1116–17. The Ninth Circuit, however, clarified that not just “any FCRA violation premised on some inaccurate disclosure of . . . information is sufficient” to show concrete injury, and noted that “in many instances, a plaintiff will not be able to show a concrete injury simply by alleging that a consumer-reporting agency failed to comply with one of [the] FCRA’s procedures.” Id. at 1115–16.
While it is too early to gauge the impact of the Ninth Circuit’s decision on remand in Spokeo, the court adopted an expansive approach to assessing whether allegations of harm are sufficient to transform a statutory violation into a concrete injury.
In addition to the Ninth Circuit, several other courts of appeals this past quarter adopted a similarly permissive approach to assessing injury under Spokeo:
At the same time, other courts of appeals this past quarter held plaintiffs to a higher standard in light of the Supreme Court’s decision in Spokeo:
In light of these conflicting interpretations of Spokeo, we will continue to closely monitor this important issue in future quarters.
Two notable arbitration-related decisions were issued by the federal courts of appeals this past quarter, with the Second Circuit addressing the acceptance of arbitration agreements via a smartphone app, and the Eight Circuit holding that courts must decide whether an arbitration agreement permits class arbitration. In addition, the Supreme Court is anticipated to rule in the coming months on the enforceability of class action waivers in employment arbitration agreements, and its ruling may have profound implications for employment class actions throughout the country.
This quarter, Gibson Dunn secured an important victory for Uber before the Second Circuit on the enforceability of arbitration agreements entered into via smartphone apps.
In Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. 2017), the Second Circuit held that a user’s registration through a smartphone app constituted valid assent to an arbitration provision contained in the company’s terms of service. Id. at 80. Applying California state contract law, the court explained that the arbitration agreement was enforceable as long as “a reasonably prudent user would be on inquiry notice” of the terms, which, in turn, would depend on the “clarity and conspicuousness” of the hyperlink to the arbitration terms. Id. at 75 (quotation marks omitted). The court then analyzed the specific interface of the app at issue (helpfully included as an attachment to the court’s opinion, see id. at 82), and held that the notice was reasonable based on the spatial and temporal proximity of the hyperlink to the registration button was sufficient to put the user on inquiry notice. Id. at 79–80. The court therefore concluded that “[a] reasonable user would know that by clicking the registration button, he was agreeing to the terms and conditions accessible via the hyperlink, whether he clicked on the hyperlink or not.” Id.
The Second Circuit’s commonsense decision in Meyer represents an important win for technology companies and other defendants that regularly rely on arbitration agreements accepted by consumers via websites or smartphone applications. Although courts have at times disfavored these so-called “clickwrap” or “browsewrap” agreements, the Second Circuit’s decision in Meyer suggests that there is growing judicial recognition of the realities of modern commerce. Meyer thus provides helpful guidance for companies seeking to develop best practices for implementing valid and enforceable arbitration agreements into their consumer-facing products and software.
In Catamaran Corp. v. Towncrest Pharmacy, 864 F.3d 966 (8th Cir. 2017), the Eighth Circuit joined a majority of courts of appeals to hold that in the absence of express language to the contrary, courts—and not arbitrators—must decide whether an arbitration agreement authorizes class arbitration. Id. at 969. The court began by noting the fundamental differences in the benefits, efficiencies, and constitutional considerations between bilateral and class arbitration, and held that “the question of class arbitration is substantive in nature, and hence one for the court to decide absent clear and unmistakable language to the contrary.” Id. at 971. Next, turning to the specific arbitration agreements at issue, the court reasoned that the agreements were completely silent on the issue of class arbitration, and that the agreements’ reference to the Arbitration Association of America rules (which delegate the threshold question of class arbitrability to the arbitrator) did not constitute “clear and unmistakable evidence of an agreement to arbitrate the particular question of class arbitration.” Id. at 973. Thus, the court remanded the case to the district court to determine whether there was a contractual basis for class arbitration between the parties. Id. at 973–74.
Importantly, Catamaran does not altogether foreclose the possibility that parties may delegate the issue of class arbitrability to an arbitrator. The decision, however, creates a strong presumption that in light of the substantive nature of class arbitration, the question will normally be reserved for the courts unless an arbitration agreement evinces a “clear” and “unmistakable” intent to the contrary. Companies are well advised to keep this standard in mind when drafting arbitration agreements that are intended to include a waiver of class arbitration.
Looking ahead to the coming months, the Supreme Court is expected to issue an opinion in a trio of closely watched cases concerning the enforceability of class arbitration waivers in Epic Systems Corp. v. Lewis (No. 16-285), National Labor Relations Board v. Murphy Oil USA, Inc. (No. 16-307), and Ernst & Young LLP v. Morris (No. 16-300). As we discussed in our 2016 Year-End Update on Class Actions, these cases pose the issue of whether the National Labor Relations Act precludes enforcement of class action waivers in mandatory employment arbitration agreements.
The Supreme Court held oral argument in these cases on October 2, 2017. During oral argument, the Court appeared to be divided, with Justices Breyer, Ginsburg, Kagan, and Sotomayor expressing support for collective actions in the workplace, and Chief Justice Roberts and Justices Alito and Kennedy suggesting they would be inclined to rule in favor of the employers. The Court’s forthcoming decision is set to be its most important ruling on arbitration in years.
Earlier this year in Microsoft Corp. v. Baker, 137 S. Ct. 1702 (2017), the Supreme Court emphasized the importance of “Rule 23(f)’s discretionary regime” for permitting interlocutory appeals of class certification orders. (See our coverage of Baker in last quarter’s update.) In this past quarter, the federal courts of appeals issued two published decisions interpreting Rule 23(f), with the D.C. Circuit reaffirming the limited circumstance in which it will authorize an interlocutory appeal of a class certification ruling, and the Ninth Circuit adopting a liberal rule for assessing the timeliness of Rule 23(f) petitions. These decisions represent important additions to the relatively small body of precedent construing Rule 23(f).
In re Brewer, 863 F.3d 861 (D.C. Cir. 2017), denied a petition for permission to appeal an order denying class certification after concluding that none of the “limited circumstances” required for Rule 23(f) review was present. Id. at 874. The plaintiff, a former deputy U.S. Marshall alleging racial discrimination, moved to certify a class predominantly seeking injunctive relief, but the district court denied the motion on the ground that the plaintiff, who recently retired, could not adequately represent the class given the nature of the relief sought. Id. at 866. The plaintiff then filed a Rule 23(f) petition seeking review of the district court’s order.
In denying the petition, the D.C. Circuit reiterated that interlocutory review under Rule 23(f) is “an exception” that “ordinarily is appropriate only in [three] limited circumstances: (1) when there is a death-knell situation for either the plaintiff or defendant that is independent of the merits of the underlying claims, coupled with a class certification decision by the district court that is questionable, taking into account the district court’s discretion over class certification; (2) when the certification decision presents an unsettled and fundamental issue of law relating to class actions, important both to the specific litigation and generally, that is likely to evade end-of-the-case review; and (3) when the district court’s class certification decision is manifestly erroneous.” Id. at 874.
The court concluded that none of the three circumstances was present in Brewer. No death-knell situation existed because intervenors had since joined the case to further pursue the litigation. Id. The court also did not believe that the Rule 23(f) petition presented an unsettled and fundamental issue of class action law given the fact-specific nature of the district court’s ruling. Id. at 874–75. And, after noting that the D.C. Circuit “has never held a district court’s class certification decision manifestly erroneous” and that the “manifest error standard is extremely difficult to meet,” the court concluded that nothing about the ruling was manifestly erroneous. Id. at 875–76.
In Lambert v. Nutraceutical Corp., 870 F.3d 1170 (9th Cir. 2017), the Ninth Circuit granted a Rule 23(f) petition and held—in a case of first impression for the court—that the 14-day deadline for filing Rule 23(f) petitions is non-jurisdictional and therefore eligible for equitable tolling. Id. at 1176–77.
Lambert involved a putative class of consumers who purchased a supplement product that allegedly was marketed in violation of FDA rules and was improperly labeled. Id. at 1174. Ten days after the district court granted a motion to decertify the class, the plaintiff informed the court of his intention to move for reconsideration of that order. The district court ordered briefing on that motion to be filed 10 days later (and thus 20 days from the order decertifying the class). Id. at 1175. The district court then took three months to resolve the motion, ultimately denying it. Id. The plaintiff then filed a Rule 23(f) petition 14 days after the denial of the motion for reconsideration. Id.
The Ninth Circuit, agreeing with the decisions of other courts of appeals, held that Rule 23(f)’s 14-day deadline is not jurisdictional and could be equitably tolled. Id. at 1177. The Ninth Circuit further held that the plaintiff’s filing of the motion for reconsideration after the 14-day period established under Rule 23(f) had lapsed and did not render his subsequent petition untimely because, according to the court, all that was necessary was for the petitioner to notify the district court within 14 days of a well-founded intention to seek reconsideration (which is what the plaintiff here did). Id. at 1179. The Ninth Circuit thus concluded that the plaintiff’s filing of the motion for reconsideration tolled the deadline for seeking review under Rule 23(f). Id.
The Ninth Circuit’s decision in Lambert represents a very forgiving interpretation of the deadline for filing a Rule 23(f) petition. But as the Ninth Circuit itself acknowledged, “other circuits would likely not toll the Rule 23(f) deadline” under similar circumstances, and specifically noted arguably conflicting decisions from the Third, Tenth, and Eleventh Circuits. Id. at 1179–80. Thus, outside of the Ninth Circuit, reliance on the tolling rule established in Lambert may be risky.
The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn A. Scolnick, Bradley J. Hamburger, Joseph P. Vardner, Laura A. Sucheski, and Wesley Sze.
Gibson Dunn are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:
Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (213-229-7726, [email protected])
Kahn A. Scolnick – Los Angeles (213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (213-229-7658, [email protected])
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