Privacy Cases Show SCOTUS’s Renewed Interest in Class Actions

The next U.S. Supreme Court term could be a big one for class action practitioners after the court granted two privacy class cases April 30.

The court hasn’t shown the appetite for limiting the class action device that it had before Justice Antonin Scalia died in 2016.

But these grants “may signal the Court’s renewed interest in class actions,” Rhonda Wasserman, professor at the University of Pittsburgh Law School, told Bloomberg Law.

They also may show “Justice Neil Gorsuch’s desire to weigh in on such important questions as cy pres distributions, class arbitration, and class action waivers,” she said. Wasserman’s scholarship focuses on class actions and other complex litigation.

One petition, Frank v. Gaos, asks the court to review a $8.5 million class settlement resolving allegations that Alphabet Inc. subsidiary Google shared user search terms with third parties.

None of the settlement funds would go to class members. Instead, $5.3 million will go to consumer privacy education and research programs as cy pres, meaning the funds are distributed in a way that indirectly benefits class members because it isn’t feasible to compensate them directly.

The other, Lamps Plus Inc. v. Varela, concerns whether class arbitration of employee data breach claims is allowed when the arbitration agreement doesn’t expressly forbid it.

Case Roberts Has Been Waiting For

Chief Justice John G. Roberts Jr. hinted in 2013 that he was interested in getting the cy pres issue before the U.S. Supreme Court.

“In a suitable case, this court may need to clarify the limits on the use of such remedies,” Roberts wrote in a statement accompanying denial of review in a Facebook privacy case, Marek v. Lane.

“Frank v. Gaos provides the court with such an opportunity,” Wasserman said. The court’s decision could provide guidance on whether “settlements that do not even attempt to compensate absent class members” pass muster under the rule that governs class actions, she said.

Ted Frank, the class member who asked the Supreme Court to review the Google deal, said the use of cy pres has decreased since the Marek statement. Frank, director of litigation at the Competitive Enterprise Institute Center for Class Action Fairness in Washington, also filed the petition in Marek.

Overall, parties have realized they need to pull back the reins on cy pres, Frank said. But there are still settlements like the Google deal, which he called “aggressively abusive.”

The parties justified giving settlement funds to cy pres because it wouldn’t be feasible to distribute funds from the deal directly to the 129 million class members who would receive only pennies apiece.

But Frank called that an “absolute misstatement.” There has never been a class action that distributed funds to every class member so those who make claims would likely get more than pennies, he said.

Professor Howard Erichson, who studies complex litigation at Fordham University School of Law in New York, laid out what is at stake in the case.

Unchecked use of cy pres threatens “to undermine the public interest because they are an easy way for class counsel to earn fees—and for defendants to get res judicata—without providing a meaningful remedy to class members,” he said. But banning cy pres altogether could kill class actions where it’s hard to get money to class members.

“Cy pres settlements run amok have become a real problem, but I’m worried about whether the Court will go too far,” Erichson said.

Frank is confident the Google settlement is egregious enough to turn the court against cy pres-only settlements. “This is not a close case,” he said. “We’re going for a nine to nothing decision on this one.”

Counsel for the parties to the Google settlement didn’t respond to requests for comment.

More to Say on Class Arbitration

The Supreme Court has generally favored companies’ rights to use arbitration clauses to keep class actions by employees and customers out of court.

Lamps Plus will give the court the chance to rule explicitly on the ability of employees and consumers to arbitrate their claims on a class basis.

The Ninth Circuit allowed class arbitration by Lamps Plus employees because their employment agreement with the company is ambiguous on whether it allows employees to arbitrate as a group.

But the U.S. Supreme Court held in Stolt-Nielsen S.A. v. Animalfeeds Int’l Corp. that class arbitration is so different from individual arbitration that the arbitrator can’t presume that the parties agreed to it by simply agreeing to arbitrate.

Lamps Plus employees filed a class action after an employee was tricked by a spoof email that appeared to be from a supervisor. She sent copies of current and former employees’ W-2 tax forms to a third party.

The case “demonstrates that the powerful are not using arbitration clauses for speedy resolution, but instead as a tool to eliminate all employee rights in the most egregious circumstances,” class counsel Michele Vercoski told Bloomberg Law.

“Arbitration provisions were not intended to allow companies to not only inflict harm upon employees, but also block meaningful recourse in any forum to such injured employees and effectively avoid any liability for its actions,” Vercoski, partner at McCune Wright Arevalo LLP in Ontario, Calif., said.

Attorney for Lamps Plus, Andrew Pincus, said the company has strong arguments on the merits. “The case deviated significantly from what the court has said in previous decisions on class arbitration,” Pincus, partner at Mayer Brown LLP in Washington, said.

The case doesn’t raise the big question still looming over the arbitration debate: whether employers should be allowed to explicitly bar class arbitration, Erichson said.

“The fact that the Court granted cert in Lamps Plus reflects the Supreme Court majority’s antipathy toward class actions,” Erichson said. “The Supreme Court has made it far too easy for corporations to avoid class actions by using arbitration clauses, and ultimately the solution will arrive by amending the Federal Arbitration Act.”

But change won’t come to the FAA “until the political winds blow differently on these questions than they do today,” he said.