Since the beginning of 2017 there have been a number of decisions issued by the Courts that have changed the legal landscape for businesses defending class actions in California. This article touches briefly on the decisions during that time that we see as the most significant.
Class actions for data breaches
The Ninth Circuit held in In re Zappos.com, Inc. that consumers need not plead additional harm from the use of stolen data to state a claim against a company when consumer information is taken in a data breach. (9th Cir. 2018) 888 F.3d 1020, 1023. Consumers filed class claims against Zappos.com, Inc. (“Zappos”) following the alleged hacking of its systems and the theft of names, credit card information, and contact information of more than 24 million customers. The claim alleged facts about the hacking and theft of the information, but made no allegations as to the subsequent use of the stolen information by the hackers and harm resulting from it. The District Court dismissed the claims, finding the allegations were insufficient to establish Article III standing (Article III standing is a constitutional requirement related to the limitations on the power of the Courts to only decide actual disputes). Plaintiffs appealed.
The issue for the Court was whether the plaintiff consumers had sufficiently alleged a controversy and harm so as to have Article III standing, when all that they alleged was the theft of the protected information. Essentially, the Court had to decide whether consumers can state a claim once a company’s systems are breached and customer information is stolen, or if the consumers have to suffer and plead some additional harm to state a claim. The 9th Circuit previously issued a decision in Krottner v. Starbucks Corp., which held that allegations of the theft of sensitive information is sufficient for Article III standing. 628 F.3d 1139 (9th Cir. 2010).
But in 2013 the U.S. Supreme Court (SCOTUS) decided Clapper v. Amnesty Intern. USA (2013) 568 U.S. 398, 401, a suit against the Director of National Intelligence seeking to end the Federal Government’s practice of surveilling communications between U.S. Citizens and foreign nationals. Amnesty International argued that because it has foreign contacts, the Federal Government could collect its communications, and the policy caused Amnesty International to incur costs to make its communications untraceable. The SCOTUS held that the claims lacked Article III standing, because it was not sufficiently imminent and definite that the Federal Government would be collecting the communications, and expenditures to address a possible future harm are not sufficient. And Zappos successfully argued in the District Court thatClapper required the Court to dismiss the claims because the existence of harm to the consumers was speculative, as they had not alleged any such harm caused by the data breach.
The 9th Circuit reversed the District Court in Zappos.com and held that the plaintiffs who only allege the theft of their data, and not any subsequent harm, have Article III standing. Among other grounds, the 9th Circuit pointed to a subsequent US Supreme Court decision to Clapper that reemphasized Article III standing if either “the threatened injury is certainly impending or there is a substantial risk that harm will occur.” The 9th Circuit noted that even Clapper acknowledged that other cases found standing if there was a “substantial risk” of harm. Had the Court determined that some discreet additional harm was required to be alleged, that would have opened the door for arguments that individual issues predominate and the class should not be certified at all. At the very least, it would limit the class to those that had suffered some discreet additional harm. It is now well settled that Article III standing exists where plaintiffs allege their information was taken in a data breach, and that the information taken is sensitive enough to enable fraud.
Class actions for TCPA claims, including unsolicited calls or text messages
More than a year before the Ninth Circuit’s decision on Article III standing with regards to data breach claims, the Court issued its decision in Van Patten v. Vertical Fitness Group, LLC decision closing that line of attack on claims for violation of the Telephone Consumer Protection Act, commonly referred to as the “TCPA.” (9th Cir. 2017) 847 F.3d 1037. TCPA claims are typically the Federal claims brought against a business when a consumer seeks class relief for the receipt of unwanted automated phone calls or text messages. While the Court ultimately found that the plaintiff consumer had given express consent to receive the message he received and defendants prevailed, the Court explained that the plaintiff had Article III standing. The Court held that Congress made “specific findings that ‘unrestricted telemarketing can be an intrusive invasion of privacy’ and are a ‘nuisance,’” and that such an injury is sufficient to confer Article III standing. Essentially the Court determined that every TCPA claim alleging an unconsented to marketing call or text message has Article III standing.
Enforceability of arbitration agreements by non-signatories to the agreements
InIn re Henson (9th Cir. 2017) 869 F.3d 1052, 1056, the 9thCircuit held that a third-party marketing company could not enforce the arbitration agreement between consumers and their wireless carrier. Plaintiffs alleged that Turn, Inc. entered into an agreement with Verizon to gain access to subscriber phones and used that access to install “zombie cookies,” data packets that tracked the consumer’s browsing and secretly transmitted that information to Turn. Turn then sold the data to advertising clients to target ads. The Plaintiffs alleged that the “zombie cookies” were concealed on user phones, and that even after death of the cookies when consumers cleared cookies and browsing history, the cookies could regenerate with all of the prior data upon the consumer visiting a partner website. (partner websites were alleged to include Google and Facebook).
The Court reversed the District Court’s granting of the petition to compel arbitration and staying the action, on the grounds that Turn was not a signatory to the agreement, and that estoppel did not apply. Estoppel would apply if the consumers were seeking to enforce the agreement containing the arbitration provision against Turn, or if the allegations against Turn were inextricably linked to Verizon and the agreement. The Court found that plaintiff’s claims did not arise from the agreement, but rather Turn’s conduct of installing the zombie cookies. The Court also found that the claims against Verizon and Turn were not substantially interdependent so as to conclude that Plaintiffs were suing Turn on the same facts as they would sue Verizon, but not naming Verizon so as to avoid arbitration. The Court noted that Plaintiffs had alleged that “Turn conducted its practices in secret and acted without Verizon's knowledge, consent, or approval,” and Verizon had publicly rebuked Turn. Given the ubiquity of arbitration provisions in consumer contracts, this case serves as a good reminder of what is required for a third-party to be able to enforce the terms of such a provision.
Class action settlements for nation-wide classes
In In re Hyundai & Kia Fuel Economy Litigation, 881 F.3d 679 (9th Cir. 2018), the 9th Circuit sided with objectors and vacated a nationwide class settlement for claims of misrepresentations of fuel economy. The district court failed to analyze whether it was proper to apply California law to consumer claims in other states. The district court failed to conduct a choice of law analysis on the reasoning that the fact it was certifying a settlement meant that the analysis was unnecessary. The Court soundly rejected that reasoning, and held that if anything the settlement context requires heightened scrutiny. This cases stands for the proposition that appellate courts will be closely scrutinizing settlements that seek to apply the law of one state to another, and it is not sufficient for approval of the settlement that neither party to the underlying action objected to the application of one state’s law.
The circuit court cited also held that reversal was warranted because the district court failed to cite sufficient evidence to establish that all class members had been exposed to the misrepresentations, because evidence of marketing campaigns for every vehicle model were not discussed or referenced. The circuit court also held that even though Monroney stickers listing inaccurate fuel mileage were required to be posted on new vehicles, that was not sufficient to establish all class members had been exposed to the misrepresentations because used car buyers would not have seen the Monroney stickers. It is clear from this holding that even in the settlement context the parties will be required to submit evidence as to the exposure of all class members to misrepresentations in advertising as to every product at issue.
Expert evidence for class certification
In a recent case a California Appellate Court held that expert evidence submitted in support of a motion for class certification should only be accepted by the Court if it meets the same standard as expert evidence to be submitted at trial. Apple Inc. v. Superior Court of San Diego County, 19 Cal. App. 5th 1101, 1106 (2018). The standard for the admissibility of expert evidence in California Courts was elucidated by the California Supreme Court in Sargon Enterprises, Inc. v. University of Southern California, 55 Cal. 4th 747 (2012), which applies a similar analysis to that used in Federal Courts. This decision now brings the law regarding the admissibility of expert evidence on class certification in California Courts more closely to the requirements in Federal Court, “as Federal courts apply their analogous standard … in connection with class certification motions.” Apple, 19 Cal. App. 5that 1119. This means that class plaintiffs will have to expend the resources necessary to develop expert evidence and a viable theory of damages before defendants are forced to litigate the question of class wide liability.
Enforceability of arbitration agreements in employee agreements
As discussed in a recent article two of our attorneys published in Law360, the US Supreme Court in Epic Systems v. Lewis held that arbitration provisions with class action waivers in employment agreements are enforceable. This development, which allows employers to require all employees to bring claims as individuals in arbitration, rather than on behalf of a class in court, promises to greatly limit employment class actions.
Filing of successive class actions after class certification in an earlier action is denied
As discussed in greater detail in a separate article, the United States Supreme Court recently held in China Agritech, Inc. v. Resh, et al., No. 17-432 (U.S. June 11, 2018), that the statute of limitations is not tolled for class claims during the pendency of a class action. Put another way, if the Court denies class certification in one class action and the statute of limitations has now run on those claims, another Plaintiff cannot file a new class action on the same claims. This has important implications for class action defendants, in that it prevents defendants from having to make settlement payments in order to avoid never ending litigation. Now businesses may defend class claims knowing that if they defeat class certification in the actions that are timely brought, they will not face never-ending, successive class actions.
Class action for violations of the Unfair Competition Law alleging the sale of items in an outlet store that had never been sold in a mainline store
In Rubenstein v. GAP, Inc. Plaintiff alleged class claims premised on the allegations that products sold in GAP and Banana Republic outlets were never sold in mainline stores, were of lesser quality, and this information was never disclosed to consumers. (2017) 14 Cal.App.5th 870, 874. The appellate court ultimately affirmed the trial court’s dismissal of the claims without leave to amend.The Court noted that Plaintiff’s allegations included “no advertising or promotional materials or any other statements disseminated by Gap to consumers that its factory store clothing items were previously for sale in traditional Gap stores or were of a certain quality.” Id. at 876. The Attorney General filed an amicus brief arguing that the Court should examine “the context of a business practice to determine whether it is likely to deceive consumers by reinforcing their misleading expectations or assumptions”. Id. at 879. Thankfully, the Court declined the Attorney General’s invitation and held that the fraud prong of the Unfair Competition Law requires that Plaintiffs plead a false or misleading statement, or a duty to disclose.
The Court also rejected Plaintiff’s argument that the allegations sufficiently alleged a violation of the unfair competition law’s unfair prong. The Court elucidated that “a business practice is ‘unfair’ if (1) the consumer injury is substantial; (2) the injury is not outweighed by any countervailing benefits to consumers or competition; and (3) the injury could not reasonably have been avoided by consumers themselves.” Id. at 880.The Court noted consumers could have avoided the alleged injury by asking sales associates if the items were identical to mainline stores, could have examined the quality of the products, read the labels regarding the materials, and returned the products if they were not satisfied. For the same reason the Court felt any alleged injury was not substantial. Id. By holding the line on what is required to plead violations of the unfair and fraudulent prongs of the Unfair Competition Law, despite the Attorney General’s Amicus brief, the court has retained some certainty as to the requirements of Unfair Competition Law claims.
Class action settlements where the class receives nothing of direct value, because the settlement is a cy pres award or injunctive relief
In Koby v. ARS National Services Inc. the district court certified a settlement class of consumers from whom ARS sought to collect debts. (9th Cir. 2017) 846 F.3d 1071, 1074. Each of the named Plaintiffs received $1,000, the maximum statutory penalty since they had no quantifiable actual damages. Based on its net worth, Defendant could only be forced to pay a maximum of $35,000 total as statutory damages, but also agreed to pay nearly twice that as attorney fees. 4 million unnamed class members were to receive nothing under the settlement, as the $35,000 was to be donated to a veteran’s charity. The 9thcircuit reversed the grant of class certification and approval of the settlement, holding that it was not reasonable for settlement class members to receive nothing of value. The injunctive relief to prevent debt collectors from leaving voicemails was deemed by the court to be valueless, because class members would not have received additional voicemails unless they accrued another debt which was assigned to ARS for collection. The cy pres to the veterans charity was deemed to be of no value to the class because it was insufficiently related to the nature of the case.
In In re Subway Footlong Sandwich Mktg. & Sales Practices Litig., the seventh circuit similarly recognized: “[a] class action that ‘seeks only worthless benefits for the class’ and ‘yields [only] fees for class counsel’ is ‘no better than a racket’ and ‘should be dismissed out of hand.’” 2017 U.S. App. LEXIS 16260 (7th Cir. Aug. 25, 2017). The court further warned that “[n]o class action settlement that yields zero benefits for the class should be approved[.]” There the injunctive relief to ensure the length of the sandwich bread was closer to 12 inches, despite the fact that the same amount of dough was always used, was deemed by the court to be worthless.
Cy pres settlements are not all doomed from the start. In In re Google Referrer Header Privacy Litigation, the Court approved a cy pres settlement, but made clear that cy pres settlements are the exception, not the norm, and only “appropriate where the settlement fund is non-distributable because the proof of individual claims would be burdensome or distribution of damages costly.” (9th Cir. 2017) 869 F.3d 737, 741, cert. granted sub nom. Frank v. Gaos (2018) 138 S.Ct. 1697. That said, a dramatic change of the law regarding the viability of cy pres settlements is likely in the near future, as the Supreme Court of the United States will review the ninth circuit’s decision, and issue a ruling at the end of the next term.
Securities class action in the 2nd circuit
While not binding on the federal courts in California, the second circuit’s decision in Waggoner v. Barclays PLC, is likely to be accepted by courts in California as sound, persuasive precedent. (2d Cir. 2017) 875 F.3d 79, 84–85, cert. denied (2018). Plaintiff in Waggoner alleged securities class claims on behalf of purchasers of Barclay’s American Depository shares. The suit alleged claims premised on Barclay’s representations to its investors that it monitored certain metrics to protect the investors from high frequency traders. On opposition to class certification Barclays argued that certification should be denied because the plaintiffs had failed to offer evidence tying the misrepresentations to an impact on the price of the security. The second circuit affirmed the application of “fraud-on-the-market” presumption of reliance, the presumption that investors relied on the false or misleading representations that impacted the price. The district court held and the second circuit affirmed that the burden is on defendant to establish by a preponderance of the evidence that the misrepresentations did not have an impact on the price. The second circuit ultimately affirmed the district court’s grant of class certification. If Barclays had succeeded in shifting the burden to Plaintiffs by requiring direct evidence that the misrepresentation impacted the price, it would have greatly limited the success of future securities claims.