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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.

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 in Frank v. Gaos is available at:  Link to Opinion.

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

The complaints alleged that when a user clicked a hyperlink from the technology 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 “referrer 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 III 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 Court 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 Court 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 Court 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 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 Court’s opinion in Spokeo, a divided panel affirmed the trial court’s approval of the class settlement. The Court 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 Court, 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 Court 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 Court observed that neither the district court, nor the 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 Court 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.

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