We have been following the Frank v. Gaos, 586 U. S. __ (2019) class action case, which presented an opportunity for the U.S. Supreme Court to determine the limits on the use of the cy pres doctrine in the context of class action settlements to distribute damages paid by a defendant company to entities other than the plaintiff class. On March 20, 2019, the U.S. Supreme Court halted Gaos in its tracks, vacating the Ninth Circuit’s decision approving the contested cy pres settlement and remanding the case for further proceedings to determine whether any named plaintiffs had sufficient standing in light of the Supreme Court’s decision in Spokeo, Inc. v. Robins, 578 U. S. ___ (2016). Spokeo established that statutory violations alone, without concrete injury, cannot support Article III standing. The question in Gaos is whether the named plaintiffs’ allegations that Google violated the federal Stored Communications Act, 18 U.S.C. § 2707(c) (SCA) by disclosing their search terms to third-party websites through a particular mechanism known as referral headers is sufficient. The SCA prohibits disclosure of electronic communications being stored by a person or entity providing electronic communication services to the public and creates a private right of action, allowing statutory damages of at least $1,000 per violation. The potential class in Gaos consisted of more than 129 million individuals and covered a period of eight years. Companies facing class action litigation are under enormous pressure and often choose to settle even meritless cases early in the litigation to mitigate risk. The Supreme Court clarified in Gaos that if class action plaintiffs have no standing to sue in the first instance, there is no mechanism for settling the case. This threshold question must be answered before plaintiffs can extract a settlement from defendants.
How It Got This Far
Prior to reaching a settlement agreement, Google moved to dismiss this case in the District Court for lack of standing several times. The company ultimately abandoned the challenge because the Supreme Court dismissed its review of the Ninth Circuit case the District Court had relied upon in finding standing sufficient. The Supreme Court then decided Spokeo and, despite Google bringing Spokeo to its attention, the Ninth Circuit did not address the decision when upholding the District Court’s settlement approval. So, Gaos reached the Supreme Court without consideration of how Spokeo affects the analysis of plaintiffs’ standing and without any objection to standing by the parties. Google articulated the difficulty of its position and the utility of class settlements in its brief opposing the petition for certiorari:
As the standards of the courts of appeals reflect, parties should have the flexibility to compromise cases like this one that limp past the pleadings stage yet still pose a risk of huge liability based on uncertain substantive law at the time of settlement…. given a class size of 129 million individuals and statutory damages of $1,000 (18 U.S.C. § 2707(c)), even the highly remote possibility of class-wide liability in a litigated class action at the time of settlement justified a compromise resolution of the case.
The United States raised the question of standing before the Supreme Court in an amicus brief in support of neither party. After probing the issue during oral arguments, the Supreme Court ordered the parties to file supplemental briefing on standing to aid in its determination of whether to reach the merits of this case.
Clearing the Standing Hurdle
A class action case differs from the more common one-on-one lawsuit in a lot of respects, particularly when it comes to reaching a settlement. In essence, a settlement is an agreement for the plaintiff to accept some form of remediation from a defendant in exchange for giving up a defined scope of further legal claims against the defendant related to that issue. In one-on-one lawsuits, the parties can agree to settlement terms without the intervention of the courts as the rights they are affecting are solely their own. In the class action context, however, a small number of named plaintiffs and class counsel purport to represent the interests of a larger class of absent individuals. And a settlement will be binding on all class members if they do not opt-out, given notice and the opportunity. Therefore, the Federal Rules of Civil Procedure require court supervision over the class action settlement process to ensure that any settlement reached between the named plaintiffs and defendants is “fair, reasonable, and adequate,” and members of the class have an opportunity to object to the settlement terms prior to court approval.
What does not differ in the class action context is the requirement that a plaintiff have standing in order to invoke the jurisdiction of the court to preside over the dispute. The Supreme Court cited to a footnote in its 1976 Simon v. Eastern Kentucky Welf. Rights Org. case, which explained “[t]hat a suit may be a class action…adds nothing to the question of standing, for even named plaintiffs who represent a class ‘must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent.’" Simon did not address the standing requirement in relation to class action settlement approval though. Citing to the Simon footnote, the Supreme Court stated the logic simply in Gaos: “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.” Given the breadth of new legal and factual issues proffered in the supplemental briefs filed with the Supreme Court, it remanded the case for resolution of the standing question in the District Court or Ninth Circuit. The majority stated that “[n]othing in our opinion should be interpreted as expressing a view on any particular resolution of the standing question.”
Rejecting the Cy Pres Settlement
A Supreme Court decision regarding the propriety of the cy pres settlement will have to wait for another day or another case. Justice Thomas, however, asserted that the Gaos plaintiffs had standing and the Court should have rejected the cy pres settlement in this case. In the Dissent, Justice Thomas reiterated his position that “a plaintiff seeking to vindicate a private right need only allege an invasion of that right to establish standing,” and the SCA and state laws plaintiffs relied upon created such private rights. With respect to the settlement terms, Justice Thomas took the position that cy pres payments are not to be considered a form of relief for class members:
Whatever role cy pres may permissibly play in disposing of unclaimed or undistributable class funds, cy pres payments are not a form of relief to the absent class members and should not be treated as such (including when calculating attorney’s fees). And the settlement agreement here provided no other form of meaningful relief to the class.
(citation omitted). Justice Thomas pointed out several shortcomings of the settlement. The fact that class counsel and named plaintiffs received compensation while the class received nothing, strongly suggested to him that the class was not adequately represented, as required by Federal Rule of Civil Procedure 23. He rejected the notion that the settlement was fair or reasonable, as required, when there was no benefit to the class members. And he raised the overarching question of whether or not the class action mechanism was the superior method in a case like this: “I question whether a class action is ‘superior to other available methods for fairly and efficiently adjudicating the controversy’ when it serves only as a vehicle through which to extinguish the absent class members’ claims without providing them any relief.”
Is Justice Thomas’ opinion on the propriety of the cy pres settlement representative of the Court’s position on the merits? We may never hear the Court’s view if the Gaos class plaintiffs cannot overcome the standing hurdles erected by Spokeo. But, as class respondents noted in their supplemental briefing, “[t]hat question, if important, will recur.” We will keep you posted.
About MVA Litigation Blog
Companies are operating in an increasingly globalized and regulated business environment, facing ever-changing and complicated litigation and regulatory challenges. We provide cutting-edge information regarding developments in federal, North Carolina State, and international litigation, as well as in arbitration, regulatory enforcement, and related business practices.
MVA Litigation Blog Updates
- As States Begin to Ease COVID-19 Restrictions, How Are Businesses Faring in Business Interruption Coverage Disputes?
- Is There a Fix for COVID Business Interruption and Event Cancellations Losses on the Horizon?
- Pandemic Risk Insurance Act of 2020 Introduced in Congress – A Federal Backstop for Business Interruption and Event Cancellation Losses
- North Carolina Considering COVID-19 Workers’ Compensation Expansion for Frontline and Essential Workers