August 18, 2021 A Benefytt or a Curse: Ninth Circuit Holds That Bristol-Myers Does Not Apply Before Class Certification

Supreme Court Pillars - iStock_000017257808LargeBy: Alexander M. Smith

In 2017, the Supreme Court held in Bristol-Myers Squibb Co. v. Superior Court, 137 S. Ct. 1773 (2017), that a defendant in a mass tort action is not subject to specific personal jurisdiction as to the claims of non-resident plaintiffs whose injuries lack a sufficient connection to the forum state. The Court did not decide, however, whether its holding applied to nationwide class actions. And in the four years following Bristol-Myers, district courts in the Ninth Circuit have reached highly divergent results:

  • Some district courts have “agree[d] . . . that Bristol-Myers Squibb applies in the nationwide class action context” and have dismissed claims brought on behalf of putative nationwide classes, reasoning that “a state cannot assert specific personal jurisdiction for the claims of unnamed class members that would not be subject to specific personal jurisdiction if asserted as individual claims.” Carpenter v. PetSmart, Inc., 441 F. Supp. 3d 1028, 1035 (S.D. Cal. 2020); see also, e.g., Wenokur v. AXA Equitable Life Ins. Co., No. 17-165, 2017 WL 4357916, at *4 (D. Ariz. Oct. 2, 2017) (“The Court notes that it lacks personal jurisdiction over the claims of putative class members with no connection to Arizona and therefore would not be able to certify a nationwide class.”).
  • Other district courts have declined to extend Bristol-Myers to nationwide class actions. Some have reasoned that Bristol-Myers likely does not apply in federal courts at all, or at least not in cases arising under federal law. See, e.g., Pascal v. Concentra, Inc., No. 19-2559, 2019 WL 3934936, at *5 (N.D. Cal. Aug. 20, 2019) (“Bristol-Myers does not apply in this case because Plaintiff asserts his claim in a federal court and under federal law.”); Massaro v. Beyond Meat, Inc., No. 20-510, 2021 WL 948805, at *11 (S.D. Cal. Mar. 12, 2021) (similar). Others have distinguished Bristol-Myers on the basis that it involved a mass tort claim and have “decline[d] to extend Bristol-Myers to the class action context,” reasoning that doing so would “radically alter the existing universe of class action law.” Sotomayor v. Bank of Am., N.A., 377 F. Supp. 3d 1034, 1038 (C.D. Cal. 2019); see also, e.g., Fitzhenry-Russell v. Dr. Pepper Snapple Grp., Inc., No. 17-564, 2017 WL 4224723, at *5 (N.D. Cal. Sept. 22, 2017) (“[T]he Supreme Court did not extend its reasoning to bar the nonresident plaintiffs’ claims here, and Bristol-Myers is meaningfully distinguishable based on that case concerning a mass tort action, in which each plaintiff was a named plaintiff.”).
  • Still others have sidestepped the question of whether Bristol-Myers applies to nationwide class actions by holding that “the claims of unnamed class members are irrelevant to the question of specific jurisdiction” until the court certifies a class. In re Morning Song Bird Food Litig., No. 12-1592, 2018 WL 1382746, at *5 (S.D. Cal. Mar. 19, 2018). These courts have concluded that, “[u]nless and until [the plaintiff] demonstrates that she is entitled to litigate the claims of non-resident potential class members, it is premature for the Court to rule on whether it has jurisdiction over claims belonging to non-resident putative class members.” Robinson v. Unilever U.S., Inc., No. 17-3010, 2018 WL 6136139, at *3 (C.D. Cal. June 25, 2018).

On August 10, 2021, the Ninth Circuit issued a published opinion, Moser v. Benefytt, Inc., --- F.4th ----, that endorsed the third approach and held that it is “premature” for a court to determine at the pleading stage whether it can exercise personal jurisdiction over the claims of putative class members. Although Moser deprives defendants in nationwide class actions of a potential jurisdictional challenge at the pleading stage, it leaves that challenge open later in the case—and makes clear that a defendant does not waive a Bristol-Myers challenge by failing to raise it at the pleading stage.

In Moser, a California resident brought a putative class action under the Telephone Consumer Protection Act against Benefytt, a Delaware corporation with its principal place of business in Florida, and sought to represent a nationwide class. Although Benefytt did not raise Bristol-Myers in its motion to dismiss, it opposed the plaintiff’s motion for class certification by arguing, among other things, that Bristol-Myers precluded the court from exercising personal jurisdiction over the claims of non-resident class members. In its order granting the plaintiff’s motion for class certification, the district court declined to reach the merits of Benefytt’s Bristol-Myers challenge, finding instead that Benefytt had waived any objections to personal jurisdiction by failing to raise them in a motion to dismiss or an answer. After granting Benefytt permission to appeal the class certification order pursuant to Federal Rule of Civil Procedure 23(f), the Ninth Circuit vacated the class certification order and held that Benefytt had not waived its Bristol-Myers challenge.

After concluding that Rule 23(f) authorized it to review the district court’s personal jurisdiction ruling, the Ninth Circuit held that the district court erred by finding that Benefytt had waived its Bristol-Myers defense by failing to raise it in a motion to dismiss. The Ninth Circuit reached this conclusion based on two premises: (1) that Federal Rule of Civil Procedure 12(b)(2) only requires defendants to raise a personal jurisdiction defense if it is “available”: and (2) that “a class action, when filed, only includes the claims of the named plaintiff.” “Putting these points together,” the Ninth Circuit reasoned, showed that Benefytt “did not have ‘available’ a Rule 12(b)(2) personal jurisdiction defense to the claims of unnamed putative class members who were not yet parties to the case.” The Ninth Circuit accordingly concluded that Benefytt “could not have moved to dismiss on personal jurisdiction grounds the claims of putative class members who were not then before the court” and that Benefytt was therefore not “required to seek dismissal of hypothetical future plaintiffs.” In so holding, the Ninth Circuit stressed that its conclusion was consistent with the holdings of the Fifth Circuit in Cruson v. Jackson National Life Insurance Co., 954 F.3d 240 (5th Cir. 2020) and the D.C. Circuit in Molock v. Whole Foods Market Group, Inc., 952 F.3d 293 (D.C. Cir. 2020)—both of which concluded that Bristol-Myers does not apply to the claims of nonresident putative class members until and unless a class is certified.

Although the Ninth Circuit held that Benefytt had not waived its Bristol-Myers challenge and vacated the district court’s class certification order, it declined to reach the underlying question of whether Bristol-Myers applies to nationwide class actions and left that issue for the district court to address on remand. In so holding, the Ninth Circuit suggested—albeit in passing—that the analysis may turn on “additional record development,” potentially including additional discovery as to the extent of Benefytt’s contacts with California. And while the Ninth Circuit did not expressly say so, this conclusion appears inconsistent with the holdings of some district courts that Bristol-Myers is categorically inapplicable in federal court or to nationwide class actions. Nonetheless, regardless of how broadly or narrowly one interprets the Ninth Circuit’s decision, it makes clear that the Bristol-Myers analysis must take place at the class certification stage—and gives defendants comfort that they will not waive their Bristol-Myers defenses by waiting until class certification to raise them.

CATEGORIES: Class Action Settlements, Class Action Trends, Class Certification, US Supreme Court

PEOPLE: Alexander M. Smith

July 8, 2021 Supreme Court Limits Article III Standing for Class Action Plaintiffs: Implications for Data Breach Class Actions

   

By: Clifford W. BerlowAlexander E. Cottingham, and Lindsay C. Harrison

SCOTUSIntroduction

On June 25, 2021, the US Supreme Court in TransUnion LLC v. Ramirez[1] narrowed the scope of Article III standing for plaintiffs who allege the violation of a statute but cannot show they otherwise suffered harm. Though decided in the context of a Fair Credit Reporting Act (FCRA) class action, the decision has major implications for parties litigating state and federal statutory claims of all varieties in federal courts. In particular, TransUnion seems poised to limit the viability of class actions arising from data breaches. The decision likely means, for example, that plaintiffs lack Article III standing when their information may have been accessed but was not misused in a manner causing concrete harm—a subject on which the courts of appeals previously had split. The decision also will limit plaintiffs’ ability to assert Article III standing merely based on the violation of privacy statutes alone without any resulting harm. 

Defendants litigating data breach class actions can take advantage of this new precedent in federal court to seek dismissal of data breach class actions for lack of Article III standing. But doing so is not without consequence. If federal courts are not available to adjudicate these claims, plaintiffs likely will pursue them in state courts, where standing precedent may be more lenient for plaintiffs. Defendants thus will need to be strategic about how aggressively they pursue TransUnion-based dismissals.

Background

A class of 8,185 individuals sued TransUnion under the FCRA for failing to use reasonable procedures to ensure the accuracy of their credit files.[2] Each of their credit reports contained inaccurate information added by TransUnion that mislabeled them as matches for potential terrorists, drug traffickers, or other serious criminals from a list maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC).[3] The parties stipulated that TransUnion actually provided credit information to potential creditors for just 1,853 of those class members, and maintained in its database but did not share with anyone inaccurate credit file information for the remaining 6,332 class members.[4] The question presented was whether the mere existence of inaccurate information, absent dissemination, constituted sufficient harm to supply the basis for Article III standing.[5]

Court’s Opinion

The Court, with Justice Kavanaugh writing for a five-justice majority, held that the class members whose credit reports were distributed had Article III standing because they demonstrated a concrete harm, but the 6,332 class members whose erroneous credit reports were never distributed lacked standing.

The Court’s decision focused on the requirement for Article III standing that the plaintiff allege an injury-in-fact that is “concrete.” In Spokeo v. Robbins,[6] the Court held that a “bare procedural violation” of a statute was not enough to plead a concrete harm.[7] But recognizing that Congress could “elevate” legally cognizable injuries that were previously inadequate,[8] the Court left open exactly when a statutory violation may reflect the kind of concrete harm necessary to confer standing. As a result, courts remained divided over how to evaluate standing where a plaintiff alleged the violation of a state or federal statute. Some circuits focused on whether the harm alleged was a “bare procedural” violation of the statute or an intrusion on a “substantive” statutory right. Other circuits focused on whether the statutory harm alleged bore a “close relationship” to a harm “traditionally” recognized as providing a basis for a lawsuit in American courts.[9] 

In TransUnion, the Court reaffirmed that “Article III standing requires a concrete injury even in the context of a statutory violation” and that a plaintiff does not automatically satisfy the injury-in-fact requirement by pleading the violation of a statute.[10] Then, the Court held that for a harm to be “concrete,” the harm attributable to the claimed statutory violation must bear a “close relationship” to a harm “traditionally” recognized as providing a basis for a lawsuit in American courts.[11] That test narrows the path for Article III standing in those circuits that had previously rejected the “close relationship” test, though lower courts have some room to determine how to apply this test moving forward.

The Court also addressed when a risk of future harm may be sufficiently concrete to supply a plaintiff with Article III standing—another question on which courts remained divided following Spokeo. Although the plaintiffs had urged the Court to hold that a risk of future harm is sufficiently concrete, the Court rejected that theory. In a suit for damages, the Court held that the “mere risk of future harm” does not confer standing unless exposure to the risk of future harm causes a separate concrete harm or the risk of harm materializes into actual harm.[12]

Takeaways for Data Breach Class Actions

While TransUnion addressed standing in the context of the FCRA, its holding on risk of future harm and concrete injury is broadly applicable to data breach class actions. Defendants litigating data breach class actions in federal court regularly move to dismiss for plaintiffs’ lack of Article III standing. In many of those cases, courts face the perennial question of a tree falling in the forest: if a plaintiff’s data is accessed but not misused in a manner causing concrete injury (such as for identity theft), was that person harmed? Courts in different circuits have resolved that question differently, with some accepting broader theories of standing related to risk of future harm than others.[13] Courts deciding those motions now have clear direction from the Supreme Court as to two key issues: a plaintiff’s ability to demonstrate standing based on the mere risk of future harm, and a plaintiff’s ability to demonstrate standing based purely on the violation of a statute.

First, in the context of suits for damages, TransUnion appears to foreclose Article III standing where plaintiffs claim only the risk of future harm from a data breach without actual misuse of their data to cause injury. In TransUnion, the plaintiffs had attempted to demonstrate a risk of future harm, but the Court rejected each of their theories, explaining that they could not plead a “sufficient likelihood” that third parties would request their personal information or that TransUnion would intentionally or accidentally release their information.[14] Those theories are remarkably similar to those pled by plaintiffs in data breach class actions, such as the risk that they will suffer identity theft, or that their information may be sold on the dark web and used to blackmail them. Just as the TransUnion class could not demonstrate standing by theorizing about hypothetical future harms, so too will data breach plaintiffs fail to satisfy Article III by pleading an imaginary parade of horribles yet to befall them.

Second, after TransUnion, plaintiffs may no longer rely on a violation of a statutory right alone to demonstrate Article III standing. In data breach cases, plaintiffs sometimes invoke state privacy statutes to bolster their standing claims, arguing that the violation of a state data breach notification or consumer protection law provides them with standing. Those sorts of arguments are likely to face greater resistance following TransUnion because plaintiffs will have to identify some historical common-law analogue to the statutory violation—a tall task in a data breach suit. Accordingly, TransUnion appears to close the door on several of the more creative arguments plaintiffs have used to assert Article III standing in data breach suits.

What to Look for Now

TransUnion is a clear win for corporate defendants, in particular corporate defendants seeking to dismiss federal class actions arising from data breaches on standing grounds. But the legacy of TransUnion may prove to be more complex, including in data breach cases. 

It is important to remember that the Court’s decision places a limit only on the jurisdiction of federal courts. The states remain free to define the parameters for standing to sue in their own courts.[15] At present, roughly half the states do not have lockstep Article III standing rules.[16] And, as Justice Thomas noted in dissent, courts in states with more lenient standing requirements may still adjudicate statutory claims that now cannot proceed in federal courts under TransUnion.[17] As a result, moving to dismiss federal class actions for lack of standing under TransUnion is not a panacea. Instead, in cases where Article III standing may be lacking under TransUnion, plaintiffs may be able to proceed in state court. And if defendants attempt to remove a state court lawsuit to federal court only to dismiss for lack of standing, courts may not only remand the case, but also may force the defendant to pay the plaintiffs’ attorney’s fees. 

In short, as the doors to the federal courthouse close, companies can expect plaintiffs to cross the street to state court, at least when companies are subject to the jurisdiction of a state that is not in lockstep with federal Article III standing rules. Companies therefore will want to be strategic about how they advocate for the application of TransUnion, bearing in mind local conditions in the states where they are amenable to suit and local standing rules in those states. As a result, the ultimate consequence for corporate defendants of the Supreme Court’s decision to limit Article III standing remains to be seen. 

 

[1] TransUnion LLC v. Ramirez, No. 20 - 297, slip op. (U.S. June 25, 2021).

[2] TransUnion, slip op. at 1.

[3] Id. at 4.

[4] Id. at 5 - 6.

[5] Id. at 6.

[6] 578 U.S. 330 (2016).

[7] Id. at 341.

[8] Id.

[9] Id.

[10] TransUnion, slip op. at 1 (quoting Spokeo, 578 U.S. at 341).

[11] Id. at 9.

[12] Id. at 20–22.

[13] Some courts have accepted broader theories of standing. See, e.g., Attias v. Carefirst, Inc., 865 F.3d 620, 629 (D.C. Cir. 2017); Galaria v. Nationwide Mut. Ins. Co., 663 F. App’x 384, 387–89 (6th Cir. 2016); Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688, 692, 694–95 (7th Cir. 2015); Krottner v. Starbucks Corp., 628 F.3d 1139, 1142–43 (9th Cir. 2010). Other courts have limited standing more narrowly. See, e.g., Tsao v. Captiva MVP Restaurant Partners, LLC, 986 F.3d 1332 (11th Cir. 2021); Beck v. McDonald, 848 F.3d 262, 273–76 (4th Cir.), cert. denied sub nom. Beck v. Shulkin, ––– U.S. ––––, 137 S. Ct. 2307, 198 L.Ed.2d 728 (2017); Whalen v. Michaels Stores, Inc., 689 F. App’x 89, 90–91 (2d Cir. 2017); In re SuperValu, Inc., 870 F.3d 763, 770–72 (8th Cir. 2017); Reilly v. Ceridian Corp., 664 F.3d 38, 42–44 (3d Cir. 2011).

[14] TransUnion, slip op. at 22–23.

[15] State courts “are not bound by the limitations of a case or controversy or other federal rules of justiciability even when they address issues of federal law.” ASARCO Inc. v. Kadish, 490 U.S. 605, 617 (1989).

[16] See Bennett, The Paradox of Exclusive State-Court Jurisdiction Over Federal Claims, 105 Minn. L. Rev. 1211 (2021).

[17] TransUnion, slip op. at 18 n.9 (Thomas, J., dissenting).

CATEGORIES: Class Action Trends, Decisions of Note, US Supreme Court

June 24, 2021 Supreme Court Gives More Tools for Defendants to Challenge Class Certification in Securities Fraud Cases

   

By: Ali M. Arain, Stephen L. Ascher, Howard S. Suskin, and Reanne Zheng

Supreme Court PillarsIntroduction

On June 21, 2021, the US Supreme Court issued its decision in Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System,[1] providing guidance to lower courts regarding class certification in securities fraud class actions. On balance, the opinion favors defendants, and potentially signals a backlash against the tide of securities fraud class actions based on vague and generic misstatements. Importantly, the Court instructed that all relevant evidence should be considered when making the class certification decision, sending a message that lower courts must grapple with and cannot ignore relevant evidence at the class certification stage simply because it overlaps with the merits-related evidence. The Court also stressed that the generic nature of a misrepresentation is often important evidence of lack of price impact, which lower courts should consider when deciding whether to grant or deny a class certification motion. 

Although the Supreme Court’s decision was not as sweeping as the defendants wanted, it does signal the Supreme Court’s concern that companies are too frequently held liable for securities fraud as a result of adverse legal or business developments, even where the company had never made any specific statements about the matters in question.

Background

The underlying facts of this case relate to Goldman’s now well-publicized involvement in the Abacus CDO transaction and subsequent settlement with the SEC in the aftermath of the 2008 financial crisis. In the consolidated complaint, which was filed in 2011, plaintiff shareholders alleged that Goldman had violated securities laws by making repeated misrepresentations in its SEC filings and other public statements in connection with the Abacus CDO transaction, beginning in late 2006/early 2007. The alleged misrepresentations were generic statements regarding Goldman’s conflict of interest policies and business practices, including statements like: “We have extensive procedures and controls that are designed to identify and address conflicts of interest”; “Our clients’ interests always come first”; and “Integrity and honesty are at the heart of our business.” According to the plaintiffs, these alleged misrepresentations allowed Goldman to maintain an inflated stock price until 2010, when the SEC filed a complaint against Goldman for securities fraud. Goldman later disclosed that it had agreed to pay $550 million as part of a settlement with the SEC and acknowledged that it should have disclosed certain conflicts of interest in 2007 when underwriting the Abacus CDO that cost its clients $1 billion.  The plaintiffs argued that once the SEC enforcement action and related news reports revealed that Goldman in fact engaged in conflicted transactions, the stock price dropped and caused Goldman shareholders to suffer losses.

The Southern District of New York denied Goldman’s motion to dismiss, and the plaintiffs moved for class certification. The plaintiffs argued that Goldman’s generic statements regarding its business practices and conflict of interest procedures artificially maintained an inflated stock price. Goldman argued that the alleged misstatements were too generic to have any impact on stock price. Following extensive expert testimony on the issue, the District Court certified the class. The Second Circuit vacated the class certification order, holding that the burden was on Goldman to prove a lack of price impact by a preponderance of the evidence, but that the District Court erred by holding Goldman to a higher burden of proof. On remand, the District Court certified the class again, finding that Goldman’s expert testimony failed to establish by a preponderance of the evidence that the alleged misrepresentations had no price impact. The Second Circuit affirmed in a divided decision, holding the District Court’s price impact determination was not an abuse of discretion. 

The Supreme Court’s Decision

On appeal, the Supreme Court was asked to resolve two questions: first, whether the generic nature of Goldman’s alleged misrepresentations is relevant to the price impact inquiry; and second, whether Goldman has the burden of persuasion to prove lack of price impact.

On the first question, Goldman argued that the Second Circuit erred in holding that the generic nature of alleged misrepresentations was irrelevant to the price impact question. Goldman’s initial position was that generic statements could not impact stock price, while the plaintiffs argued that the generic nature of the alleged misrepresentations had no relevance to the price impact inquiry at all. The parties later agreed that the generic nature of the statements was relevant to price impact and should be considered at the class certification stage. The Court agreed, holding that district courts should consider all probative evidence in assessing price impact and clarifying that courts may consider the generic nature of misrepresentations at class certification “regardless whether the evidence is also relevant to a merits question like materiality.”[2] The Court further explained that the generic nature of an alleged misrepresentation “often will be important evidence of a lack of price impact, particularly in cases proceeding under the inflation-maintenance theory” where it is less likely that a specific, negative disclosure actually corrected a prior generic misrepresentation.[3]  Ultimately, the Court remanded on this issue and instructed the Second Circuit to “take into account all record evidence relevant to price impact” because the Court concluded the Second Circuit’s decision left “sufficient doubt” that it properly considered the generic nature of the statements.[4]

On the second question, Goldman argued that the Second Circuit erred in placing the burden of persuasion on Goldman, as a defendant, to prove a lack of price impact. According to Goldman, the presumption of fraud on the market, articulated in the Court’s seminal Basic v. Levinson ruling,[5] only shifts the burden of production to the defendant, but the defendant can rebut the presumption by producing any competent evidence of a lack of price impact, while the plaintiff carries the burden of persuasion to prove price impact. The Court rejected Goldman’s argument, concluding that a defendant “bears the burden of persuasion to prove a lack of price impact” and agreeing with the Second Circuit that the defendant carries that burden by a preponderance of the evidence.[6] However, the Court noted that, because the parties in most securities fraud class actions typically submit competing expert evidence on price impact, its decision regarding the allocation of the burden was “unlikely to make much difference on the ground.”[7]

Key Takeaways

Overall, the Court’s decision favors defendants by holding that all relevant evidence, including merits-based evidence, should be considered when evaluating price impact at the class certification stage, which gives a lower court more discretion to deny class certification based on the entire record before it. 

In addition, in cases premised on generic misstatements, the Court’s holding should make it easier for defendants to rebut the Basic presumption, given that the Court expressly recognized that the general nature of a misstatement “will often be important evidence of lack of price impact.”[8] Importantly, the Court noted that this is especially true in cases based on the “inflation maintenance” theory, where price impact is the amount of price inflation maintained by an alleged misrepresentation. The Court emphasized that in these type of cases, there is less of a reason to infer front-end price inflation based on a back-end price drop. In doing so, the Court seemed to reject the idea that negative disclosures or allegations of wrongdoing necessarily “correct” prior generic statement by the defendant company. While defendants still bear the burden of disproving price impact, this should make it harder for plaintiffs to succeed in cases relying on inflation maintenance theory unless they can show a link between the front-end price and the back-end price drop.

Finally, on the burden issue, the Court made clear that its holding is unlikely to have much practical effect, noting that the defendant’s burden of persuasion would only become dispositive “in the rare case” in which the parties’ evidence of price impact is perfectly balanced.[9] In most cases, however, the “district court's task is simply to assess all the evidence of price impact — direct and indirect — and determine whether it is more likely than not that the alleged misrepresentations had a price impact.”[10] 

 

[1] Goldman Sachs Grp. Inc. v. Arkansas Tchr. Ret. Sys., No. 20–222, slip op. (U.S. June 21, 2021).

[2] Goldman, slip op. at 7.

[3] Id. at 8.

[4] Id. at 9.

[5] Basic v. Levinson, 485 U.S. 224 (1988).

[6] Id. at 11.

[7] Id. at 12.

[8] Id. at 8.

[9] Id. at 3.

[10] Id. at 12.

CATEGORIES: Class Action Trends, US Supreme Court

April 23, 2021 Supreme Court Limits FTC Authority to Obtain Disgorgement or Restitution, Rejecting Decades of Precedent

By: Gabriel K. GillettMegan B. Poetzel, and Ariana Kanavy

Supreme Court Pillars - iStock_000017257808LargeIn a high-profile decision in AMG Capital Management, LLC v. Federal Trade Commission, No. 19-508 (Apr. 22, 2021), the US Supreme Court held that the Federal Trade Commission’s (FTC) statutory authority to obtain a “permanent injunction” does not permit it to obtain “equitable monetary relief” such as restitution or disgorgement. The Court’s unanimous decision interpreted Section 13(b) of the FTC Act to “mean what it says”[1]—contrary to what the FTC and many courts have long read the statute to mean—and strips the FTC of a tool it has often used in antitrust and consumer protection cases. If the FTC wants that tool back, the Court explained, it must look to Congress.

The path to the Court’s decision is relatively straightforward. In 2012, the FTC sued a payday lender, alleging deceptive practices in violation of § 5(a) of the Federal Trade Commission Act. Invoking § 13(b), which authorizes the FTC to obtain a “permanent injunction” in “proper cases” where a party “is violating, or is about to violate, any provision of law” that the FTC enforces, the FTC asked the District Court to grant a permanent injunction and order $1.27 billion in restitution and disgorgement. The District Court granted the request. On appeal, the Ninth Circuit affirmed based on binding circuit precedent holding that § 13(b) permitted the relief the FTC sought. Two of the three judges on the panel “expressed doubt as to the correctness of that precedent” as well as of similar precedent in at least eight other circuits stretching back more than thirty years.

In a unanimous decision, the Court validated the judges’ skepticism, rejected “precedent in many Circuits,” and held that § 13(b) does not permit the FTC to seek disgorgement and restitution. Looking to the text, the Court reasoned that “the language refers only to injunctions,” contemplates prospective (not retrospective) relief, and “the words ‘permanent injunction’ have a limited purpose” which “does not extend to the grant of monetary relief.”[2] In addition, other provisions of the FTC Act (§ 5(l) and § 19) explicitly provide for limited equitable monetary remedies—but only after the FTC undertakes administrative proceedings that are “more onerous” than simply filing a complaint in federal court, obtains a cease and desist order, and satisfies various other conditions and limitations. Reading § 13(b) to permit the FTC to obtain the same relief without that additional process or those additional requirements “would allow a small statutory tail to wag a very large dog.”[3] By contrast, reading § 13(b) “to mean what it says … produces a coherent enforcement scheme.”[4]

The decision may have a major practical impact on those within the FTC’s purview. With this decision, the Supreme Court has taken away the FTC’s long-used, self-proclaimed “strongest tool” for obtaining monetary relief in cases alleging deceptive business practices, anti-competitive conduct, and fraud.[5] For example, in 2019, the FTC invoked § 13(b) in “49 complaints in federal court and obtained 81 permanent injunctions and orders, resulting in $723.2 million in consumer redress or disgorgement.”[6] And the FTC has been using § 13(b) with increasing frequency. For instance, the FTC “sought disgorgement in anti-trust cases four times between 2012 and 2016,” after seeking that relief only four times “in the prior twenty years.”[7]

Going forward, if the FTC wants disgorgement or restitution in federal court it must first pursue administrative proceedings—and must contend with the statutory limitations on the FTC’s authority and the protections for defendants in Sections 5(l) and 19. As the Supreme Court noted, however, the FTC remains “free to ask Congress to grant it further remedial authority.” The agency has recently done so, and following the decision’s announcement the FTC renewed its call on Congress “to act swiftly to restore and strengthen the powers of the agency.”[8] Time will tell whether Congress heeds that call. Meanwhile State Attorneys General may step up their own efforts to use state law to obtain monetary awards, or to partner with the FTC.[9] So while the AMG decision may be welcome for businesses,[10] it does not immunize them from being targeted for alleged misconduct or from potentially being required to pay large sums as a result.

 

[1] Id. at *10.

[2] Id. at *7.

[3] Id. at *8-9.

[4] Id. at *10.

[5] Statement by FTC Acting Chairwoman Rebecca Kelly Slaughter on the US Supreme Court Ruling in AMG Capital Management LLC v. FTC, Federal Trade Commission (April 22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/statement-ftc-acting-chairwoman-rebecca-kelly-slaughter-us.

[6] Id. at *6.

[7] Id. at *6.

[8] FTC Statement, supra note 5, https://www.ftc.gov/news-events/press-releases/2021/04/statement-ftc-acting-chairwoman-rebecca-kelly-slaughter-us.

[9] See Brief Amici Curiae of States of Illinois, et al. (Dec. 7, 2020), https://www.supremecourt.gov/DocketPDF/19/19-508/156629/20201002130714167_19-508_19-825%20Chamber%20Of%20Commerce%20Amicus.pdf

[10] See, e.g., Brief Amici Curiae of Chamber of Commerce of the United States, et al. (Oct. 2, 2020), https://www.supremecourt.gov/DocketPDF/19/19-508/156629/20201002130714167_19-508_19-825%20Chamber%20Of%20Commerce%20Amicus.pdf

CATEGORIES: US Supreme Court

PEOPLE: Megan B. Poetzel, Gabriel K. Gillett, Ariana Kanavy "Ari"

May 9, 2019 US Supreme Court Holds that Classwide Arbitration is Unavailable Unless the Parties Clearly Agree to It

By: Michael T. BrodyGabriel K. GillettHoward S. Suskin and Adam G. Unikowsky

Supreme Court Pillars - iStock_000017257808LargeOn April 24, 2019, the US Supreme Court issued its decision in Lamps Plus, Inc. v. Varela, No. 17-988, holding that classwide arbitration is not available unless clearly authorized by the parties.[1]  In a 5-4 decision authored by Chief Justice Roberts, the Court reasoned that when an arbitration agreement is ambiguous or silent about classwide arbitration, the parties have not actually agreed to it.[2]  As a result, the Federal Arbitration Act (FAA) does not allow a party to be forced into classwide arbitration based on an ambiguous agreement, even if state-law contract interpretation principles would construe ambiguity against the agreement’s drafter.[3]

Lamps Plus is just the latest in a long string of victories for arbitration advocates.  Building on prior decisions rejecting classwide arbitration in the consumer and employment contexts, the Court has now suggested that classwide arbitration is presumptively unavailable and that a clear expression of intent is required to overcome that presumption.  The practical result is that classwide arbitration may only be available against corporate defendants that specifically subject themselves to it.  And that may be a null (or very small) set, at least for companies that take the majority opinion’s view that classwide arbitration “‘sacrifices the principal ad­vantage of arbitration—its informality—and makes the process slow­er, more costly and more likely to generate procedural morass than final judgment.’”[4]

The Lower Courts Order Classwide Arbitration Based on an Ambiguous Contract

The Lamps Plus case began when a hacker obtained access to tax information for 1,300 Lamps Plus employees.  The purloined information was used to file a fraudulent federal income tax return on behalf of one of company’s employees, Frank Varela.  Varela then sued his employer in federal court, asserting state and federal claims on behalf of a putative class of employees whose tax information had been disclosed.  Lamps Plus moved to compel individual arbitration based on an employment agreement Varela had signed, which said that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.”  The district court agreed that the language compelled arbitration but authorized arbitration on a classwide basis.[5]

Lamps Plus appealed, and the Ninth Circuit affirmed.[6]  The panel recognized that the agreement did not expressly address classwide arbitration but found that failure rendered the agreement ambiguous rather than silent.  Therefore, the panel found its decision was not controlled by Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010), which held that a court may not compel classwide arbitration when an agreement is silent on the subject.  Instead, the Ninth Circuit followed California law to construe the ambiguity against the drafter.  Because Lamps Plus had drafted the ambiguous agreement, the court accepted Varela’s interpretation and allowed classwide arbitration.

The Supreme Court granted cert and reversed.  The majority framed the central question as “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”[7]  No, it held:  “Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration.  The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”[8]  “Like silence,” the majority explained, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[] the principal advantage of arbitration.’”[9]  Nor can the doctrine of interpreting ambiguities against the drafter.  In the majority’s view, that canon of construction is a rule of public policy that “is by definition triggered only after a court determines that it cannot discern the intent of the parties,” and therefore “cannot be applied to impose class arbitration in the absence of the parties’ consent.”[10]

Justices Ginsburg, Breyer, Sotomayor and Kagan each wrote a dissent.  Across nearly three times the number of pages as the majority, they contended that the Court lacks jurisdiction; the FAA is inapplicable for contracts where the parties had unequal bargaining power; classwide arbitration is not fundamentally different from bilateral arbitration; and neutral state-law rules of contract interpretation are not preempted by the FAA because they do not conflict with it.

What’s Next for Arbitration at the Court?

The Court’s pro-arbitration bent is by now well-known and well-established.  Earlier this term, the Court surprised some by handing down unanimous decisions in two different arbitration cases.[11]  Lamps Plus demonstrates that the Court’s trend of issuing sharply divided, defendant-friendly arbitration decisions is not likely to change any time soon.  The Court has not yet added any arbitration-related cases to its docket for October Term 2019,[12] and no notable petitions are currently pending.[13]  But a footnote in Lamps Plus may light the way to at least one open issue the Court could address in the future:  “whether the availability of class arbitra­tion is a so-called ‘question of arbitrability,’” and is thus a gateway issue to be decided by a court rather than an arbitrator.[14]

Jenner & Block has substantial experience in arbitration and class action disputes and appeals.  Partner Adam Unikowsky represented the Retail Litigation Center as amicus curiae at the Supreme Court in Lamps Plus.  Both Mr. Unikowsky and Associate Gabriel Gillett, members of Jenner & Block’s Appellate and Supreme Court Practice, have represented clients in cases involving arbitration and class actions across the country.  Partners Michael Brody and Howard Suskin, co-chairs of Jenner & Block’s Class Action Practice Group, have represented many clients in efforts to enforce and limit arbitration clauses.  Mr. Suskin serves as an arbitrator for the American Arbitration Association, FINRA, CBOE and NFA and has substantial experience interpreting the scope of arbitration clauses. 

 

 

[1]  -- S. Ct. --, 2019 WL 1780275 (Apr. 24, 2019).

[2]  Slip op. 8.

[3]  See id. at 9-12.

[4]  Id. at 8 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350 (2011)).

[5]  Varela v. Lamps Plus, Inc., 2016 WL 9110161 (C.D. Cal. Jul. 7, 2016).

[6]  Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017).

[7]  Slip op. at 6.

[8]  Id.

[9]  Id. at 8 (quoting Concepcion, 563 U.S. at 348).

[10]  Id. at 10-12.

[11]  See New Prime v. Oliveira, 139 S. Ct. 532 (2019); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

[12]  See https://www.scotusblog.com/case-files/terms/ot19/.

[13]  See https://www.scotusblog.com/case-files/petitions-were-watching/.

[14]  Slip op. at 9 n.4 (citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569, n. 2 (2013)).

CATEGORIES: US Supreme Court

May 9, 2019 US Supreme Court Holds that Classwide Arbitration is Unavailable Unless the Parties Clearly Agree to It

   

By: Michael T. BrodyGabriel K. GillettHoward S. Suskin and Adam G. Unikowsky

Supreme Court Pillars - iStock_000017257808LargeOn April 24, 2019, the US Supreme Court issued its decision in Lamps Plus, Inc. v. Varela, No. 17-988, holding that classwide arbitration is not available unless clearly authorized by the parties.[1]  In a 5-4 decision authored by Chief Justice Roberts, the Court reasoned that when an arbitration agreement is ambiguous or silent about classwide arbitration, the parties have not actually agreed to it.[2]  As a result, the Federal Arbitration Act (FAA) does not allow a party to be forced into classwide arbitration based on an ambiguous agreement, even if state-law contract interpretation principles would construe ambiguity against the agreement’s drafter.[3]

Lamps Plus is just the latest in a long string of victories for arbitration advocates.  Building on prior decisions rejecting classwide arbitration in the consumer and employment contexts, the Court has now suggested that classwide arbitration is presumptively unavailable and that a clear expression of intent is required to overcome that presumption.  The practical result is that classwide arbitration may only be available against corporate defendants that specifically subject themselves to it.  And that may be a null (or very small) set, at least for companies that take the majority opinion’s view that classwide arbitration “‘sacrifices the principal ad­vantage of arbitration—its informality—and makes the process slow­er, more costly and more likely to generate procedural morass than final judgment.’”[4]

The Lower Courts Order Classwide Arbitration Based on an Ambiguous Contract

The Lamps Plus case began when a hacker obtained access to tax information for 1,300 Lamps Plus employees.  The purloined information was used to file a fraudulent federal income tax return on behalf of one of company’s employees, Frank Varela.  Varela then sued his employer in federal court, asserting state and federal claims on behalf of a putative class of employees whose tax information had been disclosed.  Lamps Plus moved to compel individual arbitration based on an employment agreement Varela had signed, which said that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.”  The district court agreed that the language compelled arbitration but authorized arbitration on a classwide basis.[5]

Lamps Plus appealed, and the Ninth Circuit affirmed.[6]  The panel recognized that the agreement did not expressly address classwide arbitration but found that failure rendered the agreement ambiguous rather than silent.  Therefore, the panel found its decision was not controlled by Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010), which held that a court may not compel classwide arbitration when an agreement is silent on the subject.  Instead, the Ninth Circuit followed California law to construe the ambiguity against the drafter.  Because Lamps Plus had drafted the ambiguous agreement, the court accepted Varela’s interpretation and allowed classwide arbitration.

The Supreme Court granted cert and reversed.  The majority framed the central question as “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.”[7]  No, it held:  “Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration.  The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”[8]  “Like silence,” the majority explained, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice[] the principal advantage of arbitration.’”[9]  Nor can the doctrine of interpreting ambiguities against the drafter.  In the majority’s view, that canon of construction is a rule of public policy that “is by definition triggered only after a court determines that it cannot discern the intent of the parties,” and therefore “cannot be applied to impose class arbitration in the absence of the parties’ consent.”[10]

Justices Ginsburg, Breyer, Sotomayor and Kagan each wrote a dissent.  Across nearly three times the number of pages as the majority, they contended that the Court lacks jurisdiction; the FAA is inapplicable for contracts where the parties had unequal bargaining power; classwide arbitration is not fundamentally different from bilateral arbitration; and neutral state-law rules of contract interpretation are not preempted by the FAA because they do not conflict with it.

What’s Next for Arbitration at the Court?

The Court’s pro-arbitration bent is by now well-known and well-established.  Earlier this term, the Court surprised some by handing down unanimous decisions in two different arbitration cases.[11]  Lamps Plus demonstrates that the Court’s trend of issuing sharply divided, defendant-friendly arbitration decisions is not likely to change any time soon.  The Court has not yet added any arbitration-related cases to its docket for October Term 2019,[12] and no notable petitions are currently pending.[13]  But a footnote in Lamps Plus may light the way to at least one open issue the Court could address in the future:  “whether the availability of class arbitra­tion is a so-called ‘question of arbitrability,’” and is thus a gateway issue to be decided by a court rather than an arbitrator.[14]

Jenner & Block has substantial experience in arbitration and class action disputes and appeals.  Partner Adam Unikowsky represented the Retail Litigation Center as amicus curiae at the Supreme Court in Lamps Plus.  Both Mr. Unikowsky and Associate Gabriel Gillett, members of Jenner & Block’s Appellate and Supreme Court Practice, have represented clients in cases involving arbitration and class actions across the country.  Partners Michael Brody and Howard Suskin, co-chairs of Jenner & Block’s Class Action Practice Group, have represented many clients in efforts to enforce and limit arbitration clauses.  Mr. Suskin serves as an arbitrator for the American Arbitration Association, FINRA, CBOE and NFA and has substantial experience interpreting the scope of arbitration clauses. 

 

 

[1]  -- S. Ct. --, 2019 WL 1780275 (Apr. 24, 2019).

[2]  Slip op. 8.

[3]  See id. at 9-12.

[4]  Id. at 8 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350 (2011)).

[5]  Varela v. Lamps Plus, Inc., 2016 WL 9110161 (C.D. Cal. Jul. 7, 2016).

[6]  Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017).

[7]  Slip op. at 6.

[8]  Id.

[9]  Id. at 8 (quoting Concepcion, 563 U.S. at 348).

[10]  Id. at 10-12.

[11]  See New Prime v. Oliveira, 139 S. Ct. 532 (2019); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

[12]  See https://www.scotusblog.com/case-files/terms/ot19/.

[13]  See https://www.scotusblog.com/case-files/petitions-were-watching/.

[14]  Slip op. at 9 n.4 (citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569, n. 2 (2013)).

CATEGORIES: Arbitration, Decisions of Note, US Supreme Court