Where Do We Go from Here: Article Iii Standing and Cy Pres-only Settlements in Privacy Class Actions in the Wake of Frank v. Gaos

• Publication year: 2019
• Author: By Bethany Caracuzzo

WHERE DO WE GO FROM HERE: ARTICLE III STANDING AND CY PRES-ONLY SETTLEMENTS IN PRIVACY CLASS ACTIONS IN THE WAKE OF FRANK V. GAOS

By Bethany Caracuzzo¹

I. INTRODUCTION

This term, the Supreme Court heard argument in Frank v. Gaos.² The case involves an objector appeal to a class settlement reached in multi-district litigation against Google, in which plaintiffs allege the internet search engine violated users' privacy by collecting and disclosing their internet search terms to owners of third-party websites. The lead objector and petitioner, Theodore Frank, founder of the Competitive Institute's Center for Class Action Fairness (CCAF), and a frequent opponent of class action settlements, obtained certiorari to a challenge of the settlement, which took the form of an "all cy pres³ settlement" providing for $5.3 million in charitable contributions to several non-profits, including the law schools of lead plaintiff's counsel, in lieu of any monetary or other compensation to an estimated 129 million unnamed class members.⁴

As everyone braced for what the high court had in store for cy pres settlements,⁵ a funny thing happened. At oral argument on October 31, 2018, the justices devoted much of their questioning⁶ to the issue of whether plaintiffs had suffered an "injury-in-fact" sufficient to confer Article III standing as required by the Supreme Court's 2016 ruling in Spokeo, Inc. v. Robins.⁷ Justices Gorsuch and Kavanaugh, who joined the Court after Spokeo was decided, were active in the hearing debate on this issue.⁸ Indeed, the standing question, which had not been formally briefed previously, was of such significance that the Supreme Court ordered the parties to provide post-argument supplemental briefing directed solely to that issue.⁹ That briefing concluded in late December 2018.

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Given the question presented on appeal, the Supreme Court's decision in Frank v. Gaos had the potential to significantly impact privacy class actions in two ways. It could have prohibited, or placed further restrictions on, class action settlements that provide only cy pres relief. Also, with two new justices on the Court, the decision could have altered the Article III standing requirements articulated in Spokeo. Instead, the Court punted on both issues: it vacated the judgment issued by the Ninth Circuit, remanded in a per curiam decision issued March 20, 2019, and directed that the Ninth Circuit or the District Court undertake a Spokeo analysis in the first instance.¹⁰

Although the Supreme Court did not reach the merits of the issues presented, the history of briefing and arguments before the Court provide an important glimpse of the justices' views on Article III standing in the privacy context, and the continued viability of cy pres only settlements in class action cases generally. This article summarizes the parties' briefing and argument on these core questions, as well as the justices' questions on these issues. The article concludes with this author's view of some of the important takeaways from the proceedings.

II. BACKGROUND

A. Pre-Settlement Briefing in the District Court

This case arises from class action claims that Google violated users' privacy by disclosing their Internet search terms to owners of third-party websites.

In October 2010, plaintiff Paloma Gaos filed a class action lawsuit against Google in the U.S. District Court for the Northern District of California. The claimed privacy violations involve browser architecture. When a user submits search terms to Google, it returns a list of websites on a "search results page." When a user then visits a website on the list by clicking on the provided link, that website is privy to the search terms the user originally submitted to Google, as part of the referrer header information collected by Google in the search process.¹¹ Those search terms, plaintiffs contend, can reveal users' highly sensitive or personally identifying information such as real names, street addresses, confidential medical information, racial or ethnic origins, political or religious beliefs or sexuality, and can also disclose a user's IP address, pinpointing the user's exact computer.¹² Plaintiff complained that this application of the search protocol, coupled with Google's "Web History" service, which tracks and stores account holders' browsing activity on Google's servers, was contrary to representations in Google's Terms of Service, and violated users' privacy and other state and federal laws.¹³ Plaintiff also alleged that, with the use of "reidentification" or "deanonymizing of data" processes, a third party may be able to reverse-engineer information divulged in the referrer header to learn the user's identity.¹⁴

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The district court granted Google's first motion to dismiss with leave to amend because Plaintiff Gaos had failed to allege an "injury in fact" sufficient to establish Article III standing.¹⁵ Gaos amended her complaint, and Google again challenged her standing under Article III on the same grounds.¹⁶ The district court agreed with Google as to plaintiff's six common law claims and dismissed them with leave to amend.¹⁷ As to her first cause of action for violation of the federal Stored Communications Act (the "SCA")¹⁸, the district court denied the motion, stating "[t]he injury required by Article III [] can exist solely by virtue of 'statutes creating legal rights, the invasion of which creates standing.'" The court found that the SCA "creates a right to be free from the unlawful disclosure of communications as prohibited by the statute" and that Ms. Gaos had "alleged a concrete and particularized injury in fact as a result of the alleged violation of her rights under the SCA."¹⁹ Plaintiff amended a second time, also adding Anthony Italiano as another representative plaintiff.

A third motion to dismiss again challenging plaintiffs' Article III standing, was filed, briefed, and taken under submission without oral argument. While it was pending, the Supreme Court denied as improvidently granted ("DIG") the appeal in First Financial Corp. v. Edwards²⁰, which questioned whether a statutory violation could support standing. When Edwards was DIG'd, Google withdrew its standing challenge to the SCA cause of action in Gaos, the parties stipulated to the filing of an amended consolidated class action complaint ("CCAC")²¹, the third motion to dismiss was terminated as moot, and the standing issue was never addressed.²² The CACC asserts causes of action for violation of the SCA, as well as common law claims of breach of contract, breach of the covenant of good faith and fair dealing, breach of contract implied in law, unjust enrichment (in the alternative), and declaratory judgment and corresponding injunctive relief, on behalf of an admittedly colossal class of "[a]ll persons in the United States who submitted a search query to Google at any time between October 25, 2006 and the date of notice to the class of certification."²³

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B. The Proposed Cy Pres Only Settlement

The parties then proceeded to mediation and reached a settlement, which they submitted to the district court for preliminary approval in July 2013. The settlement did not require Google to stop providing users' search information via the referrer header to third parties, but instead mandated that Google provide updated information in the FAQ portion of Google's Website informing users what it was doing, and providing users an opportunity to opt out.²⁴ As settlement consideration, the settlement provided that Google would pay a total of $8.5 million in exchange for a release of the claims of the approximately 129 million people who used Google Search in the United States between October 25, 2006 and April 25, 2014 (the date the class was given notice of the settlement).²⁵ Of the $8.5 million to be paid by Google, $2.125 million was to be allocated to attorneys' fees and costs; $15,000 in incentive awards to be paid, in total, to the three named plaintiffs; and approximately $1 million in costs to administer the settlement.²⁶ The settlement proposed that the remaining $5.3 million be distributed entirely to six cy pres recipients, each of which would receive between 15 and 21 percent of the net cy pres money.²⁷

The doctrine of cy pres has a long, historical background, with legal concepts surrounding cy pres potentially dating back to the Roman Empire,²⁸ which is far beyond the scope of this article. The term is derived from the Norman French phrase, "cy pres comme possible," or "as near as possible."²⁹ In the U.S., state courts for some time have utilized cy pres to enforce charitable trusts where it is impossible or impractical to honor the original gift but there is a desire to preserve the general charitable intention of the testator.³⁰

Federal courts use the cy pres doctrine as a remedy in the class action context in two ways.

First, cy pres can be used to distribute unclaimed or non-distributable portions of a class action settlement to the "next best" class of beneficiaries.³¹ This is preferable to having unclaimed class action settlement funds simply revert back to the defendants— thwarting the deterrent impact of civil litigation on defendants' activities—or having funds escheat to the state.

Second, cy pres may be included as part of the settlement consideration itself, as was proposed in Gaos, by directing that a portion of the settlement money go to designated charities. This latter form of cy pres has been held by the Ninth Circuit to be "fundamentally fair" and satisfying the requirements of Rule 23(e) where plaintiffs have shown that it is infeasible to provide monetary payments to absent class members and there is a sufficient nexus between the chosen charitable organization(s) and the harm that the plaintiffs suffered.³²

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C. The District Court Approved the Cy Pres-Only Settlement

The Gaos settlement came before the district court for preliminary settlement approval on August 27, 2013. The...