State consumer-protection statutes frequently authorize claims for class-wide injunctive relief; notably, California courts have fashioned a similar remedy allowing for injunctions on behalf of the “general public.” Plaintiffs bringing class actions alleging that a company’s advertising is deceptive or misleading frequently tack on to their damages claims a request to enjoin the disputed marketing—sometimes to halt allegedly false advertising and sometimes to require the company to disclose some allegedly concealed fact about its product or service. These types of injunction claims are especially common in cases against food and beverage companies. But it is difficult to square these injunction claims with Article III standing requirements, and companies defending against class actions in federal court should be aware of the potential for seeking dismissal of requests for injunctive relief on standing grounds.Continue Reading The importance of scrutinizing standing to seek injunctive relief in defending or settling false-advertising suits
Supreme Court declines to hear challenge to validity of incentive awards
A common feature in class action settlements is an incentive (or service) award for each named plaintiff—an extra payment above and beyond what they would receive as ordinary class members that is in theory designed to compensate them for the work of being a named plaintiff. A circuit split has developed over whether incentive awards are permissible in federal class action lawsuits. But the Supreme Court’s guidance on whether these awards are improper will have to await another day, because the Court recently denied the petitions for review in Johnson v. Dickenson, No. 22-389, and Dickenson v. Johnson, No. 22-517.Continue Reading Supreme Court declines to hear challenge to validity of incentive awards
Supreme Court hears oral argument in cases involving stays pending appeals of orders denying motions to compel arbitration
This morning we attended the Supreme Court’s oral arguments in Coinbase, Inc. v. Bielski. The issue presented in Coinbase is a procedural one, but of tremendous practical importance to defendants that seek to enforce arbitration agreements: does an appeal from an order denying a motion to compel arbitration automatically stay further proceedings in the district court during the appeal?Continue Reading Supreme Court hears oral argument in cases involving stays pending appeals of orders denying motions to compel arbitration
US Chamber of Commerce Institute of Legal Reform releases report on mass arbitration, its abuses, and how to prevent them
The plaintiffs’ bar has been trying to kill arbitration for more than a decade. But the courts have repeatedly rejected efforts to invalidate arbitration agreements. These lawyers have therefore switched to a different tactic: mass filing of arbitration demands.
When a single law firm or group of firms files 20,000 or 50,000 or 100,000 demands, does it really intend to resolve those claims on the merits? Or is the goal to use the costs of instituting an arbitration—which are disproportionately borne by companies when consumers or employees initiate arbitration—to coerce a settlement without regard to the merits of the underlying claim? If, for example, a company would immediately have to pay more than $10 million in fees upon the filing of 5,000 arbitration demands, just to be able to contest the merits, and thousands more for each claim that actually goes to arbitration—then paying a hefty settlement can seem like the only realistic option.
The U.S. Chamber of Commerce Institute of Legal Reform just issued a 75-page in-depth analysis of the mass arbitration phenomenon—Mass Arbitration Shakedown: Coercing Unjustified Settlements—that we authored. It documents the rise of mass arbitrations, the abusive consequences of these filings, and the ethical problems they present. We also suggest solutions that preserve the key benefit of arbitration—speedy, less-costly merit-based decisions—while also ensuring access to fair resolution of claims for injured consumers and employees.
Below the fold is a summary of the white paper.Continue Reading US Chamber of Commerce Institute of Legal Reform releases report on mass arbitration, its abuses, and how to prevent them
Fifth Circuit affirms striking class allegations at the pleadings stage
Win or lose, class actions that make it past the pleadings threaten businesses with enormous defense costs, especially the costs associated with class-wide discovery. As we’ve discussed before on this blog, one powerful tool for defendants to avoid these costs is to file an early motion to strike class allegations, taking a shot at nipping the class action in the bud when it is apparent from the pleadings that a class cannot be certified.
We were therefore pleased to see the Fifth Circuit recently join the growing ranks of courts that have endorsed pre-discovery motions to strike class allegations. In Elson v. Black, 56 F.4th 1002 (5th Cir. 2023), the court affirmed the district court’s order striking plaintiffs’ class allegations in their entirety. (The court also affirmed in large part the dismissal of the individual plaintiffs’ claims.)Continue Reading Fifth Circuit affirms striking class allegations at the pleadings stage
Illinois Supreme Court’s Most Recent BIPA Decision Exponentially Increases Potential Exposure for Businesses
The Illinois Supreme Court recently issued another decision interpreting the Biometric Information Privacy Act (“BIPA”) to expand potential liability for businesses. The court held in Cothron v. White Castle that each time a business collects or discloses an individual’s biometric data without first obtaining BIPA-compliant consent (for example, each time an employee clocks in and out of work using a fingerprint timekeeping system), a separate claim accrues under BIPA. My colleagues and I have written a report about the court’s decision.
Ninth Circuit Upholds Injunction Blocking a California Law That Would Have Severely Limited Employment Arbitration Agreements
Earlier this week, a Ninth Circuit panel sided with a coalition of business groups to affirm a preliminary injunction that stopped California state officials from enforcing California’s AB 51, a 2019 law that would have effectively prevented the formation of employment arbitration agreements in California. (Mayer Brown lawyers filed the lawsuit on behalf of the U.S. Chamber of Commerce and the California Chamber of Commerce and led briefing and argument in the Ninth Circuit.) This decision eliminates the considerable uncertainty about the use of arbitration to resolve employment disputes that had been caused by the enactment of AB 51 and makes clear that California may not circumvent the FAA’s requirement that arbitration agreements be enforced by trying to block their formation on the front end.
This Legal Update that my colleagues and I authored provides more information about the case and the Ninth Circuit’s new opinion.
The Courts of Appeals’ Rigorous Application of TransUnion’s Standing Analysis Continues To Provide Defendants With Strong Arguments For Defeating Non-Injury Class Actions
Motions to dismiss federal-court actions based on a lack of Article III standing are succeeding more frequently—thanks to the Supreme Court’s 2021 decision in TransUnion LLC v. Ramirez. That ruling reaffirmed and clarified that every plaintiff must plausibly allege a “concrete injury” that is “‘real,’ and not ‘abstract,’” even when the plaintiff claims a violation of federal statutory rights.
This past June, the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) issued TransUnion and Concrete Harm: One Year Later, a 68-page report that we authored for ILR. It explains the multiple arguments made available, or strengthened, by TransUnion and discussed key post-TransUnion lower court decisions.
TransUnion continues to be applied by dozens of federal courts each month. Several federal court of appeals decisions issued since June provide powerful additional support for defendants’ arguments.
In this post, we summarize TransUnion’s impact on standing jurisprudence and explain how those arguments gain additional support from recent appellate decisions.
Background—TransUnion’s explication of the concrete harm inquiry
TransUnion has its roots in the modern phenomenon of no-injury class actions—cases based on statutes creating private causes of action that give plaintiffs the option of seeking either actual damages based on harm suffered, or statutory damages (a specified minimum amount per statutory violation). Plaintiffs’ lawyers used the statutory damages option to multiply damages claims into tens or hundreds of millions of dollars, asserting that an entire class could recover by alleging a bare statutory violation without any actual injury.
The Supreme Court rejected that argument in Spokeo, Inc. v. Robins (which our team litigated), holding that “concrete injury” is required. But a number of lower courts read Spokeo narrowly, and continued to uphold standing in the absence of real-world injury.
TransUnion closed the door on those arguments. It rejected decisions limiting Spokeo to “procedural” statutory violations and those finding standing based on harm to generalized statutory “interests” rather than real-world harm to the plaintiff.
It also clarified the content of the concrete harm requirement. The Court:
- Reiterated that, to qualify as sufficiently concrete, a claimed intangible injury must bear “a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.” The ultimate reference point is the harms actionable at the Founding—because the question is whether the claim satisfies Article III’s limitation of the judicial power to “Cases” and “Controversies”—but injuries with a lengthy common-law pedigree may also satisfy the “close relationship” standard;
- Confirmed that Congress may create causes of action to redress real-world concrete harms that were not previously actionable, but it may not displace the concrete harm requirement and courts ultimately must determine for themselves whether the asserted harm satisfies the constitutional standard;
- Rejected the notion, endorsed by some lower courts, that when a statute requires a party to provide information and the party fails to do so, the failure to provide information by itself constituted a concrete injury satisfying Article III—real-world harm resulting from the failure to provide information is required to establish standing; and
- Held that a risk of future harm that has not materialized cannot support standing to recover statutory damages.
In addition, TransUnion makes clear that, when plaintiffs’ lawyers seek to obtain class certification of statutory damages claims, they cannot obtain a class-wide judgment without proving concrete, real-world harm to the plaintiff and every absent class member—which means that standing is likely to be an individualized issue that weighs heavily against class certification in these damages actions.
And TransUnion provides an important new argument to defendants faced with class actions asserting federal claims in state court. Many states already follow federal standing requirements in their own courts. Even in those states that do not, the TransUnion Court’s grounding of the real-world harm requirement in the Constitution’s allocation of executive authority to the President—because suits by uninjured parties seek to vindicate a general interest in enforcement of federal law and therefore intrude on the President’s exclusive powers under Article II—gives defendants a significant new argument that the federal Constitution bars state court adjudication of injury-free lawsuits based on federal statutes.
These arguments, and the relevant authorities, are spelled out in detail in the ILR report.
More recent court of appeals decisions provide still more support for those arguments.
The en banc Eleventh Circuit and the Fifth Circuit demonstrate how to apply the “traditionally actionable harm” standard
When a plaintiff asserts standing based on alleged intangible harm, the critical question is likely to be whether that claimed harm bears the necessary “close relationship” to a harm that was actionable at the time Article III was adopted, considering both the nature and the degree of the harm. Two recent court of appeals decisions make clear that the harm alleged by the plaintiff must satisfy all of the common-law elements that made the injury actionable; loose comparisons that ignore or discard some of those standards are not permissible.
Hunstein v. Preferred Collection and Management Services, Inc. involved an alleged violation of the Federal Fair Debt Collection Practices Act (FDCPA). The plaintiff asserted that the defendant, a collection agency, violated the Act’s prohibition against disclosure of information to third parties by providing Hunstein’s name and information about the debt to the company hired to produce the collection agency’s debt notification letters.
The en banc Eleventh Circuit held that Hunstein lacked Article III standing by an 8-4 vote.
The majority first explained that “for intangible harms, analogizing to longstanding torts is an important way to determine whether an alleged intangible injury meets the concreteness requirement.” Importantly, “when an element ‘essential to liability’ at common law is missing from an alleged harm, the common-law comparator is not closely related to that harm” and the intangible injury cannot satisfy Article III’s concrete harm requirement.
The plaintiff alleged that the disclosure of information to the mail vendor was “an act similar to the tort of public disclosure.” But, the court held, “[t]he problem with his comparison is evident from the start: the disclosure alleged here lacks the fundamental element of publicity. And without publicity, there is no invasion of privacy—which means no harm, at least not one that is at all similar to that suffered after a public disclosure.”
The court explained that in the tort context “[t]he effect of a disclosure is what matters—not the number of people to whom it is made. This is why, rather than playing a numbers game, we ask whether the disclosed information ‘reaches, or is sure to reach, the public.’” Because Hunstein alleged at most that the information would reach the mail vendor and its employees, and not that it was shared generally, he asserted “a qualitatively different harm” than the one actionable at common law: “having some finite number of people know (true) details about your life is fundamentally different than having that information disseminated to the general public.”
Hunstein thus makes clear that TransUnion requires an “element-for-element approach” in comparing the plaintiff’s claimed harm with the common-law comparator. “[T]he common law analogy collapses if we can rewrite a traditional tort to exclude an essential element.” (Indeed, Chief Judge Pryor wrote a concurring opinion, joined by Judge Tjoflat, pointing out that the plaintiff’s harm allegations lacked additional elements of the common law public disclosure tort.)
Another recent decision, from the Fifth Circuit, applies the same rigorous approach in assessing claimed concrete injuries—requiring that the harm asserted by the plaintiff have all of the same elements as the harm remedied by the common-law cause of action invoked by the plaintiff to demonstrate compliance with Article III.
Perez v. McCreary, Veselka, Bragg, & Allen, P.C. also involved a claim under the FDCPA. The defendant sent the plaintiff a letter demanding payment of a debt without stating that the limitations period for the debt had elapsed. The district court upheld the named plaintiff’s standing and certified a class of individuals who had received the same letter about time-barred debt.
The court explained that “a plaintiff doesn’t need to demonstrate that the level of harm he has suffered would be actionable under a similar, common-law cause of action. But he does need to show that the type of harm he’s suffered is similar in kind to a type of harm that the common law has recognized as actionable.” It concluded that Perez’s allegations failed that test.
First, the court rejected the argument that alleging a violation of her “substantive right to be free from misleading information” was sufficient to satisfy Article III, holding that “regardless of whether a statutory right is procedural or substantive, Spokeo emphasized that “Article III standing requires a concrete injury even in the context of a statutory violation.”
Second, Perez claimed that she was confused by the law firm’s letter, analogizing her injury to the harm remedied by fraudulent misrepresentation claims. But “[t]he nature of the harm recognized by fraudulent misrepresentation is a traditional, tangible harm: the ‘pecuniary loss’ the plaintiff sustains. And that means Perez’s confusion—which can only be an intangible harm, if it’s a harm at all—is necessarily different ‘in kind’ from her common-law analog.” The Fifth Circuit therefore “join[ed] several of our sister circuits in holding that the state of confusion, absent more, is not a concrete injury under Article III.”
Third, the court held that Perez could not establish concrete injury based on her time spent consulting with lawyers about the collection letter. “[W]e are not aware of any tort that makes a person liable for wasting another’s time. Although tort plaintiffs can sometimes recover damages for the opportunity costs attributable to the tort, the nature of the underlying harm is different—e.g., physical damage in the case of a personal injury suit.” Perez failed to demonstrate the necessary link to an injury traditionally actionable in court.
Finally, Perez could not rest on an analogy to the common-law tort of intrusion upon seclusion because “Congress didn’t elevate the receipt of a single, unwanted message to the status of a legally cognizable injury in the FDCPA.” The court explained that the statutory provision invoked by Perez addressed fraud rather than privacy-based harms and, in addition, when Congress prohibited intrusions (such as harassing telephone calls) it required “repeated or continuous” activity. Because Congress did not elevate the receipt of a single, unwanted communication to a legally cognizable injury, the court did not need to decide whether Congress could do so.
Courts of appeals recognize that claims based on failure to comply with a statutory obligation to provide information require the plaintiff to demonstrate downstream harm from the lack of information.
TransUnion made clear that “[a]n ‘asserted informational injury that causes no adverse effects cannot satisfy Article III.’” The plaintiff must have suffered concrete, adverse “downstream consequences” as a result of the non-disclosure.
Campaign Legal Center v. Scott, another recent Fifth Circuit decision, applied this requirement in the context of a claim alleging that Texas violated a disclosure requirement imposed by the National Voter Registration Act (NVRA) because it failed to provide a list of voters identified as potential non-U.S. citizens. The plaintiffs “offered no meaningful evidence regarding any downstream consequences from an alleged injury in law under the NVRA”: they asserted “a statutory right of the public to the ‘visibility’” of Texas’s process, but without “concrete and particularized harm to these Plaintiffs from not obtaining the requested personal voter information,” they could not satisfy Article III.
The court rejected the plaintiffs’ argument that claims under “sunshine” statutes requiring disclosure of information to the public do not require proof of downstream harm: “even in public disclosure-based cases, plaintiffs must and can assert ‘downstream consequences.’”
The Third Circuit, in Kelly v. RealPage, Inc., applied the downstream consequence standard and found it satisfied.
The case involved an alleged violation of the Fair Credit Reporting Act based on the defendant’s failure to disclose to the plaintiffs the third-party sources for what the plaintiffs alleged was erroneous information in their credit reports produced by the defendant.
The court of appeals stated that “a plaintiff seeking to assert an informational injury must establish a nexus among the omitted information to which she has entitlement, the purported harm actually caused by the specific violation, and the ‘concrete interest’ that Congress identified as ‘deserving of protection’ when it created the disclosure requirement.” In particular, the court said (quoting TransUnion), “a plaintiff must allege that ‘they failed to receive … required information,’ and that the omission led to ‘adverse effects’ or other ‘downstream consequences.”
The Kelly plaintiffs sufficiently alleged adverse downstream consequences. The credit reports were requested in connection with the plaintiffs’ applications for apartments. The defendant’s failure to provide the required information “impaired [the plaintiffs’] ability to correct” the errors in the reports and both “were denied the apartments for which they applied.”
Lower courts are applying TransUnion’s holding that plaintiffs lack standing to recover damages when they rely on a risk of future harm that never materialized
TransUnion explained that standing must be assessed separately with respect to each claim for relief asserted by a plaintiff. With respect to a claim for damages, “the mere risk of future harm, standing alone, cannot qualify as a concrete harm—at least unless the exposure to the risk of future harm itself causes a separate concrete harm.” “If the risk of future harm does not materialize, then the individual cannot establish a concrete harm sufficient for standing” to recover damages—absent a separate concrete harm from the risk itself.
The Fifth Circuit applied that principle in Perez, rejecting standing to seek damages based on the plaintiff’s claim of a risk of future financial harm. It held that “if a risk hasn’t materialized, the plaintiff hasn’t yet been injured. TransUnion held that merely being subjected to a risk of future harm cannot support a suit for damages. A plaintiff can sue for damages if the risk materializes or causes a separate injury-in-fact, such as emotional distress. But those are suits based on those injuries, not the risk itself.” The court concluded that “the unmaterialized risk Perez experienced can’t support her suit for damages.”
The Perez court further held that Perez lacked standing to seek injunctive or declaratory relief.
It recognized that “[a] plaintiff can sometimes show standing by pointing to a concrete injury that is ‘imminent.’ Accordingly, ‘a material risk of future harm’ permits the plaintiff to sue ‘to prevent the harm from occurring, at least so long as the risk of harm is sufficiently imminent and substantial.’”
But here, any risk of financial harm that she suffered was, the court emphasized, “in the past” and “dissipated once she consulted her attorney. She hasn’t alleged facts that show she might receive another misleading letter from [the defendant] in the future. So she can’t point to an ‘imminent’ concrete harm to support her request for forward-looking relief.”
The Third Circuit, in Clemens v. Execupharm Inc., a data breach case, held that the plaintiff could assert a damages claim, even though she had not suffered harm from the theft and posting on the Dark Web of her personal and financial information, because she suffered “several additional concrete harms . . . as a result of that risk”—including “purchas[ing] three-bureau credit monitoring services for herself and her family for $39.99 per month for additional protection.” That makes clear that the risk of imminent harm is not sufficient to support a claim for damages; in the Clemens court’s words, “a plaintiff suing for damages can satisfy concreteness as long as he alleges that the exposure to that substantial risk [of harm] caused additional, currently felt concrete harms.” (But that showing is highly likely to be individualized, making class certification in such cases less likely.)
New authority confirms that the concrete harm requirement makes it harder for plaintiffs to obtain class certification
TransUnion held that “[e]very class member must have Article III standing in order to recover individual damages.”
The Eleventh Circuit applied this requirement in the context of the settlement of a class action under the Telephone Consumer Protection Act in Drazen v. Pinto. The case involved claims based on unwanted texts and telephone calls from GoDaddy.com. The parties reached a settlement, and described the settlement class as anyone in the United States who received a call or text message from the defendant during a specified period—and the district court approved the settlement.
The court of appeals vacated that approval because the class included persons that lacked Article III standing—under Eleventh Circuit precedent, the receipt of a single text, without more, does not qualify as concrete harm. The district court had concluded that only the named plaintiffs had to satisfy Article III, and that, in any event, class members who received a single text would have standing under the decisions of other circuits.
Both of those determinations were wrong, the court of appeals held. Class members who did not suffer concrete harm cannot recover, even pursuant to a settlement. And the district court was obligated to apply Eleventh Circuit precedent defining concrete harm. The case was remanded to the district court “in order to give the parties an opportunity to redefine the class with the benefit of TransUnion and its common-law analogue analysis”—including whether receipt of a single unwanted telephone call qualifies as concrete harm under that analysis.
* * * * *
Parties facing lawsuits—especially putative class actions—in which the plaintiffs’ injury allegations involve a claimed intangible harm should continue to closely monitor the federal courts’ application of TransUnion. That ruling is significantly restricting plaintiffs’ ability to pursue class-wide claims based on “injuries” that don’t involve any real-world concrete harm.
Supreme Court strikes down California rule barring individualized arbitration of California PAGA claims
Yesterday, the Supreme Court held in Viking River Cruises, Inc. v. Moriana (pdf) that the Federal Arbitration Act preempts a California rule invalidating arbitration agreements that provide for arbitration of an employee’s own claims under California’s Private Attorney General Act (PAGA), but waive the employee’s ability to assert PAGA claims affecting others.
The decision is enormously important to companies seeking to enforce workplace arbitration agreements in California. The decision also provides businesses with powerful arguments that California laws restricting arbitration in the consumer setting are preempted as well. (Disclosure: we filed an amicus brief (pdf) in support of the petition on behalf of the Chamber of Commerce of the United States of America, the California Chamber of Commerce, and the National Federation of Independent Business Small Business Legal Center.)
Under California’s PAGA statute, an employee affected by violations of the California Labor Code can sue her employer to obtain civil penalties. The employee also can seek civil penalties for violations affecting other employees—including violations of Labor Code provisions not suffered by the plaintiff. The employee retains 25% of the penalties and the remaining 75% is paid to the state. California courts characterize PAGA claims as analogous to qui tam actions.
In Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court held that an arbitration agreement is invalid under California law if the agreement limits PAGA claims to violations affecting the claimant alone and prevents the claimant from asserting violations experienced by other employees. The Iskanian court also held that the FAA does not preempt this state-law rule because, in its view, PAGA claims are asserted on behalf of the State, which is not bound by workers’ arbitration agreements.
In a later case, Sakkab v. Luxotica Retail North America, Inc., the Ninth Circuit agreed that the FAA does not preempt the Iskanian rule—but for a different reason. In the Ninth Circuit’s view, the Iskanian rule was permissible because representative PAGA claims could be arbitrated using informal procedures that the Ninth Circuit considered to be materially different from class procedures. Therefore, according to the Ninth Circuit, the Iskanian rule did not violate the principles set forth in the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion and its progeny, which established that the FAA’s protection of individualized arbitration preempts state-law rules barring waiver of class and collective actions.
Viking River Cruises v. Moriana arose out of this legal background. The plaintiff is an employee who had agreed to arbitrate disputes on an individual basis, and waived any right to bring class, collective, or representative proceedings. She then filed a PAGA claim against her employer, asserting that she hadn’t received her final paycheck within the required time period and that the employer had committed multiple other unrelated California Labor Code violations with respect to other employees. The employer moved to compel arbitration of her individual PAGA claim and preclude the claims asserted on behalf of other employees. The trial court denied the motion, holding that Iskanian precludes waivers of PAGA claims and that PAGA claims cannot be split into arbitrable individual claims and nonarbitrable representative claims. The California Court of Appeal affirmed that order. Subsequently, the U.S. Supreme Court granted review.
The Supreme Court’s decision
By an 8-1 vote, the Supreme Court reversed the state court, concluding that the FAA preempts California’s Iskanian rule.
In an opinion written by Justice Alito, joined in full by Justices Breyer, Sotomayor, Kagan, and Gorsuch, and joined in part by Chief Justice Roberts and Justices Kavanaugh and Barrett, the Supreme Court held that the FAA bars California from refusing to enforce arbitration agreements that call for individualized arbitration of PAGA claims—limiting the arbitration to alleged violations affecting the individual claimant.
As a starting point, the Court observed that the employee did not defend the California Supreme Court’s conclusion in Iskanian itself that its state-law rule survives preemption because the PAGA claims are asserted on behalf of the State and therefore outside the coverage of the FAA. Instead, as the Supreme Court explained, PAGA claims arise out of the employment relationship.
The Court then reaffirmed two key aspects of its FAA precedents. First, the FAA sets forth “an equal-treatment principle,” under which “the FAA preempts any state rule discriminating on its face against arbitration—for example, a law prohibit[ing] outright the arbitration of a particular type of claim.”
Second, “even rules that are generally applicable as a formal matter are not immune to preemption by the FAA” if “state law could be used to transform ‘traditional individualized … arbitration’ into the ‘litigation it was meant to displace’ through the imposition of procedures at odds with arbitration’s informal nature.” That second type of preemption—which protects “individualized arbitration” as “arbitration’s traditional form”—was at the core of the Court’s decisions in AT&T Mobility v. Concepcion and the follow-on rulings in American Express Co. v. Italian Colors Restaurant and Epic Systems Corp. v. Lewis.
Viking River turned on this second type of FAA preemption.
The plaintiff defended Iskanian by arguing that PAGA was simply a new substantive cause of action. In plaintiff’s view, there are no separate representative PAGA claims, merely a single indivisible PAGA claim.
The Court acknowledged that “the FAA does not require courts to enforce contractual waivers of substantive rights and remedies,” rejecting the defendant’s argument that the FAA should be interpreted to protect the enforceability of an agreement waiving all PAGA claims—including Labor Code violations affecting the plaintiff.
But the Court held that California’s rule invalidating agreements waiving arbitration of representative PAGA claimsnonetheless is preempted because it coerces parties into agreeing to something very different from traditional individualized arbitration—mandating the arbitration of issues that they never agreed to arbitrate. The Court explained that one of the reasons why “class procedures cannot be imposed [on arbitration] by state law” is that such a state law “present[s] unwilling parties with an unacceptable choice between being compelled to arbitrate using procedures at odds with arbitration’s traditional form and forgoing arbitration altogether.” State law cannot “coercively impose arbitration in contravention of the ‘first principle’ of our FAA preemption: that ‘arbitration is strictly “a matter of consent.”’”
Applying that principle, the Court held that California’s Iskanian rule imposed that precise type of coercion. The Court explained that “a PAGA action asserting multiple code violations affecting a range of different employees does not constitute ‘a single claim’ in even the broadest possible sense.” By combining these different claims into a single PAGA claim, PAGA effectively has a “built-in mechanism of claim joinder.”
Reaffirming and expanding on its prior preemption precedents, the Court held that the FAA does not permit California to impose a regime in which “[t]he only way for parties to agree to arbitrate one of an employee’s PAGA claims is to also ‘agree’ to arbitrate all other PAGA claims in the same arbitral proceeding.” Such a result—conditioning arbitration on allowing a claimant to seek remedies in arbitration on behalf of other employees—“is incompatible with the FAA.”
The Court added that a “state rule imposing” this “expansive rule of joinder,” rather than allowing parties to “contract around” it, “would defeat the ability of parties to control which claims are subject to arbitration.” California’s rule thus “compels parties to either go along with an arbitration in which the range of issues under consideration is determined by coercion rather than consent, or else forgo arbitration altogether.” “Either way,” the Court continued, “the parties are coerced into giving up a right they enjoy under the FAA.”
Moreover, the Court explained, “[l]iberal rules of claim joinder presuppose a backdrop in which litigants assert their own claims and those of a limited class of other parties who are usually connected with the plaintiff by virtue of a distinctive legal relationship.” PAGA “departs from that norm by granting the power to enforce a subset of California public law to every employee in the State,” which “allows plaintiffs to unite a massive number of claims in a single-package suit.”
The Court therefore held that the FAA requires enforcement of the parties’ agreement to arbitrate only the plaintiff’s individual PAGA claim. The Court further held that, because California law “provides no mechanism to enable a court to adjudicate non-individual PAGA claims once an individual claim has been committed to a separate proceeding,” the lower court was required to dismiss the plaintiff’s non-individual PAGA claims.
Justice Sotomayor authored a concurrence, joining the Court’s opinion in full but arguing that California may in the future revisit its law on employees’ standing to assert non-individual PAGA claims in court.
Justice Barrett authored a concurrence, joined by Justice Kavanaugh and joined in large part by Chief Justice Roberts, stating that much of the Court’s discussion was unnecessary to the result, given that “reversal is required under our precedent because PAGA’s procedure is akin to other aggregation devices that cannot be imposed on a party to an arbitration agreement.”
Justice Thomas authored a dissent, adhering to his long-standing view that the FAA does not apply in state courts.
Implications for PAGA litigation
The Supreme Court’s decision in Viking River Cruises represents a significant victory for businesses. Since Iskanian was decided in 2014 and Sakkab was decided in 2015, employers subject to suit in California have faced a massive increase in the number of PAGA lawsuits.
Employers with agreements for individual arbitration should now be able to compel arbitration of individual PAGA claims and obtain the dismissal of remaining non-individual PAGA claims seeking penalties on behalf of other employees.
The plaintiffs’ bar, picking up on Justice Sotomayor’s separate opinion, may urge the California Legislature to change the statutory standing rule for PAGA actions to permit an employee (or anyone else) to assert in court PAGA claims based on Labor Code violations suffered by others even though the plaintiff does not seek recovery for a violation that he or she suffered.
That would be an exceedingly odd claim. And it resembles an approach that California previously tried, and subsequently rejected, in the context of consumer lawsuits. Before 2004, any person (injured or not) could sue on behalf of the general public under California’s Unfair Competition Law. The absence of standing requirements predictably led to an avalanche of abusive lawsuits. In response, in 2004, California voters enacted Proposition 64, which declared that plaintiffs bringing UCL claims must have “suffered injury in fact and … lost money or property as a result of” the challenged conduct. Given that history, California should be wary of going down that route again.
If it did, there would be a substantial argument that the FAA preempts such claims—a question that the Supreme Court did not have to reach in Viking River Cruises. After all, Concepcion and its progeny make clear that an arbitration agreement’s class action waiver precluded class proceedings in arbitration and in court—because permitting court actions would undermine the agreement to arbitrate. As the Ninth and Eleventh Circuits both observed in rejecting the argument that states can still forbid individual arbitration if the class action would proceed in court rather than arbitration, “[e]ven a cursory reading of the opinion reveals that the Concepcion Court described the ‘fundamental’ changes brought about by the shift from bilateral to class arbitration to show that non-consensual class procedures are inconsistent with the FAA—not to argue for increased class action litigation.” There accordingly is a strong argument that the FAA itself would preclude litigation in court of a “representative-only” PAGA claim when the parties to an arbitration agreement have agreed to individualized arbitration.
Implications for consumer litigation
Beyond the context of employment litigation, Viking River Cruises likely will have positive ripple effects in consumer cases in California.
California’s Unfair Competition Law, False Advertising Law, and the Consumers Legal Remedies Act permit plaintiffs to obtain, in addition to individualized relief, “public injunctive relief,” which the California Supreme Court defined in McGill v. Citibank, N.A. as relief that “‘by and large’ benefits the general public … and that benefits the plaintiff, ‘if at all,’ only ‘incidental[ly]’ and/or as ‘a member of the general public.’”
McGill involved the enforceability of an arbitration agreement in which the parties agreed to permit only individualized injunctive relief and waived any right to public injunctive relief. The California Supreme Court held that state law invalidated the waiver of public injunctive relief and concluded that the FAA did not preempt that state-law rule. The court concluded that the anti-waiver principle was a generally applicable contract rule and that the FAA did not require enforcement of agreements to waive a remedy provided by state law.
The Ninth Circuit reached the same conclusion in Blair v. Rent-a-Center, relying entirely on its prior decision in Sakkab involving PAGA claims (discussed above), which limited the preemption principle recognized in Concepcion and its progeny to attempts to impose class and collective-action procedures in arbitration. In recent years, many consumer class actions filed in California have included claims purporting to seek public injunctive relief in an effort to avoid arbitration.
Viking River Cruises, however, gives businesses a substantial argument that McGill and Blair are no longer good law. The Supreme Court’s decision confirms that a state cannot create a cause of action that (1) entitles an individual to seek relief on behalf of others; (2) declares the individualized component of the claim indivisible from the representative component; and then (3) conditions enforceability of arbitration agreements on allowing the entire indivisible claim to proceed in arbitration. Such a rule improperly “coerces parties into forgoing their right to arbitrate by conditioning that right on the use of a procedural format that makes arbitration artificially unattractive.”
California’s McGill rule exhibits this very defect: statutory public-injunction claims under California law combine a claim for an individual injunction on behalf of the named plaintiff with an injunction for relief on behalf of the general public that benefits only third parties. Under Viking River Cruises, California cannot insist on tying together these individual and non-individual injunctive claims to prevent the enforcement of agreements for individual arbitration. Accordingly, businesses facing such claims should be entitled to compel arbitration of the named plaintiff’s claim for an individualized injunction and to dismissal of the remaining request for an injunction sought on behalf of only third parties.
Plaintiffs’ lawyers may try to argue that this result runs afoul of the statement in Viking River Cruises that “the FAA does not require courts to enforce contractual waivers of substantive rights and remedies.” But public injunctive relief is not a remedy for the claimant—as defined by the California Supreme Court, that relief is to benefit third parties, with the claimant made whole by separate individualized relief, typically damages but sometimes including individualized injunctive relief remedying harm that the claimant suffered or might suffer in the future.
Public injunctive relief closely resembles the relief provided to absent class members in a class action seeking injunctive relief—such as in a Rule 23(b)(2) class action in federal court. Concepcion and its progeny make clear that the FAA protects the enforceability of agreements waiving any right to obtain such relief—confirming that the “substantive rights and remedies” Viking River Cruises refers to are limited to rights and remedies relating to a claimant’s own harm.
In addition, this issue can be addressed in the same way the Viking River Cruises resolved the question of representative PAGA claims. Because the claimant can and will obtain full individualized relief in arbitration, she would lack statutory standing to bring a claim for injunctive relief in court—under the standing requirement discussed above—and therefore any claim for public injunctive relief would have to be dismissed.
Viking River Cruises reaffirms and expands the FAA’s protection of individualized, bilateral arbitration. And it does so with an eight-Justice majority, in sharp contrast to the 5-4 decisions in Concepcion, American Express, and Epic Systems. By rejecting arguments that would undermine those precedents, and preventing the use of PAGA to circumvent them, the Court made clear that it will remain vigilant in reining-in States’ attempts to circumvent the FAA.
Judicial review of pre-certification settlements: it’s time to put some district courts’ continued reliance on the Ninth Circuit’s Diaz rule to rest
Most potential class actions are resolved before class certification. Often courts dismiss cases at the pleadings stage or grant early summary judgment. Sometimes plaintiffs choose to dismiss their cases rather than continuing to pursue them. And often class actions settle on an individual basis at an early stage.
The benefits are obvious. Early settlements offer individual plaintiffs relatively quick payments. They allow defendants the opportunity to end cases early without the need to pay the high costs—including often burdensome discovery-related costs—to defend against class litigation. And they benefit the court system by avoiding needless litigation that can clog court dockets. When permitted by law, parties frequently choose to settle on a confidential basis, thereby avoiding the risk of adverse publicity—something that benefits both defendants and plaintiffs.
The current federal rules facilitate this practice. As written, they give parties autonomy to settle claims early and without judicial intervention. First, Federal Rule of Civil Procedure 41(a)(1) allows a plaintiff to voluntarily dismiss the lawsuit prior to the filing of an answer or motion for summary judgment; alternatively, parties may stipulate to dismissal. This process is efficient. It allows parties to negotiate settlements quickly and without barriers. There is one potential twist—Rule 41 is subject to Rule 23(e), which was amended in 2003 and again in 2018 to provide that “[t]he claims, issues, or defenses of a certified class—or a class proposed to be certified for purposes of settlement” may be settled or voluntarily dismissed “only with the court’s approval” (emphasis added). But the text makes clear that prior to class or proposed settlement certification, court approval is not needed. As the Wright & Miller treatise puts it, “settlements or voluntary dismissals that occur before class certification are outside the scope of subdivision (e).” 7B Charles Alan Wright & Arthur R. Miller, Federal Prac. & Proc., Settlement, Voluntary Dismissal, or Compromise of Class Actions-Purpose and Scope of Rule 23(e) § 1797 (3d ed. 2021). In those instances, the settlement binds only the proposed class representative and the defendant—the claims of absent members of the potential class are not affected. See 2 Joseph McLaughlin, McLaughlin on Class Actions § 6:1, Voluntary Dismissal (18th ed. 2021).
Despite the plain language of Rule 41 and the 2003 amendment to Rule 23(e), some district courts, notably including those in the Northern District of California, continue to insist upon review of pre-certification class settlements. Rather than litigate over whether such review is necessary, parties commonly continue to file motions for judicial approval of the settlement “as a cautionary step.” Houston v. Cintas Corp., 2009 WL 921627, at *1–2 (N.D. Cal. Apr. 3, 2009). And a number of judges in the Northern District of California continue to review proposed settlements prior to class certification. See e.g., Dunn v. Tchrs. Ins. & Annuity Ass’n of Am., 2016 WL 153266, at *3 (N.D. Cal. Jan. 13, 2016) (explaining that “courts in this district continue to follow Diaz to evaluate the proposed settlement and dismissal of putative class claims”); Castro v. Zenith Acquisition Corp., 2007 WL 81905 (N.D. Cal. Jan. 9, 2007) (applying Diaz to review a pre-certification settlement); Singer v. Am. Airlines Fed. Credit Union, 2006 WL 3093759 (N.D. Cal. Oct. 30, 2006) (same).
This outmoded treatment of pre-certification settlements stems from a three-decade-old decision, Diaz v. Trust Territory of the Pacific Islands, 876 F.2d 1401 (9th Cir. 1989). The Ninth Circuit decided Diaz under an earlier version of Rule 23(e), prior to the 2003 amendment. At that time, the federal rules did not specifically address whether a settlement reached prior to class certification required judicial approval. In Diaz, the Ninth Circuit confronted that question after plaintiffs’ counsel bit off more than they could chew and reached an agreement that narrowed a proposed class. Specifically, plaintiffs’ and defendant’s counsel reached an agreement to “eliminate certain categories of plaintiffs.” Id. at 1403. The district court granted the parties’ proposed order dismissing certain class claims from the suit without providing notice to the putative class members or determining whether they would be prejudiced. Id. Individuals dropped from the proposed class then sought to intervene and vacate that order.
On appeal, the Ninth Circuit in Diaz joined the then-majority of jurisdictions holding that pre-certification settlements require judicial approval under Rule 23(e)—albeit through less stringent procedures than those that apply to post-certification settlements. Diaz, 876 F.2d at 1408 (stating that “[t]he court’s duty to inquire into a settlement or dismissal differs before and after certification.”). Despite its holding applying Rule 23(e) to pre-certification settlements, the Diaz court recognized some of the very reasons that Rule 23 was later amended to expressly clarify that court approval is not required for pre-certification settlements: that is, “[b]efore certification, the dismissal is not res judicata against the absent class members” such that “the court does not need to perform the kind of substantive oversight required when reviewing a settlement binding upon the class.” Id. Nonetheless, the Diaz court reviewed the settlement to determine whether Rule 23(e) required notice to absent class members, and concluded that notice was necessary to prevent the potential for prejudice. Id. at 1409-11. It accordingly vacated the district court’s order.
Perhaps this holding made sense under the prior version of Rule 23(e). As the advisory committee notes explain, by referring merely to “a class action,” the prior version of Rule 23(e) was ambiguous as to whether a pre-certification settlement required judicial approval. But the amended Rule 23(e) is clear: court approval and notice is only required when parties settle the claims, issues, or defenses of “a certified class” or a proposed “settlement class.” Fed. R. Civ. P. 23(e). As one treatise has explained, the amended Rule 23(e) “overruled” Diaz and other cases. 2 Joseph McLaughlin, McLaughlin on Class Actions § 6:1, Voluntary Dismissal (18th ed. 2021). Under the amended rules, where a class is not certified, Rule 41 allows for the parties to negotiate a speedy dismissal. The approach taken by courts that continue to require judicial approval fails to recognize that Diaz is no longer the law in light of the 2003 amendment to Rule 23.
To be sure, in practice courts generally don’t withhold approval of pre-certification individual settlements of class actions. But the approval process itself erects unnecessary barriers to early settlement, and might in some cases reduce the value of a settlement or impede settlement altogether. More important, requiring judicial approval of such settlements contradicts the right to voluntary or stipulated dismissals without court intervention provided under Rule 41. Courts that continue to apply Diaz should reconsider their approach.