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

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

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.

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. 

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.

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.)

Background

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.

Conclusion

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.

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.

Last Friday, the Supreme Court reversed the class-wide judgment in TransUnion LLC v. Ramirez (pdf), concluding that the lower courts had not properly applied the Court’s holding in Spokeo Inc. v. Robins and that the vast majority of the class members failed to satisfy the injury-in-fact requirement for Article III standing.  (Our firm, including the three of us, represented the petitioner in Spokeo, and we filed an amicus brief (pdf) in support of TransUnion.)

The Court’s holding has enormous practical significance for defendants facing class actions seeking statutory damages.  The Court reinforced Spokeo’s core holding that Congress’s creation of a cause of action with a statutory-damages remedy does not by itself satisfy Article III.  Instead, a plaintiff (and in a class action, each class member) must show a concrete harm resulting from the statutory violation in order to pursue a damages action in federal court.  The Court also provided important guidance for applying Article III’s concrete-injury requirement to damages actions based upon claimed risks of future harm that never materialized.

Background

Federal law forbids U.S. companies from doing business with certain persons who are believed to threaten the security of the United States.  The Treasury Department’s Office of Foreign Assets Control (OFAC) maintains a list of these individuals, which includes suspected terrorists and narcotics traffickers.

Plaintiff Sergio Ramirez sued TransUnion on behalf of a class of 8,185 individuals alleging violations of the Fair Credit Reporting Act (FCRA), which regulates consumer reporting agencies that compile and disseminate personal information about consumers.  Ramirez asserted two categories of FCRA violations.  First, he claimed that TransUnion had failed to use reasonable procedures to ensure the accuracy of class members’ credit files, which included statements that the member was a “potential match” to a name on the OFAC list.  Second, he claimed that the formatting of the mailings that TransUnion used to inform members about the potential match violated FCRA.

Ramirez, the sole named plaintiff, found out about his potential match while attempting to purchase a car, causing him to suffer difficulty in obtaining an auto loan and embarrassment in front of his family, and leading him to cancel a planned vacation out of concern about the alert.  But none of the other class members submitted any evidence of harms of this kind, and the evidence showed that only 1,853 of the 8,185 had their credit reports referencing the “potential” OFAC match disseminated to potential creditors.

The district court certified the class and ruled that each member of the class had Article III standing for both categories of FCRA claims.  After a trial, the jury returned a verdict in favor of the class and the district court entered a class-wide judgment.  The Ninth Circuit affirmed in relevant part, holding that all members of the class had Article III standing to recover damages for the alleged FCRA violations.  The Ninth Circuit also concluded that, despite Ramirez’s uniquely distressing situation, Ramirez’s claims were typical of the class’s claims for purposes of satisfying Federal Rule of Civil Procedure 23(a)(3).

The Court’s Opinion

In an opinion by Justice Kavanaugh, the Supreme Court reversed the Ninth Circuit by a 5-4 vote.  (Justice Kavanaugh’s opinion was joined by Chief Justice Roberts and Justices Alito, Gorsuch, and Barrett.) The Court held that only plaintiffs and class members who are concretely harmed by a defendant’s statutory violation have Article III standing to seek damages.

The Court began with principles of Article III standing.  Building on its prior opinion in Spokeo, the Court reaffirmed that in order to satisfy Article III’s requirement of injury in fact, a plaintiff must establish a concrete injury—in other words, an injury that (in Spokeo’s words) is “real, and not abstract.”  And the Court reaffirmed that the requirement to establish concrete injury is not relaxed in the context of statutory violations.  As the Court emphasized, “an injury in law is not an injury in fact.”  Instead, only “those plaintiffs who have been concretely harmed by a defendant’s statutory violation may sue that private defendant over that violation in federal court.”

The Court also confirmed that “Congress’ creation of a statutory prohibition or obligation and a cause of action does not relieve courts of their responsibility to independently decide whether a plaintiff has suffered a concrete harm.”  Quoting from an opinion by Sixth Circuit Judge Sutton, the Court explained that “even though ‘Congress may elevate harms that exist in the real world before Congress recognized them to actionable legal status, it may not simply enact an injury into existence, using its lawmaking power to transform something that is not remotely harmful into something that is.’”  To determine whether the concrete-harm requirement is satisfied, the Court instructed (quoting Spokeo) that courts should “assess whether the alleged injury to the plaintiff has a ‘close relationship’ to a harm ‘traditionally’ recognized as providing a basis for a lawsuit in American courts.”

Applying those principles, the Court first made clear that every class member—not just the named plaintiff—must satisfy Article III’s standing requirement in order to recover damages.  (As we noted in our report on the oral argument, this preliminary holding was not surprising, given that Ramirez conceded as much.)

Next, in reserving the question whether putative class members must demonstrate standing at the class-certification stage, the Court pointed in a footnote to an Eleventh Circuit decision, Cordoba v. DIRECTV, LLC, that reversed certification of a damages class because individualized issues surrounding class’ members Article III standing “posed a powerful problem under Rule 23(b)(3)’s predominance factor.”  (Our firm represented DIRECTV in Cordoba; Andy Pincus argued the appeal.)  Accordingly, the Court’s opinion signals that the obligation for each class member to demonstrate concrete harm will make it much more difficult for plaintiffs to obtain class certification in statutory damages cases, because the “bare statutory violation” shortcut to satisfying Article III is no longer available.

For the reasonable-procedures claim, the Court held that the 1,853 class members whose credit reports were disseminated to third parties did have standing, concluding that being labeled as a potential terrorist in a report disseminated to third parties sufficiently resembled the harm associated with the common-law tort of defamation.  But the Court held that the remaining 6,332 class members whose credit reports were not disseminated to third parties lacked standing, because in the absence of publication of their information they could not point to any concrete harm akin to defamation resulting from the OFAC alert in their credit files.

The Court also rejected the argument that the 6,332 class members had standing based on a risk of future harm.  It began by explaining that “in a suit for damages, the mere risk of future harm, standing alone, cannot qualify as a concrete harm—at least unless the exposure to a risk of future harm itself causes a separate concrete harm.”  As an example, the Court, echoing a hypothetical posed by the Chief Justice at oral argument, imagined someone driving a quarter of a mile ahead of a reckless driver—where the risk posed by the reckless driver does not materialize and the first driver makes it home safely.  Under those circumstances, the Court explained, the first driver has not suffered a concrete harm under Article III: the failure of the risk to materialize “would ordinarily be cause for celebration, not a lawsuit.”

Turning to the case before it, the Court noted the “fundamental problem” with the class’s future-risk-of-harm argument was that the risk never materialized; the 6,332 class members’ credit reports were not disseminated to third parties and did not result in the denial of credit.  Nor did the class members show independent harm posed by the threat of future harm (such as incurring expenses to prevent the realization of the threat).

The Court also noted that the risk of future dissemination was too speculative to satisfy Article III in any event.  The 6,332 class members did not demonstrate a sufficient likelihood that their credit reports would be disclosed.  They also did not present any evidence that they even knew about the OFAC alerts in their credit files.  As the Court noted, “[i]t is difficult to see how a risk of future harm could supply the basis for a plaintiff’s standing when the plaintiff did not even know that there was a risk of future harm.”

For the second category of claims, about the format of TransUnion’s mailings, the Court concluded that Ramirez alone, and no other class member, had standing.  The Court explained that the class members did “not demonstrate that they suffered any harm at all from the formatting violations,” much less a “harm with a close relationship to a harm traditionally recognized as providing a basis for a lawsuit.”  The Court also rejected the argument advanced by the government that an alleged deprivation of information, without more, could constitute an injury in fact.  Instead, “[a]n ‘asserted informational injury that causes no adverse effects cannot satisfy Article III.’”  The Court further noted that the class members here were not actually deprived of any information to which they were entitled; their complaint instead was “only that they received it in the wrong format.”

In light of its holding on Article III standing, the Court declined to address the Rule 23 typicality issue.  It remanded the case to the Ninth Circuit, including to address whether class certification is appropriate in light of the Court’s standing holding.

Takeaways from the Opinion

TransUnion clarifies several key elements of Article III’s standing requirement.

First, the Court’s decision confirms that Spokeo eliminated the “no injury” class action.  Although Spokeo’s holding was clear, some commentators and lower court judges had seized on Justice Thomas’s concurring opinion in Spokeo—and his subsequent separate opinion in Frank v. Gaos—to express skepticism that the Court would continue to adhere to that holding.

The TransUnion Court’s analysis opens with a detailed explanation of the roots of the real-world injury requirement in Article III’s limitation of federal-court jurisdiction to “Cases” and “Controversies” and in Article II’s allocation of power to the Executive Branch.  The Court explained that “[a] regime where Congress could freely authorize unharmed plaintiffs to sue defendants who violate federal law . . . would infringe on the Executive Branch’s Article II authority.”  That is because, absent “‘an actual case,’” “the choice of how to prioritize and how aggressively to pursue legal actions against defendants who violate the law falls within the discretion of the Executive Branch, not within the purview of private plaintiffs (and their attorneys).  Private plaintiffs are not accountable to the people and are not charged with pursuing the public interest in enforcing a defendant’s general compliance with regulatory law.”

The majority’s clear rejection of the contrary arguments set forth in the dissents leaves no doubt that Spokeo’s requirement of concrete, “real world” injury is here to stay—and alleging a statutory violation is not enough to satisfy Article III.  Plaintiffs will have to meet the “concrete harm” test laid out in Spokeo and reaffirmed in TransUnion.

Second, the Court’s application of the concrete-harm standard provides guidance that should eliminate sharply divergent approaches in the lower courts.

Some lower courts have been receptive to arguments that Spokeo did not meaningfully change the law of standing, and they have concluded that Congress’ creation of a “substantive” (as opposed to “procedural”) right and a cause of action to enforce that right makes any alleged violation of the statutory right a concrete harm.  But the TransUnion Court did not limit the applicability of the requirement that plaintiffs demonstrate that they suffered real-world harm—making clear that the obligation applies across the board to all claims.  Indeed, some lower courts had found the FCRA’s “reasonable procedures” requirement to be substantive, and concluded that it therefore was unnecessary to determine whether the plaintiffs had demonstrated real-world injury.  The Supreme Court’s analysis squarely rejects that approach, instead requiring an assessment of whether each class member demonstrated real-world injuries from the alleged violation.

The Court’s application of its standard also demonstrates that injuries must both be “real” and resemble harms traditionally actionable in courts. Moreover, by rejecting the claims asserted by class members whose credit reports were not distributed to third parties and the mailing-format claims asserted by all class members, the Court made clear that the Article III standard has real teeth.

Third, some lower courts have relied heavily on risk-of-harm theories in upholding plaintiffs’ standing. TransUnion’s analysis significantly limits plaintiffs’ ability to use this “work-around” to satisfy Article III in the context of damages claims.  If the risk never materialized and has ended by the time the lawsuit is filed, then plaintiffs must demonstrate that they suffered harm from the risk itself—in terms of expenditures to avoid the risk or other real-world injuries.  And TransUnion makes clear that, in addition, the risk must be a serious one in order to establish standing: the Court quoted Judge McKeown’s statement in her dissenting opinion in the court of appeals that “[b]ecause no evidence in the record establishes a serious likelihood of disclosure, we cannot simply presume a material risk of concrete harm.”

Fourth, even when a named plaintiff is able to satisfy the TransUnion standard, putative class actions will face significant challenges in obtaining class certification—much less a class-wide damages award.  If proof of injury is individualized, which will be true in many cases, that reality frequently will make it impossible for the class to show that common issues predominate.  And, separately, when a defendant is able to show that most class members will be unable to satisfy Article III, courts may be reluctant to grant certification.

All of that said, we do not expect plaintiffs’ lawyers to give up on class actions seeking statutory damages under federal statutes.  Some, including Justice Thomas in his dissent, speculate that such cases will be brought in state court instead.  But plaintiffs’ lawyers will face multiple obstacles in moving their cases to state court.

To begin with, many state courts follow federal standing precedent.  In those state courts, TransUnion is likely to preclude actions barred in federal court.

Next, the Court’s grounding of the real-world harm requirement in Article II gives defendants a new argument in opposing cases in state court.  To the extent a lawsuit would intrude upon Article II’s allocation of authority to the Executive Branch, separation-of-powers principles—combined with principles barring states from interfering with the Constitution’s allocation of authority—would preclude state courts from entertaining the claim.  There also will be serious questions whether Congress intended to authorize state courts to adjudicate claims that the Constitution bars from federal court, given that Congress legislates against settled background legal principles, including constitutional limits on federal court jurisdiction.

Finally, the Supreme Court’s personal jurisdiction cases, such as Bristol-Myers Squibb Co. v. Superior Court of California, likely limit state courts’ power to entertain claims of absent class members who are nonresidents unless the court can exercise general jurisdiction over the defendant.  So any cases brought in state courts will be much more limited than those permissible in federal court.

In sum, TransUnion provides defendants with significant new arguments for defeating the no-injury class actions that Spokeo prohibited.

 

 

 

 

 

 

 

 

 

Ever since the Supreme Court granted review in Facebook, Inc. v. Duguid, businesses facing the risk of TCPA class actions have been waiting to see whether the Court would accept or reject a sweepingly broad interpretation—adopted by three circuits and rejected by three others—of what constitutes an autodialer under the statute.   

Today, the Supreme Court unanimously reversed (pdf), holding that equipment must be capable of random or sequential number generation in order to qualify as an “automatic telephone dialing system” under the TCPA.

The Court’s holding has enormous practical significance for defendants facing TCPA class actions.  The use of random or sequential number generators is not common (certainly far less so today than in 1991 when the TCPA was enacted and those devices were in use), while a wide range of equipment stores lists of numbers to be called.  Companies should remain mindful, however, that the Court’s decision affects only alleged violations of the TCPA’s restrictions on the use of autodialers, and not the TCPA’s separate restrictions on the use of artificial or prerecorded voices or on violations of do-not-call regulations.

Background

The TCPA, among other things, restricts certain communications made with an “automatic telephone dialing system” (ATDS), colloquially referred to as an “autodialer.”  The statute defines an “automatic telephone dialing system” as “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.”  47 U.S.C. § 227(a)(1).

The interpretive question before the Court was whether the phrase “using a random or sequential number generator” modifies both “store” and “produce,” or just “produce.”

As we have previously reported, the courts of appeals were divided on this question.  Adhering to its broad interpretation of an autodialer in Marks v. Crunch San Diego, LLC, the Ninth Circuit held in Duguid that Facebook’s equipment, which sent text messages to a set list of numbers stored in its database rather than to random or sequentially generated numbers, nonetheless qualified as an ATDS.  The Second and Sixth Circuits subsequently agreed with the Ninth Circuit’s approach.  In contrast, the Third, Seventh, and Eleventh Circuits had all held that an autodialer must be able to generate random or sequential phone numbers. (Our firm, including Archis, represented the defendant in the Seventh Circuit case, Gadelhak v. AT&T Services, Inc.)

The Court granted review to resolve this deep circuit split.

The Court’s Opinion

In an opinion by Justice Sotomayor, a unanimous Supreme Court reversed the Ninth Circuit.  The Court held that “Congress’ definition of an autodialer requires that in all cases, whether storing or producing numbers to be called, the equipment in question must use a random or sequential number generator.”

The Court began with the text, noting that “conventional rules of grammar” support reading the phrase “using a random or sequential number generator” to apply to both antecedent verbs, “store” and “produce.”  The Court first applied the “series-qualifier canon,” which says that a modifier at the end of a parallel list—here, “using a random or sequential number generator”—applies to all of the nouns and verbs in that list—here, both “store” and “produce.”  The Court also observed that the clause “store or produce telephone numbers to be called” is a single, cohesive clause, so “it would be odd” to apply the random or sequential number generation requirement to only a portion of that clause.

The Court then noted that its interpretation of the statutory definition “heeds the commands of its punctuation” as well.  The fact that Congress used a comma to set off the phrase “using a random or sequential number generator” demonstrated its intent for that phrase “to apply equally to both preceding elements.”

The Court did not rest on text alone but also relied on the “statutory context.”  The Court recounted that when Congress passed the TCPA in 1991, it was concerned with the “uniquely harmful” impact of then-emerging technology allowing companies to dial random or sequential blocks of telephone numbers.  For example, such technology could “seiz[e] the telephone lines of public emergency services,” or “simultaneously tie up all the lines of any business with sequentially numbered phone lines.”  And many of the TCPA’s restrictions on the use of autodialers enacted “[a]gainst this technological backdrop” reflect that Congress was “target[ing] a unique type of telemarketing equipment that risks dialing emergency lines randomly or tying up all the sequentially numbered lines at a single entity.”  For example, the TCPA “makes it unlawful to use an autodialer to call certain ‘emergency telephone line[s]’” (quoting 47 U.S.C. § 227(b)(1)(A)) or “‘in such a way that two or more telephone lines of a multi-line business are engaged simultaneously’” (quoting 47 U.S.C. § 227(b)(1)(D)).

The Court recognized that the autodialer provision of the TCPA was tailored narrowly: “Expanding the definition of an autodialer to encompass any equipment that merely stores and dials telephone numbers would take a chainsaw to these nuanced problems when Congress meant to use a scalpel.”  Indeed, the Court warned, the alternative reading of an ATDS “would capture virtually all modern cell phones” and commonplace activities such as speed dialing or sending automatic text message replies—“an outcome that makes even less sense.”

The Court concluded by rejecting the respondent’s counterarguments, noting that they could not overcome the “clear commands” of the statutory text and context.  The Court remarked that respondent’s resort to his view of the broad “sense” of the text “would have some appeal” only if traditional tools of interpretation led to an impossible or implausible outcome, which they did not.  The Court was unpersuaded by the respondent’s resort to broad statements of Congress’s purpose, noting that they “do not mean it adopted a broad autodialer definition.”  The Court observed, for instance, that the statute separately prohibits calls using artificial or prerecorded voices regardless of the technology used—prohibitions that are unaffected by Congress’ narrow definition of an autodialer.  And, more fundamentally, the respondent’s “quarrel is with Congress, which did not define an autodialer as malleably as he would have liked.”

Finally, Justice Alito’s short concurrence reflects a thought-provoking dialogue between him and the majority about the proper method of statutory interpretation.  He expresses concerns about the majority’s “heavy reliance” on canons of interpretation, which he warns are not “inflexible rules” capable of mechanical application and depend heavily on context.  The debate is largely academic in the context of this case, given Justice Alito’s express agreement with the majority’s reading of the statute, but it will be interesting to see how that debate plays out in future cases.

 

 

 

Yesterday, the Supreme Court heard oral argument (pdf) (audio) in TransUnion, LLC v. Ramirez, a Fair Credit Reporting Act case in which a federal court entered a class-wide judgment awarding statutory damages for two practices that TransUnion ended years ago.

The case boils down to two issues:

  1. Can “risk” of harm confer Article III standing on all members of a class when the challenged policy has ended and the risk never materialized for the overwhelming majority of the class?  And, if so, how much of a “risk” is needed?
  2. Can a class representative satisfy Rule 23(a)’s typicality requirement when he experienced a distinct and exceptionally severe injury as compared to other class members?

The Justices asked difficult questions of both the parties and the Office of the Solicitor General, which participated in the argument as an amicus curiae supporting the plaintiff on the question of standing but suggesting that the case be remanded to the Ninth Circuit to reconsider the typicality question.  It is difficult to predict how the Court will rule.  Although some observers believed that the Court would focus its attention chiefly on typicality—which is the position the Solicitor General’s office urged—the argument suggested that the Justices are just as focused on the question of Article III standing.

At a minimum, the Court seems poised to confirm that all members of a class—not just the named representative—must have Article III standing to obtain a judgment in their favor.  In fact, the respondent conceded as much.

Members of the Court will likely also use this case as an opportunity to clarify its prior holding in Spokeo Inc. v. Robins, in which it ruled that a bare violation of a statute, without other accompanying harm, is not an injury in fact. (Our firm, including Archis, represented Spokeo; and the two of us, along with our colleagues, filed an amicus brief (pdf) in support of TransUnion.)

Background

Under federal law, U.S. companies are forbidden to do business with certain persons who are believed to threaten the security of the United States.  The Treasury Department’s Office of Foreign Assets Control (OFAC) maintains a list of these individuals, which includes suspected terrorists and narcotics traffickers.

TransUnion offers, as part of its credit-reporting services, to identify individuals whose first and last names match those of someone on the OFAC list to assist companies in complying with the law. TransUnion does not guarantee that an OFAC alert on a credit report means that the person is actually on the OFAC list, just that the individual shares a name with someone who is.

Respondent Sergio Ramirez has the same first and last name as an individual on the OFAC list.  When he attempted to purchase a car, the dealership pulled his credit report from TransUnion, saw the OFAC notation, and declined to sell him the car.  Ramirez was humiliated in front of his wife and father-in-law and cancelled an upcoming vacation because he feared being on a “terrorist” list would make traveling difficult.

Procedural History

Ramirez filed a class action against TransUnion, alleging two sets of FCRA violations.  First, he asserted that TransUnion violated FCRA’s disclosure requirements because, when individuals asked for their credit file, TransUnion notified them that they were a potential OFAC match in a separate letter.  In other words, while TransUnion sent all of the information that FCRA requires it to disclose, it did so in two envelopes instead of one, allegedly in violation of 15 U.S.C. § 1681g(a)(1) and § 1681g(c)(2).  Second, Ramirez asserted that TransUnion failed to maintain “reasonable procedures to assure maximum possible accuracy” of its credit reports, in violation of 15 U.S.C. § 1681e(b).

The district court certified a class of all individuals who had received a letter from TransUnion informing them that they were potential OFAC matches.  It is undisputed that credit reports were not disseminated for 6,332 of the 8,185 class members. Therefore, the fact that TransUnion had marked them as an OFAC match was not provided to a third party.

The case proceeded to a full jury trial, where Ramirez’s testimony about the embarrassment he experienced at the car dealership played a starring role.  The jury awarded each class member $984.22 in statutory damages and $6,353.09 in punitive damages

Facing a $60 million damages award, TransUnion appealed, challenging both Ramirez’s suitability as a class representative, given his exceptionally bad experience (one not shared by other class members), and the standing of the absent class members.

The Ninth Circuit affirmed.  Although it reduced the punitive damages award, it otherwise upheld the class-wide judgment.  Ramirez, it said, was sufficiently typical of the class because his legal claim was the same as and arose out of the same circumstances as the other class members.  According to the court, the fact that his injury was far more severe than other class members played no part in Rule 23’s typicality analysis.  The court of appeals also held that the 6,332 class members whose credit reports were not provided to others had standing because, in the court’s view, they faced a material risk that their credit reports with the OFAC alert would be disseminated to others.

The oral argument

At yesterday’s oral argument, the Justices focused most of their questions on when and how a risk of harm—as opposed to actual harm—can amount to an injury in fact. As the Court had explained in Spokeo, a plaintiff cannot “allege a bare procedural violation, divorced from any concrete harm,” but statutory violations that result in a “risk of real harm” can be concrete.  The Spokeo Court, which also had been considering “FCRA’s procedural requirements,” explained that not all violations of those requirements “cause harm or present any material risk of harm.”

In Transunion, two discrete aspects of what counts as a “material risk of harm” took center stage.  First, because this case is a class action, it presents a unique dilemma:  Some members of the class who were not actually harmed may not even have been aware of the potential for any risk of harm at the time because they did not realize that an OFAC alert was on their credit reports.  Second, because TransUnion has since changed its practices and because 6,332 of the class members never had their credit report disseminated, any risk of harm that might have previously existed had, by the time of final judgment, dissipated entirely.

Justice Gorsuch tackled the first issue in an exchange with TransUnion’s counsel, remarking that “in order to have emotional distress” from a risk of harm, “you have to have knowledge of the thing that would cause the emotional distress.”  Counsel agreed and argued that risk unaccompanied by emotional distress could rarely serve as an injury in fact; the risk would have to be quite high, approaching near certainty, and the potential harm far more serious than an incorrect credit report.  Justice Alito, meanwhile, recalled the Court’s admonition in Spokeo that injuries in fact should have a common-law analogue, and wondered whether there was any common-law analogue where an unknown risk of harm was actionable.

Justice Barrett addressed the second aspect, remarking that if an injury—here, the risk of harm—existed at one point, but later evaporates, the case likely cannot move forward, but courts would call that a mootness problem, as opposed to standing.  Chief Justice Roberts pushed Ramirez’s counsel on this point as well, asking him whether, rather than bringing a lawsuit, litigants shouldn’t feel grateful to have avoided harm when they learn they were exposed to a risk that never materialized.

The Chief Justice also attempted to find an outer limit to Ramirez’s standing theory.  Suppose, he asked Ramirez’s counsel, “Congress creates a cause of action for statutory damages for anyone driving within a quarter mile of a drunk driver.”  Would Article III allow someone to bring a claim under this provision if, several days later and long after the risk had passed, she finds out a drunk driver had been nearby? Ramirez’s counsel replied that it would—essentially conceding that his client’s theory of standing would authorize lawsuits over statutory violations that could never result in actual harm nor a known risk of harm.  As counsel for TransUnion pointed out in rebuttal, if Ramirez’s theory were correct, “everybody [could] bring actions for traffic violations that didn’t actually [result in] any harm.”  That result would open Article III courts “to all sorts of trivial injuries,” when people should actually be “toasting their good luck, not suing the person who posed a risk to them, but didn’t actually injure them.”

The question of typicality received far less attention. Justices Breyer and Sotomayor in particular expressed doubt that Ramirez was “atypical” within the meaning of Rule 23.  They expressed the belief that any unfairness caused by his testimony at trial should have been remedied by objecting to his testimony, countering it with testimony from absent class members—something that defendants will fasten on in future class action trials—or using a verdict form that would allow for different statutory-damages awards.  The other Justices paid comparatively less attention to the typicality issue.  Despite that, the lawyer arguing for the Solicitor General’s office made a powerful case for why Ramirez was an atypical class representative, explaining that whether a representative’s “claim” was typical of the class includes evaluating the representative’s injury.  Further, the lawyer argued that having Ramirez testify about his unusually severe injury told the jury a story that was not “indicative of what happened to other class members,” who “might benefit from that”—when the jury awarded statutory damages—“in a way that they really shouldn’t.”

Final Thoughts

It is hard to deny that Mr. Ramirez himself experienced a real harm—certainly enough to open the doors to federal court.  But the same cannot be said of the many thousands of class members who never had their credit reports disseminated and thus suffered nothing more than a bare procedural violation—which, under Spokeo, is insufficient to confer standing.  Indeed, Ramirez’s theory would open the floodgates to all sorts of claims, including ones where the plaintiff had neither been harmed by a statutory violation nor was even aware of any possible risk of harm to himself or herself.   That limitless theory of jurisdiction seems antithetical to Article III’s requirement that the federal courts can hear only cases involving injuries that are “concrete” and “real,” as the Spokeo Court put it.

That said, how the Justices will rule on this issue, or on the typicality question, is difficult to predict.  Given the timing of this argument, it seems likely that this case will be one of the last decisions of the Term.  We will keep readers posted on the outcome.