Courthouse Steps Decision Teleforum: Frank v. Gaos

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Monday, March 25, 2019, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's subject is a Courthouse Steps Decision Teleforum on Frank v. Gaos. My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.

 

As always, please note that all expressions of opinion are those of the expert on today's call.

 

Today we are very fortunate to have with us Mr. Ted Frank, who is Director of Litigation and Senior Attorney at the Hamilton Lincoln Law Institute. After our speaker gives his remarks today, we will move to an audience Q&A, so please keep in mind what questions you have for the case, for our speaker, for whatever you'd like to ask about. Thank you very much for sharing with us today. Ted, the floor is yours.

 

Theodore "Ted" Frank:  Thanks for having me, and thanks to everybody for signing on with me rather than the U.S. Attorney's press conference on Michael Avenatti. Frank v. Gaos came down last week, and it was considerably briefer than we had hoped but still has interesting implications. And I will not end the battle over cy pres in the Supreme Court.

 

Just as background, of course, the underlying litigation was a class action brought against Google for alleged violations of the Stored Communications Act, alleging that Google's practice of sharing referred headers with targeted websites when you click on a search result in Google violated the Stored Communications Act and subjected them to statutory damages. Beyond the possible problems of the factual allegations, this had survived a motion to dismiss and Google decided, along with a putative class counsel, to settle the case before any further briefing or litigation had been done.

 

The settlement did not provide any money to the allegedly injured class members of whom there were some 120 million or so, but did pay the attorneys over $2 million. The parties rationalized this by saying that there was going to be $5 million or so that would be given to what is known as cy pres where parties agree rather than paying class members, they'll pay third party charities. Melissa Holyoak and I objected to this settlement as class members, noting that in addition to failing to provide the class anything, even as cy pres, it was questionable because many of the recipients were already affiliated with Google. And indeed two of them were the alma maters of class counsel, including Harvard and Chicago Law School.

 

The district court at the fairness hearing suggested that none of this passed the smell test but feeling bound by previous Ninth Circuit precedent Lane v. Facebook, it approved the settlement. And the Ninth Circuit followed suit in affirming in a 2-1 decision, again following Lane v. Facebook saying that it would not be feasible to pay all 129 million class members with only $8 million or so in the pot, and therefore an all-cy-pres settlement was acceptable and then by 2-1 vote deciding that the district court did enough to determine that there wasn't a conflict of interest in terms of attorneys funneling money to their alma maters.

 

This presented a circuit split with other cases we had won challenging cy pres in the Third, Seventh, and Eighth Circuit as well as an outstanding Fifth Circuit opinion. The Supreme Court had previously, when on a cert petition in Lane v. Facebook, called sub nom. Marek v. Lane, Justice Roberts had written an opinion respecting the denial of certiorari suggesting that the Court might need to take up the issue in the future because of the substantial questions it raised. And taking that invitation in a cert petition, ably written by attorney Andrew Grossman, the Supreme Court did grant cert last April, and it was argued October 31st.

 

At the oral argument, you might recall the panel was particularly enamored with an argument that the Solicitor General had made that the underlying lawsuit did not satisfy Article III jurisdiction; that plaintiffs had failed to allege a concrete injury under Spokeo v. Robins. None of the lower courts had addressed Spokeo when the district court had decided that the parties had standing. It was relying on Edwards v. First [American] Financial which held that a Ninth Circuit decision holding that the mere creation of a cause of action by Congress was sufficient to create standing proposition rejected by Spokeo, which held that while an intangible injury might satisfy Article III case or controversy requirement, it had to be concrete even if it was intangible. Of course, you look up concrete in the dictionary and it means tangible. So it's not clear what the parameters of concrete but intangible are. However, the Ninth Circuit never reached that question even though it was flagged for it in a 28(j) letter filed by Google. And so at oral argument, much of the time was spent asking the parties where they stood on the Spokeo question, and the Court very quickly asked for two additional rounds of briefing on that question.

 

I did not think that there was that much of a problem with standing. Though the lower courts did not appropriately apply the correct standard, there was Supreme Court precedent in a number of cases, such as Doe v. Chao where the allegation of a concrete injury was enough to get you within the courthouse door even if you might want to throw the case out for lack of failure to prove the injury; that there is a distinction between the allegation of a concrete injury and actually having to delve into the factual basis for that.

 

The Court in its per curiam opinion, an 8-1 decision that it released Wednesday, held, "Well, we're a court of review, not of first review, and therefore we're remanding it to the Ninth Circuit to adjudicate where this stands with respect to Spokeo." Justice Thomas dissented following his Spokeo concurrence. He argued that standing should turn on the private right versus public right distinction which is, unlike Spokeo, a nice, bright-line rule that's easy to apply by lower courts. And under that distinction there would be standing. There would be Article III jurisdiction. And then he would reach the merits, and then very quickly rattled off the problems with this that wouldn't be fair under 23(e) for the attorneys to be paid with a class not being paid. There's a 23(a)(4) problem when the attorneys are diverting money to cy pres rather than to the class. And, indeed, there's superiority problem under Rule 23(b)(3) in that it's hard to call a class action a superior means of resolving of the litigation if you're claiming that no money can be delivered to the class.

 

And, indeed, the nature of our objection was yes, you can't give money to every single class member, but next to no class action ever bothers to try to give money to ever single class member. Instead, they set up a claims process. And even when the average claim, where the average amount of money if it was to be divided among every single class member, is only pennies, as it is here, parties find that the claims process can readily provide $5, $10 per class member because so few class members bother to submit claims in any given class action. And even if, for some reason, the claims process is oversubscribed, you could hold a lottery to distribute the sums to some fraction of the claiming class members. Not necessarily a $5 million award for one class member, but you could certainly give out 5,000 $1,000 awards or 50,000 $100 awards or something like that.

 

However, the Court, of course, did not reach that issue and has remanded to the Ninth Circuit. So where are we on by pres? Well, as I said in our last teleforum it's hard to imagine that the lower courts are going to find that there's isn't standing here. No appellate court has thrown out a case in this posture for lack of standing. Even Spokeo on remand to the Ninth Circuit found yes, there is Article III standing to make the allegations that Spokeo suggested did not provide standing. And then the Supreme Court denied cert the second time around.

 

While Google, using at the Supreme Court oral argument the same attorney that argued Spokeo, once again reiterated its attempt to claim that there is no intangible injury that Congress could create Article III standing for in a civil litigation, unless that injury were a cause of action that existed at the time of the Founding, and privacy injuries do not rise to that standard. The Supreme Court did not adopt that in Spokeo and no lower court has followed suit. And, indeed, there is an Eleventh Circuit opinion that was decided over the course of last year holding that the allegation of the concrete injury was sufficient at the class action settlement stage under Lujan to create Article III standing.

 

So I suspect that the Ninth Circuit will eventually, or the lower courts, will eventually find standing here, and then we will be submitting another certiorari petition right back up to the Supreme Court. And it's possible that Google will also once they lose on the standing question, which I think is an important question and now one that the Supreme Court has punted on three times – in this case, to a certain extent in Spokeo where it remanded without giving especially clear guidance, and earlier than that First American Financial v. Edwards where it dismissed cert as improvidently granted on appeal from the Ninth Circuit Edwards decision that was discussed earlier.

 

But even before Frank v. Goas II might get back up before the Supreme Court, we have another cert petition pending now, Case Number 18-1074 Perryman v. Romero, which is an interesting case. It's a settlement where they created a $12 million cash fund. The attorneys get $9 million of it and the class can claim from the other $3 million. But they made the claims process in such a way that only 0.2 percent of the class claimed anything and over 99 percent of the class would be getting coupons only. And these [are] coupons for flower delivery services that expire in a year and aren't good for Valentine's Day or Mother's Day or Christmas. The class isn't getting very much while the attorneys are getting $9 million, and then $200,000 in cash going to the class, and then another $3 million going to endow chairs at local San Diego universities in the defendant's name. We suggested that this was a problem given that there is so many uncompensated class members for so much money to be diverted to cy pres – 15 times as much as what the class is getting.

 

The Ninth Circuit, again following Lane v. Facebook in contrast to all of the other circuits that rule on these questions, upheld that part of the settlement, though they remanded on the question of attorney's fees. So we've filed for cert in that case. And there's no question of standing there because the underlying allegation is one of consumer fraud and financial damages. So whatever vehicle problems might have existed in Frank v. Goas will not exist in Perryman v. Romero.

 

And it brings forward the broader case of the appropriateness of cy pres, not just in the limited scenario where $0 is going to the class but in a broader scenario where the class is getting some token amount of money in non-financial relief, but most of the -- a disproportionate amount of money is going to cy pres that could be feasibly distributed to the class. Indeed, if the lower court reduces attorney's fees, the cy pres could grow to as much as $9 million. And with about 1 million class members, all of whom are not only readily identifiable but are already getting a distribution of coupons from the settlement, there's no reason that a check couldn't also be issued.

 

I think the only thing that's happened here is that the ultimate day of reckoning for cy pres has been postponed. Either Perryman or Frank v. Gaos II will raise the issue again. Indeed, there is a Third Circuit case pending involving another Google settlement that's almost identical to the Gaos settlement, a settlement over Google's use of cookies on Apple iPhones. And the Third Circuit delayed ruling on that until Gaos came down. But that could potentially work its way up to the Supreme Court also, either because there's a circuit split with the Ninth Circuit or because they joined the Ninth Circuit and sign off on a bad settlement. And there's another Google settlement in the Northern District of California that was put on hold until Gaos was decided.

 

So there are plenty of other cy pres settlements out there that the Court can consider eventually, and with Justice Thomas now vocally speaking on this in addition to the Justices who were very vocally skeptical of it at oral argument, there does seem to be a majority ready to reject the practice. And I think that will deter future cy pres settlements that aren't already in the pipeline.

 

Happy to take your questions, and look forward to hearing from people.

 

Wesley Hodges:  Well, thank you so much, Ted, for that wonderful analysis. Here's our first caller.

 

Michael Rosman:  Hi, it's Michael Rosman with the Center for Individual Rights. Ted, as I read the opinion, the Court implied but did not state that assessing standing at this stage of the litigation would be done by determining whether the complaint alleges standing; that is, say, whether they allege facts that would constitute an injury under Spokeo. Now, the first question, of course, if that's right why they just couldn't do it themselves, and the fact that they remanded it suggests perhaps that it's not right. But I was wondering if you had an opinion about that on reading the opinion whether or not the Court viewed the complaint as the operative document to look at to determine standing?

 

Theodore "Ted" Frank:  Yeah, I think that's a fascinating question that nobody's really closely looked at. The Fifth Circuit has sort of waived at it in the BP litigation, and then the Eleventh Circuit came down and made that decision in Muransky. And obviously the alternative is to conduct a mini trial before entering final judgment, and that doesn't seem right either because courts can enter final judgment without having a factual determination. It does that all the time. For example, if there was a 12(b)(6) motion to dismiss the complaint, the court can find the complaint adequately alleges standing, and that's all you need at the complaint stage under Lujan. But if it enters judgment on the merits, it doesn't have to now do the factual determination of whether standing exists. And indeed, the Supreme Court itself did that in a case called Doe v. Chao where there was a disclosure of Social Security numbers. The Court found that the allegation of the disclosure was enough to get them in the courthouse door, even if the failure to adequately prove injury was not enough to prevail, and therefore merited throwing the complaint out.

 

I think that's right, and we briefed it as such, but it's possible --

 

Michael Rosman:  How do you read the opinion?

 

Theodore "Ted" Frank:  I'll have to look more closely at that. I sort of assumed that it wasn't reaching that issue, but now that you've raised it in those terms --

 

Michael Rosman:  Well, they didn't say a lot. They said that the district court and the Ninth Circuit never said anything about whether the complaints allege standing. So from that I am perhaps extrapolating too much but . . .

 

Theodore "Ted" Frank:  That might be extrapolating too much. I mean, they've never adjudicated the standing question. The district court adjudicated it on the first motion to dismiss and applied what turned out to be the wrong legal standard as determined by Spokeo years later as the case was pending on appeal. Then the Ninth Circuit did not fulfill its duty to initially determine whether it had standing, especially after Spokeo had come down and Google had flagged it for it. So Google didn't raise it at the oral argument, just in a 28(j) letter.

 

I think that's just a factual description of what happened below rather than -- and certainly it's a minimum of what's required. But Lujan talking about if you're entering judgement you have to prove it on the facts. And if it's at the complaint stage, they'd have to survive a motion to dismiss. And at the summary judgment stage, you got to have facts sufficient to create an issue of fact.

 

You know, what is the Lujan standard for entering judgment on a class action settlement? And probably the right answer is, as we discussed, in our first supplemental brief that we filed in November, the idea of whatever the procedural posture is at the time of the settlement is enough. If the court had jurisdiction at that time, then it has standing to enter judgment on whatever settlement is reached because the alternative just wildly complicates matters and takes away much of the benefit of settlement if you have to litigate the standing question. But even if you have to prove the facts, certainly settling parties can stipulate to it, even if in this particular one-off case Google effectively reneged on the settlement to protect itself and is now seeking to have the case tossed on standing.

 

Wesley Hodges:  Thank you so much, caller. Appreciate your question. Ted, seeing no immediate questions, do you have anything that you'd like to cover in more detail or shift our attention to?

 

Theodore "Ted" Frank:  Well, certainly. What we've been doing over the last ten year at the Center of Class Action Fairness which is now part of the Hamilton Lincoln Law Institute, HLLI.org, is we represent class members objecting to unfair class action settlement practices, such as cy pres which divert millions of dollars away from class members to what are basically attorney flush funds. And in Frank v. Gaos there is a very interesting series of amicus briefs arguing that it was really important that cy pres be allowed as a mechanism to fund legal aid societies because if class members weren't taxed to have these cy pres settlements providing funding for legal aid, well the legal aid would be insufficiently funded because legislatures are refusing to do so. And I thought that fascinating that we need this completely undemocratic process where attorneys are diverting client's money to these causes that the duly democratically elected representatives of the class members are choosing not to fund. And I think that says a lot about the problem of cy pres.

 

In this particular case, I was the objector, and thus the petitioner and will have my name inscribed somewhere in Volume 586 of the U.S. Reports a few years down the line. But that can be you. We can't just show up in court complaining about abusive class action settlement practices. We have to have a client. And whether that's attorneys over billing or attorneys diverting money from the class to their own pockets or to cy pres, we don't have -- unless we have a class member who can object to -- who's a member of the class and effected by the settlement to object to the practice, we can't do anything about it. And so everyone on this phone call is at least a member of a few pending class actions, and if you see one that gets your dander up, give us a call.

 

Wesley Hodges:  Wonderful. Well, thank you so much, Ted. Well, we have a large audience here listening to your remarks, Ted, and I'm sure we're all very grateful for the remarks. Perhaps you're just so thorough that our questions are answered.

 

Theodore "Ted" Frank:  I've preempted every question. That's a sign of a good advocate.

 

Wesley Hodges:  It sounds like it. Do you have any closing thoughts for us, Ted, before we sign off today?

 

Theodore "Ted" Frank:  Thanks for joining, and thanks to The Federalist Society for making this phone call possible.

 

Wesley Hodges:  Great. On behalf of The Federalist Society, I'd like to thank you for the benefit of your very valuable time and expertise today. We welcome all listener feedback by email at [email protected]. Thank you all for joining. The call is now adjourned.

 

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