An arbitration clause in contracts between Verizon and its customers could not bar a class action against Turn, Inc., an ad company that collected data from Verizon customers’ mobile devices without their permission or knowledge, the Ninth Circuit has ruled. (In re Anthony Henson and William Cintron, No. 16-71818 (9th Cir. Sept. 5, 2017).) Verizon and Turn have a separate contract under which Verizon granted a license to Turn to use its service for targeted advertising in return for a percentage of the advertisement-generated revenue that Turn received.
Anthony Henson and William Cintron, the plaintiffs, are both Verizon cellular and data subscribers. Their contract with Verizon contained an arbitration clause that governs all disputes between the parties. Each subscriber’s wireless transmissions contained a Unique Identifier Header (UIDH) to which Turn attached cookies to obtain information such as the customer’s browsing habits and usage data. These cookies were allegedly not detectable. In fact, the plaintiffs claimed that if a subscriber deleted Turn’s cookie, Turn would “revive” it by attaching a new one without the subscriber’s knowledge or consent and repopulating it with the same information—the so-called “zombie” cookie.
San Francisco attorney Michael Sobol, who represented the plaintiffs, explained the significance and privacy concerns of this practice. “Cookies have various purposes, but ultimately they help keep track of your browsing activity,” he said. “Advertisers increasingly use third-party tracking cookies that act as a beacon, transmitting your browsing history back to the third party who first generated the cookie. This browsing history can provide a startlingly detailed picture into the user’s life because we use the internet for everything—health care, shopping, dating, news, and so on.”
He added, “We allege that by devising a scheme to secretly revive deleted cookies, Turn could maintain an uninterrupted chain of browsing history despite users’ express efforts to delete that history from their devices and browsers.”
The plaintiffs filed a class action in the Northern District of California on behalf of all Verizon subscribers in New York. They alleged that Turn engaged in deceptive business practices in violation of New York law and committed trespass to chattels through intentional interference with Verizon subscribers’ use and enjoyment of their mobile devices. Turn moved to dismiss the plaintiffs’ claims—because the contract between the plaintiffs and Verizon contained an arbitration clause, it argued, it barred the class action. The district court granted the motion, and the plaintiffs filed a writ of mandamus to vacate the lower court’s order. The Ninth Circuit granted the writ.
The Ninth Circuit first noted that in deciding whether to grant a writ of mandamus, the court must weigh whether the petitioner has other adequate means to attain relief, whether the petitioner will be damaged or prejudiced in a way not correctable on appeal, whether the district court’s order is clearly erroneous, whether the district court’s order makes an oft-repeated error, and whether the district court’s order raises new and important problems or legal issues of first impression. The Ninth Circuit noted that the plaintiffs did not have adequate means to attain relief because an order compelling arbitration is not a final decision subject to ordinary appeal. The court also noted that the second factor—whether that prejudice would be correctable on appeal—weighed in favor of granting the writ because it did not allow the plaintiffs to arbitrate the appeal on behalf of a class.
Turning next to whether the district court committed clear error, the Ninth Circuit held that it did: Turn’s attempt to invoke the arbitration agreement should not have been successful because the plaintiffs and Turn did not have an arbitration agreement with each other, and Turn was not a signatory to the contract between Verizon and its subscribers. Further, the contract between Turn and Verizon specifically stated that the parties are “independent of each other” and that “nothing in this Agreement creates any partnership . . . [or] joint venture.” Although Turn argued that New York law should apply when determining whether Turn could compel arbitration as a nonparty under the doctrine of equitable estoppel, the plaintiffs asserted that California law should apply.
The district court erred when it applied New York law based on the Verizon contract’s choice-of-law provision, the Ninth Circuit held. That provision is a contractual right and cannot be invoked by a nonparty to the contract. Turn, in other words, could not benefit from the choice-of-law provision as a nonparty. Instead, the Ninth Circuit held, the choice-of-law principles of the forum state—California—should have been applied.
California law would permit Turn to invoke the arbitration clause in two circumstances: The claims are founded in and intertwined with the customer agreement between Verizon and the plaintiffs, or the plaintiffs allege substantially “interdependent and concerted misconduct” by Turn and Verizon and the allegations are founded in or intimately connected with the obligations under the customer agreement between Verizon and the plaintiffs. Neither applied here, however. The plaintiffs’ claims, the Ninth Circuit pointed out, did not rely on the agreement they signed with Verizon. Further, they could have sued Turn whether or not they had signed a contract with Verizon.
Further, the plaintiffs did not allege that Verizon colluded with Turn—rather, the allegations were that Turn acted in secret without Verizon’s knowledge or approval. Sobol explained, “The two companies disclaimed any sort of formal relationship. When a security researcher discovered Turn’s zombie cookies, Verizon strongly condemned it.” Despite this, however, Sobol also pointed out that Turn’s use of the UIDH was not unforeseen: “It’s worth noting that the Electronic Frontier Foundation expressly warned of these kinds of risks when it learned of Verizon’s headers and before Turn’s zombie cookies were made public,” he said.
The Ninth Circuit noted that the fourth and fifth factors—oft-repeated error and issue of first impression—weighed against granting mandamus relief. But because the first three factors weighed in the plaintiffs’ favor, the Ninth Circuit vacated the lower court’s order granting Turn’s motion to stay the action and compel arbitration.
Verizon itself has been fined for its own use of zombie cookies, and both it and Turn have taken remedial measures due to government enforcement actions, including giving consumers an easier way of opting out of targeted advertising programs. However, Sobol warned, “These are real steps, but the underlying dynamic remains worrisome: Internet advertisers have strong financial incentives to circumvent user privacy and the ability to employ fast-evolving technology to do so secretly.”
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