Jessica L. Hubley is guest writer for UpCounsel and part of their attorney network. She is a graduate of Stanford Law School and a former associate at Latham & Watkins LLP and Dickstein Shapiro LLP. She advises emerging companies on general corporate matters, with a focus on eCommerce and Privacy, and regularly consults startups on how to affect Privacy by Design.
Privacy rules and guidance come from many different places: regulators, state statutes, federal statutes, and courts. When web companies get sued in court over alleged privacy violations, the lawsuit almost always takes the form of a class action – where many plaintiffs join forces accusing a company of doing them a similar wrong. Fortunately for the tech industry, a Supreme Court case called AT&T vs Concepcion, gave it a silver bullet to knock out most class action liability in the privacy space. Their solution, adding an “arbitration clause” into a terms of service that users agree to when using an application. Such a clause can help your startup to avoid a class action lawsuit.
What you choose to put in your terms of service generally becomes a contractual agreement with your users. Courts enforce these contracts against consumers in most cases where they’re not totally hidden from a user. These contractual obligations can include an agreement to arbitrate your consumer disputes instead of going to court, and they can include an agreement to conduct such arbitration on an individual basis like the one found in the UpCounsel Terms of Service in section 21.
In Concepcion, the Court said that such arbitration clauses are enforceable. Up until Concepcion, California courts had said that arbitration clauses in terms of service agreements were not enforceable because they limited the possibility of class action litigation.
So how exactly does this simple clause prevent your startup from being dragged into a class action suit? Lets take a brief look at the incentives which drive class action lawyers in privacy related suits.
Privacy class actions over the past decade generally claim a very small amount of money on an individual basis, so class action lawyers bundle all of these people together in what is called a class action lawsuit and sue the company for the aggregated amount. Lawyers start these cases on a contingency fee basis (i.e., “if we win, we collect a significant portion of your verdict as our fee in exchange for the risk of bringing a potential loser suit”) because few Plaintiffs will pay thousands of dollars to bring a suit themselves when they can only recover a few dollars. So, a class action lawyer may sue you for a privacy violation that “cost” a million people a few dollars hoping that the whole class settles for something like $10 million, of which the lawyers take home about $3 million.
But, post-Concepcion, if a consumer has agreed to arbitrate their disputes on an individual basis, they cannot join a class action suit. This makes the company’s users far less attractive to a lawyer who needs a whole class of plaintiffs to make any real money from suing the company.
Thus, by plugging in a simple, reasonable arbitration provision into your terms of service, you can likely prevent most, if not all, privacy class-action suits against you. Again, you can see an example in the UpCounsel Terms of Service:
. . . any dispute arising under this Agreement shall be finally settled on an individual basis in accordance with the Comprehensive Arbitration Rules of the Judicial Arbitration and Mediation Service, Inc. (“JAMS”) by three arbitrators appointed in accordance with such Rules. The arbitration shall take place in San Francisco, California, in the English language and the arbitral decision may be enforced in any court . . .
For a more detailed discussion of the cases discussing this ruling and the rules about enforcing terms of service generally, as well as a sample arbitration provision, please check out my full law review article, “How Concepcion Killed the Privacy Class Action” in the Santa Clara Computer and High Technology Law Journal.