Phone Makers Hope Carriers' ADR Clause Can Protect Them Too

Phone Makers Hope Carriers' ADR Clause Can Protect Them Too Hillary Jones-Mixon Judge Edward Chen, Northern District of California

SAN FRANCISCO — Software company Carrier IQ and a host of cell phone manufacturers are trying to dismantle a potentially enormous privacy case before it begins by borrowing an arbitration provision that consumers signed with their carriers.

Plaintiffs allege that Carrier IQ and manufacturers including Samsung and HTC violated their privacy by installing tracking software on their phones. Pointing to arbitration agreements that the consumers signed when they bought their phones, the defendants argue that plaintiffs’ claims must be swept out of federal court.

But plaintiffs insist that they never agreed to arbitrate their claims with the defendants. Carrier IQ and the cell phone manufacturers are wielding a contract struck between consumers and their cell phone carriers, which are not defendants in In re Carrier IQ Inc. Consumer Privacy Litigation, 12-2330.

The case has kept many players in Big Law busy. Firms enlisted for the defense include Fenwick & West for Carrier IQ; Munger, Tolles & Olson for HTC America; Covington & Burling for Huawei Devices USA; Greenberg Traurig for LG Electronics MobileComm U.S.A.; and Skadden Arps Slate Meagher & Flom for Samsung Telecommunications America.

The plaintiffs bar is also watching. “An effort from a defendant to invoke someone else’s arbitration clause is a pretty audacious move,” said Jahan Sagafi, a class action partner at Outten & Golden who is not involved in the case.

The reach of arbitration agreements is, of course, a hotly contested question in the law. U.S. District Judge Edward Chen will consider the defendants’ motion to compel arbitration at a hearing on March 12, and his decision could offer important guidance on corporate defendants’ ability to benefit from arbitration agreements to which they are not a party, attorneys say.

It is much more than an intellectual question for plaintiffs lawyers at Pearson Simon & Warshaw and Hagens Berman Sobol Shapiro, who are trying to hang onto a class action with millions of potential class members.

Driving the case into arbitration would be “a death knell for the class action,” said Bruce Simon of Pearson Simon & Warshaw.

In Simon’s view, the case is about much more than contract enforcement.

“You have to weigh the privacy violations against how far you would extend the arbitration provision,” Simon said. “The balance could, in a privacy case, weigh more toward protecting people’s privacy rights and allowing the class action to proceed.”

Meanwhile, defendants accuse the plaintiffs of using their underlying privacy claims to dress up a classic question of contract law.

“Plaintiffs are doing a nice job of trying to make the claims sound different,” said Carrier IQ lawyer Rodger Cole, a partner at Fenwick & West. “But at the end of the day the critical issue is still whether the consumers entered into an agreement with the carriers that … procedurally requires the consumers to arbitrate any disputes.”

Sunnyvale-based Carrier IQ, whose software helps carriers collect data about their service, became a target of the plaintiffs bar in 2011, when a blogger posted a YouTube video showing how his smartphone logged his keystrokes and other data. The cases were clustered together in the U.S. District Court for the Northern District of California in August 2012, but the litigation has moved at a glacial pace since.

The motion to compel arbitration, filed in November 2012, triggered an avalanche of discovery. If successful, the motion would defuse a class action with potentially astronomical damages.

Like many of the largest privacy class actions facing technology companies, the Carrier IQ case includes claims filed under the Electronic Communications Privacy Act, which provides statutory damages of up to $10,000 per violation.

The defendants accuse the plaintiffs of citing their service contracts to argue that their privacy was violated while distancing themselves from the documents’ arbitration provisions.

“The stakes are whether plaintiffs, when they have complaints about the service, can choose to assert claims against the phone manufacturers and a software provider, instead of the service providers, to avoid plaintiffs’ choice to submit any disputes to individual arbitration,” Cole wrote in the motion to compel arbitration.

Moreover, defendants argue that plaintiffs must arbitrate their claims against Carrier IQ and the manufacturers because the allegations are intertwined with the actions of the carriers. The defendants note in their briefs that cell phone carriers were targeted in some early complaints before the cases were consolidated. Although they have since been dropped, the carriers and the contracts they struck with plaintiffs remain central to the case, the defendants argue.

The plaintiffs dispute they are trying to have it both ways. Plaintiffs also argue that they cannot be held to the arbitration provision because their service contracts did not inform them that their data would be tracked by a third party like Carrier IQ.

With such complex claims, privacy cases like Carrier IQ are bound to get messy, said Brian Pascal, a fellow at the UC-Hastings Institute for Innovation Law.

“It definitely is emblematic of one of the problems with modern privacy,” Pascal said. “Data isn’t just between two parties. It goes everywhere.”

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