Ninth Circuit: “Zombie” Cookie Installer Cannot Compel Arbitration Based on Verizon Arbitration Agreement

by Kilpatrick Townsend & Stockton LLP
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Takeaway: Non-parties who seek to rely on equitable estoppel to compel arbitration of claims based on an arbitration agreement they did not sign face an uphill battle in the Ninth Circuit. In In re Henson, No. 16-71818, 2017 WL 3862458 (9th Cir. Sept. 5, 2017), the Court again held that business to business service providers cannot take advantage of their clients’ arbitration agreements simply because a consumer’s claims against them are related to the underlying consumer contract. Rather, the non-signatory must prove that the claims actually rely on the existence of the customer agreement or otherwise arise from its obligations.

In April 2015, Anthony Henson and William Cintron filed suit against Turn, Inc. in the Northern District of California on behalf of all New York Verizon Wireless subscribers. The class action complaint alleged Turn had a contract with Verizon to facilitate the delivery of third-party online behavioral advertising to Verizon subscribers. To customize the advertisements it would deliver to each subscriber, Turn attached cookies to the subscribers’ mobile device transmissions to collect their web-browsing and usage data and then stored that data on Turn’s servers – a commonplace practice in today’s advertising world that was disclosed in Verizon’s agreement with each of its subscribers.

Plaintiffs alleged, however, that Turn was attaching no ordinary cookies to their transmissions. Instead, Turn attached “zombie” cookies that automatically saved a backup version of the cookies in a directory on the subscribers’ phones, outside of the dedicated directory for cookie storage. Plaintiffs claimed that if a subscriber deleted Turn’s original cookie by clearing the directory where all cookies were supposed to be (e.g., by using the “clear cookies and browsing data” function on their browser), the backup version would automatically repopulate the cookie using the same data the subscriber thought he had deleted. That newly-resurrected cookie would then link itself to the data about the subscriber that Turn had already stored on its servers and continue collecting information about the subscriber. In sum, zombie cookies are very difficult to remove and often result in the subscriber’s browsing activity being collected after the subscriber believes the cookie has already been deleted.

Based on these allegations, plaintiffs asserted claims against Turn for violation of New York’s consumer protection laws and for common-law trespass. Turn moved to compel arbitration based on the arbitration clause in Verizon’s agreement with each of its subscribers (to which Turn was not a signatory). The district court granted the motion based on New York’s equitable estoppel doctrine and stayed the litigation.

In a brief opinion with little analysis, the district court held New York law applied because the plaintiffs’ (and each of the class members’) subscriber agreements with Verizon contained a New York choice of law provision. It also held plaintiffs should be equitably estopped from avoiding arbitration because the plaintiffs’ claims against Turn (1) were “inextricably intertwined” with Verizon’s subscriber agreements containing the arbitrate clause, given that the agreement’s disclosure of the use of third-party cookies would be an aspect of Turn’s defense, and (2) were based on “substantially interdependent and concerted conduct” between Verizon and Turn. The district court also was of the view that plaintiffs had engaged in “artful pleading” to avoid arbitration, since they originally filed the case against both Turn and Verizon (and would have had to contend with the arbitration clause in Verizon’s subscriber agreement), but voluntarily dismissed that complaint and filed essentially the same claims five days later against Turn only.

Plaintiffs petitioned the Ninth Circuit for a writ of mandamus. Granting mandamus, the Court of Appeals found that the district court committed two clear errors. First, the lower could erred by applying New York’s equitable estoppel doctrine on the basis of the New York choice of law provision in Verizon’s subscriber agreement, since Turn was not a party to that agreement. Instead, the district court should have applied California equitable estoppel law. Second, according to the Ninth Circuit, the district court did not correctly apply the equitable estoppel doctrine.

To satisfy California’s equitable estoppel doctrine, a non-signatory must show the claims against it (a) rely on the terms of the agreement containing the arbitration clause or are intimately intertwined with that agreement, or (b) are based on concerted misconduct by the signatory and non-signatory, which misconduct is intimately connected with the obligations of the agreement. The Ninth Circuit found neither situation applied.

First, the fact that plaintiffs’ claims against Turn might relate to their subscriber agreement with Verizon in no way meant the claims were dependent on the agreement. The Ninth Circuit noted that plaintiffs’ claims contained numerous allegations against Turn that had nothing to do with Verizon’s subscriber agreement (e.g., violations of reasonable privacy expectations, interfering with plaintiffs’ ownership and control over the content stored on their mobile devices). Further, under the facts alleged, plaintiffs could maintain their claim under New York’s consumer protection statute even if they had never entered into subscriber agreements with Verizon. Second, there was no basis for finding “concerted misconduct” between Verizon and Turn. Plaintiffs did not allege Verizon and Turn acted in concert, but rather asserted Turn engaged in its misconduct in secret and without Verizon’s knowledge. Thus, it was clear error to apply equitable estoppel.

Even under Henson, a non-signatory may be able to invoke equitable estoppel where, but for the existence of the customer agreement, the consumer’s claims could not survive (for example, where an essential element of the claim depends on an obligation in the agreement). Otherwise, the non-signatory must show the consumer alleges truly concerted and interdependent misconduct among the signatory and non-signatory defendant with respect to the performance (or breach) of the consumer agreement. As Henson re-affirms, this will be nearly impossible where the terms of the agreement between the signatory and non-signatory disclaim any joint venture or partnership. 2017 WL 3862458, at *2 n.4. And, where a non-signatory claims the terms of its confidential agreement with the signatory established an interdependent relationship supporting equitable estoppel, the defendant will be found to have waived any claim of confidentiality as to those portions of its agreement. Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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