• by Wendy Davis  @wendyndavis, July 15, 2013

A federal appellate panel has sided with the Internet service provider Bresnan Communications in a lawsuit stemming from its partnership with defunct behavioral advertising company NebuAd.

The 9th Circuit Court of Appeals ruled on Monday that a trial judge wrongly rejected Bresnan's request to compel arbitration. The appellate court returned the case to the trial judge, with instructions to reconsider Bresnan's request for arbitration.

That ruling is “a blow to the plaintiffs,” because it means the case will likely head to arbitration, says Internet law expert Venkat Balasubramani. “This will definitely take the wind out of the plaintiffs' sails,” he says.

In general, consumers usually prefer to have cases decided by juries (which often award large monetary damages) than arbitrators. In this case, the arbitration clause specifically banned class-action lawsuits. That's significant because consumers often find it prohibitively expensive to bring a suit that's not a class-action. (Attorneys who successfully bring class-actions are entitled to recover their fees from the losing side, but the same isn't true for lawyers who sue on behalf of a single individual.)

The latest decision is the latest in a series of court rulings stemming from a 2007-2008 partnership between NebuAd and half a dozen Internet service providers. The ISPs, including Bresnan, allowed NebuAd to use deep-packet inspection technology to monitor subscribers' Web activity and serve targeted ads based on the data collected. Other ISPs to partner with NebuAd included Cable One, CenturyTel, Embarq and Wide Open West.

Bresnan asked the trial judge to send the case to arbitration, arguing that the company's agreement with subscribers specifically provided that all disputes would be resolved by an arbitrator. But in 2010, U.S. District Court Judge Richard Cebull in Montana rejected Bresnan's request and invalidated the arbitration clause, which he described as a “take-it-or-leave-it” arrangement. Cebull wrote that Montana courts refuse to enforce such terms.

But on Monday, the 9th Circuit said that Cebull should have examined how courts in New York would approach the issue. The appellate judges added that "New York law generally favors arbitration."

Bresnan Communications is headquartered in New York, but the consumer who filed the potential class-action resides in Montana.

Scott Kamber, a lawyer who represents the plaintiffs, says his firm is “evaluating our options for further review.”

Many companies engage in behavioral advertising, but NebuAd was particularly controversial because its technology was considered more intrusive than older forms of behavioral targeting. In 2007, when NebuAd launched, competing behavioral targeting companies only collected information from a network of commercial sites. But NebuAd was able to draw on data from ISPs, which were able to provide information about everything consumers did online, including their search activity and visits to non-commercial sites.

NebuAd maintained that its data collection was anonymous and that consumers could opt out of the program. However, most of the ISPs that participated only provided notice of the program by quietly revising their online privacy policies -- a method that critics called inadequate, given that consumers had no reason to suspect the change in terms.

NebuAd's technology emergence spurred congressional hearings, following which the company suspended plans to roll out its system. Shortly afterward, the company folded. After the details of the tests came to light, a group of consumers sued all six ISPs and NebuAd for allegedly violating federal and state laws with the platform.

NebuAd settled the litigation in 2011 for $2.4 million. But the ISPs, which opposed the lawsuits, have so far escaped liability.