May 2012: Class Action Litigation Update: Data Breach Class Actions—Courts Treat Theft Differently From Mere Loss

by Quinn Emanuel Urquhart & Sullivan, LLP
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Data Breach Class Actions—Courts Treat Theft Differently From Mere Loss: Any company that stores or processes consumers’ personal information is at risk of suffering a data breach—and, potentially, defending a class action lawsuit. Class actions based on data breaches are increasingly common and attractive to plaintiffs’ lawyers because of the enormous class sizes that often result from a single breach. But despite their favor with the plaintiffs’ bar, some defendants can obtain dismissals at the pleading stage due to absence of an injury in fact resulting from the breach.

The Ninth Circuit has held that increased risk of identity theft resulting from a data breach establishes Article III standing. Krottner v. Starbucks Corp., 628 F.3d 1139 (9th Cir. 2010). Krottner involved a laptop stolen from Starbucks that contained the names, addresses, and social security numbers of about 97,000 Starbucks employees. Although several plaintiffs had not alleged they had suffered identity theft or any other financial harm, someone had tried to open a bank account with one of the plaintiff’s information. Under these circumstances, the court held increased risk of future harm sufficed to confer standing. Id. at 1143.

The Seventh Circuit has come to the same conclusion. In a case involving a “sophisticated, intentional and malicious” data breach, the court held that the increased risk of future harm resulting from breach established standing. Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 634 (7th Cir. 2007).

The Third Circuit, however, recently drew a line between intentional breaches and mere loss of information. In Reilly v. Ceridian Corp., 664 F.3d 38 (3d Cir. 2011), the court held that the plaintiffs would only be injured if a series of speculative harms actually came true:

          "Appellants’ contentions rely on speculation that the hacker: (1) read, copied, and   
          understood their personal information; (2) intends to commit future criminal acts by  
          misusing the information; and (3) is able to use such information to the detriment of  
          Appellants by making unauthorized transactions in Appellants’ names. Unless and until  
          these conjectures come true, Appellants have not suffered any injury; there has been no
          misuse of the information, and thus, no harm."

Id. at 42. The court distinguished Krottner and Pisciotta, saying that the threats in those cases were “significantly more ‘imminent’ and ‘certainly impending’ than the alleged harm here.” Id. at 44. The court reasoned that, “[h]ere, there is no evidence that the intrusion was intentional or malicious,” and the plaintiffs “alleged no misuse, and therefore, no injury.” Id. Cf. Lambert v. Hartman, 517 F.3d 433, 437 (6th Cir. 2008) (stating that although risk of future identity theft was “somewhat ‘hypothetical’ and ‘conjectural,’ [plaintiff’s] actual financial injuries are sufficient to meet the injury-in-fact requirement”).

The Ninth Circuit also recently embraced this distinction in Whitaker v. Health Net of Cal., Inc., No. CIV S-11-0910 KJM, 2012 WL 174961 (N.D. Cal. Jan. 20, 2012). In Whitaker, Quinn Emanuel successfully dismissed a data-breach class action involving allegedly lost hard drives that contained 800,000 California residents’ personal and medical information. There was no evidence of hacking, theft, or misuse of the plaintiffs’ personal information.

Quinn Emanuel argued that mere loss of data—as opposed to hacking or theft—was insufficient to establish standing. Judge Mueller of the Eastern District of California accepted our argument. Because “Krottner . . . arose from the theft of information, not its loss,” the court held that it did not control the outcome. Whitaker, 2012 WL 174961, at *2. The plaintiffs failed to “explain how the loss here has actually harmed them or threatens to harm them,” and so the court held that “[a]ny harm stemming from their loss thus is precisely the type of conjectural and hypothetical harm that is insufficient to allege standing.” Id.

Thus, in cases of lost rather than stolen data, Whitaker is obviously extremely helpful precedent. But even when plaintiffs allege someone has hacked or stolen their data, the Third Circuit’s decision in Reilly may still provide a basis for dismissal where there are no allegations of concrete harm to any plaintiff.

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