Appellate Court Finds Risk of Identity Theft Sufficient to Establish Standing, Circuit Split Worsens

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The U.S. Court of Appeals for the Ninth Circuit has found that allegations of a future risk of identity theft resulting from a data breach are sufficient to establish standing. The March 8 ruling in In re Zappos.com Customer Data Security Breach Litigation, which follows the court’s prior decision in Krottner v. Starbucks (9th Cir. 2010), does not require that data breach plaintiffs allege an actual injury for Article III standing, making it much more likely for such plaintiffs to survive a motion to dismiss for lack of subject matter jurisdiction.

Background

In January 2012, hackers breached the servers of Zappos.com, an online retailer, and allegedly stole the names, account numbers, passwords, email addresses, billing and shipping addresses, telephone numbers, and credit and debit card information of more than 24 million Zappos customers. On January 16, 2012, Zappos sent an email to its customers notifying them of the theft of their personal information and recommending that they reset their Zappos.com account passwords and change the passwords on any other web sites that used the same or similar passwords. 

Plaintiffs immediately filed putative class actions alleging that Zappos had not adequately protected their personal information and that they faced an “imminent” risk of fraud or identity theft resulting from the breach. After several years of litigation at the pleading stage, the district court granted in part and denied in part Zappos’ motion to dismiss the plaintiffs’ Third Amended Consolidated Complaint. The court denied the motion as to those plaintiffs who alleged that they had already suffered financial losses from identity theft resulting from the Zappos breach but granted the motion as to the plaintiffs who did not allege having suffered any financial losses from the breach.

The district court found that the first group of plaintiffs possessed Article III standing because they had alleged “that actual fraud occurred as a direct result of the breach.” As to the second group of plaintiffs, the district court found that they lacked Article III standing because they had “failed to allege instances of actual identity theft or fraud.”

Ninth Circuit Decision

The Ninth Circuit reversed the district court’s judgment and remanded the case, concluding that, under Krottner, plaintiffs had sufficiently alleged standing based on the risk of identity theft. 

The Ninth Circuit began its analysis by examining whether Krottner was still good law after the Supreme Court’s decision in Clapper v. Amnesty International, USA (2013). In Krottner, a thief stole a laptop containing the unencrypted names, addresses and social security numbers of approximately 97,000 Starbucks employees. After those employees sued, the Ninth Circuit determined that their allegations of an “increased risk of future identity theft” resulting from the laptop theft represented “a credible threat of real and immediate harm” sufficient for Article III standing. In Clapper, plaintiffs challenged a provision of the Foreign Intelligence Surveillance Act that permitted surveillance of foreign nationals outside the United States. The Clapper plaintiffs were not foreign nationals but argued they had standing because it was “an objectively reasonable likelihood” that their communications with overseas contacts would be intercepted at some point in the future. The Supreme Court rejected their argument, holding that a “threatened injury must be certainly impending to constitute injury in fact,” and that the injury that the plaintiffs feared was too “speculative.”

The Ninth Circuit reconciled Krottner with Clapper and found that Krottner was still controlling in data breach cases. Unlike in Clapper, the alleged injury in Krottner was not based on a “speculative multi-link chain of inferences.” In addition, the standing analysis in Krottner did not involve any national security or separation of powers concerns as in Clapper. Moreover, the court found that, even after Clapper, allegations of future injury may still establish Article III standing where there is a “substantial risk that the harm will occur.”

Having determined that Krottner was controlling, the court turned to the plaintiffs’ allegations and concluded that information they alleged had been stolen, particularly the credit card numbers, was sensitive like the data in Krottner and could be used in committing fraud or identity theft. The court observed that Zappos itself acknowledged this fact by warning the affected customers to change their passwords on any other accounts where they might have used the same or similar passwords. The Ninth Circuit also noted that the actual harm suffered by the other plaintiffs whose claims the district court did not dismiss undermined Zappos’ assertion that the stolen information could not be used for fraud or identity theft.

Zappos further argued that even if the stolen information was as sensitive as the data in Krottner, too much time had passed for the harm to be imminent. Rejecting that argument, the Ninth Circuit held that harm (or the risk of harm) should be assessed at the time the action is brought, not as of the present. In doing so, the court found that the plaintiffs had sufficiently alleged an injury in fact, “based on a substantial risk that the Zappos hackers will commit identity fraud or identity theft.”

Finally, in completing the standing analysis, the Ninth Circuit found that the plaintiff’s alleged injury was “fairly traceable” to Zappos’ failure to prevent the breach despite the fact that their personal information may have also been stolen in other breaches (which was more an issue of causation and damages and less one of standing). The Ninth Circuit also found that the plaintiffs’ injury was “likely to be redressed by relief that could be obtained through this litigation” as “any proven injury could be compensated through damages” and “injunctive relief would limit the extent of the threatened injury by helping plaintiffs monitor their credit and the like.”

Takeaways

Zappos reaffirms the applicability of Krottner in the Ninth Circuit in the data breach context after both Clapper and Spokeo. Zappos also exacerbates the split among the Circuits concerning the pleading standard for Article III standing in data breach cases. Zappos places the Ninth Circuit squarely on the side of the D.C., Sixth and Seventh Circuits in holding that allegations that the increased risk of fraud and identity theft resulting from a data breach without more constitutes an injury sufficient to confer Artwicle III standing. Joining the D.C. Circuit in Attias v. CareFirst (D.C. Cir. 2017), the Sixth Circuit in Galaria v. Nationwide Mutual Insurance (6th Cir. 2016), and the Seventh Circuit in Remijas v. Neiman Marcus (7th Cir. 2015) and Lewert v. P.F. Chang’s China Bistro (7th Cir. 2015), the Ninth Circuit in Zappos has made it easier for plaintiffs to meet their pleading burden and expanded standing to bring data breach cases. In contrast, the Second Circuit in Whalen v. Michaels Stores (2d Cir. May 2017), the Fourth Circuit in Beck v. McDonald (4th Cir. 2017), and the Eighth Circuit in In re SuperValu Customer Data Security Breach Litigation (8th Cir. 2017) have found that general allegations of a heightened risk of identity theft from personal information stolen in a data breach alone do not constitute an injury in fact, raising the pleading requirements for plaintiffs in data breach cases. These Circuits have held that plaintiffs must allege an actual injury in the form of fraudulent charges on existing credit or debit card accounts or the opening of fraudulent financial accounts based upon their stolen personal information to establish an Article III injury and survive a motion to dismiss for lack of standing. This Circuit split will likely continue unless and until the Supreme Court weighs in and offers more definitive guidance. Given that the Supreme Court has recently denied certiorari to review the CareFirst decision, when and if that will occur is uncertain.​​​​​

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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