Data Breach Class Actions Can't Survive Certification Without Expert Testimony On Classwide Damages

by Perkins Coie

This is the latest opinion in the ongoing litigation arising out of a massive data breach suffered by Hannaford Bros. grocery stores. In re Hannaford Bros. Privacy Litigation, __F. Supp. 2d __, Case No. 2:08-MD-1954-DBH, 2013 WL 1182733 (D. Me. Mar. 20, 2013).

The litigation arises out of a criminal attack on the payment card systems at the Hannaford Bros. grocery chain in late 2007 and 2008, which potentially affected over 4 million card numbers. The district court initially dismissed the action after the plaintiffs stipulated that none of the plaintiffs had incurred fraudulent charges that had not been reimbursed. The court certified a question to the Maine Supreme Judicial Court, which agreed that in the absence of physical harm, economic loss or identity theft, the time and effort spent to avoid or remediate reasonably foreseeable harm did not constitute cognizable injuries for which damages may be recovered under Maine law.[1]

On appeal, the U.S. Court of Appeals for the First Circuit reversed with regard to two of the claims, finding that the plaintiffs had alleged sufficient injury for their negligence and implied breach of contract claims because "fees for replacing cards and the cost of identity theft protection products were foreseeable costs to mitigate any harm arising from the data breach.”

Finding themselves back before the district court, plaintiffs moved to certify a class consisting of those “Hannaford customers who incurred out-of-pocket costs in mitigation efforts that they undertook in response to learning of the data intrusion.”  The court addressed each of the factors provided in Federal Rule of Civil Procedure 23 and ultimately denied certification based only on a finding that plaintiffs’ failure to provide expert testimony supporting its theory of classwide damages meant that common issues would not predominate with regard to damages. The plaintiffs moved for reconsideration on April 4, 2013, further clarifying their theory of damages and asking for 60 days to obtain and tender to the court appropriate expert evidence.[2]  Because data breach class actions rarely get to this point, a summary of the court’s review of each element follows.

Numerosity:  First, the court found numerosity satisfied based on evidence from several banks indicating that thousands of affected Hannaford customers had purchased identity protection products or had been charged for replacement cards. The court was careful to note that this evidence was merely a correlation and did not demonstrate causation.  While the court stated that it could not be confident that the Hannaford incident was the sole cause for all the noted expenses, this fact was sufficient to conclude that the number of Hannaford customers who incurred fees satisfied the numerosity requirement.

Hannaford argued that it was likely that only a tiny percentage of class members would file paperwork for reimbursement of the relatively small fees at issue, citing testimony from a former named plaintiff who stated that she did not know whether she had been reimbursed for the $5 card replacement fee and did not bother to check her statement because it was not worth her time to verify whether she had received the refund.  The court expressed concern with the historically low claim rates in data breach litigation, citing In re Heartland Payment Systems, Inc. Customer Data Security Breach Litigation, 851 F. Supp. 2d 1040 (S.D. Tex. 2012), where only 290 claims were filed—of which only 11 were valid—in a potential class of 130 million. The court noted that of the $1 million settlement fund created by Heartland, only $1,925 was paid out to class members, and the remainder was distributed through cy pres.  In comparison, the plaintiffs’ attorneys received $606,192.50 in fees and Heartland paid $1,770,000 for notice and administration costs.  Despite its uneasiness and concern that the class was “a de minimis class where virtually no one will bother to make a claim and that any recovery will serve solely the lawyers (and perhaps some modest measure of corporate deterrence),” the court found that there was no precedent for refusing certification based on such speculation, and that such concerns must be addressed by Congress.

Commonality: The court found commonality because the following questions were central to the validity of each of the plaintiffs’ claims: "whether Hannaford's conduct was negligent or a contractual breach and whether it caused a data security breach that resulted in theft of customers' data and reasonably prompted customers to take mitigation measures."  Although losses may not be identical in amount or type, there were common questions of law and fact concerning Hannaford’s action or inaction that allegedly produced the loss.

Typicality:  In evaluating this prong, the court looked to whether the class representatives’ claims would be typical of the claims of the class. The court noted that the class was limited to those who incurred one or more of the identified fees and that any economic differences among the plaintiffs could not defeat typicality. It also looked to the First Circuit’s opinion that found that the intentional criminal nature of the breach made it reasonable for customers to expend funds to protect themselves. Thus, the court determined that denying class certification on the grounds that there were differences in customers' rational reliance would be inconsistent with the First Circuit's opinion.

Adequacy:  Hannaford asserted that the named plaintiffs would not adequately represent the class because they had chosen to participate in class litigation rather than participate in Hannaford’s gift card refund program.  Hannaford claimed that this choice was irrational and, in fact, harmful to the class because litigation expenses would reduce class recovery.  The court noted that the U.S. Court of Appeals for the Seventh Circuit seems to have accepted such an argument[3], but it also stated that “[n]amed plaintiffs are hardly adequate representatives of a class by not filing a lawsuit, because then they are not class representatives at all.” The court also rejected similar arguments later when finding that the class action was the superior method of adjudicating the controversy.

Superiority:   Rule 23(b)(3) requires a class action to be superior “to other available methods for fairly and efficiently adjudicating the controversy.”  Hannaford asserted that its refund program, which provided refunds or gift cards to users who paid fees to replace cards without the need to prove causation, was a comparable or even better remedy than they could hope to achieve in court. While some courts have accepted similar arguments in finding that class actions were not superior to refund and product replacement programs, and the court seemed to prefer policy preferences that allowed controversies to be resolved without expensive litigation, it focused on the language of the rule that limited the analysis to methods of “adjudicating the controversy.”  Because refund programs are not a method of adjudication, the court limited its analysis to four listed factors: (A) the class members’ interest in individually controlling the prosecution of separate actions; (B) the extent and nature of litigation already begun by class members; (C) the desirability or undesirability of concentrating the litigation in a particular forum; and (D) the likely difficulties in managing a class action. Based on this more limited evaluation of superiority, the court found the superiority prong satisfied.

Predominance: Lastly, the court addressed the requirement in Rule 23(b)(3) that "questions of law or fact common to the class members predominate over any questions affecting only individual members.”  The court found there were many common questions of liability but grappled with the issue of damages.  The court acknowledged the First Circuit precedent that individual variations in damages should not prevent class certification, but it also noted that when the issue is related to causation of damages, common proof is required.  Finding that the labeling of the issue as damages or causation was not particularly helpful, the court viewed the question through the lens of how a trial would work if the lawsuit proceeded as a class action. Plaintiffs claimed that they had records showing additional charges incurred by cardholders, and they planned to find an expert who would use a statistical analysis to demonstrate what portion of the charges were attributable to the Hannaford incident. However, plaintiffs presented no expert opinion at the class certification stage. Because the lack of an expert opinion at trial would require individualized determination of damages (i.e., a plaintiff–by-plaintiff review of the costs they incurred and whether those costs were the result of the Hannaford incident), and because the court was unwilling to assume that plaintiffs would find an appropriate expert, the court denied certification on predominance grounds. 

Perkins Coie’s Security Breach Chart

While the Hannaford Bros. litigation is an exceptional case that has moved well past the stage of the notification to affected users, all breaches start with an assessment of the breach and determination of whether notification is appropriate and required.  Perkins Coie maintains summary information on notification requirements from 46 individual states (as well as Washington, D.C. and Puerto Rico) in both html and PDF form.  We would like to make this informational resource as useful as possible and invite you to share your views with us by answering a few short questions in our ongoing survey, which is available here.

We value your feedback and invite you to share the chart with others who you believe may find it helpful.

Perkins Coie’s data breach and network intrusion response team is an integral part of our overall Privacy & Security practice. The group regularly counsels clients with concerns about data breaches and assists with coordinating responses and required notifications.  They have helped large and small clients respond to events involving lost or stolen physical and electronic records containing personal information of employees and customers, as well as the company’s own trade secrets and intellectual property. 

[1] In re Hannaford Bros. Customer Data Sec. Breach Litig., 671 F. Supp. 2d 198, 201 (D. Me. 2009)

[2] Plaintiffs’ Mtn. for Reconsideration, In re Hannaford Bros. Co. Customer Data Sec. Breach Litig., MDL 2:08-MDL-1954 (D. Me. Apr. 4, 2013)  

[3] In re Aqua Dots Prods. Liab. Litig., 654 F.3d 748, 752 (7th Cir. 2011)

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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