Eighth Circuit Issues Two Class Action Data Breach Rulings

by Ballard Spahr LLP
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In the span of just nine days, the U.S. Court of Appeals for the Eighth Circuit issued two rulings in class actions involving data breaches—one breach in 2013 at brokerage firm Scottrade and another in 2014 at grocery stores operated by SuperValu, Inc., AB Acquisition, LLC, and New Albertsons, Inc. In Scottrade, the Eighth Circuit affirmed the district court’s dismissal of the class action complaint, finding that although the plaintiff had Article III standing, his claim must be dismissed for failure to state a claim. Conversely, in SuperValu, the appellate court reversed, in part, the district court’s dismissal, finding that one named plaintiff had alleged a sufficient injury in fact to survive the motion to dismiss.

The decisions are instructive on how companies that deal with sensitive customer information should protect that information from illegal activity and how those companies should respond to a cyber incident.

Kuhns v. Scottrade, Inc.

The case arose out of a 2013 data breach in which hackers infiltrated Scottrade’s database and stole the personal identifying information (PII) of over 4.6 million customers. The hackers allegedly used the stolen PII to operate a stock price manipulation scheme, a dozen illegal gambling websites, and a Bitcoin exchange.

Crucial to the appellate court’s ruling was that when Mr. Kuhns opened his Scottrade account, he signed a Brokerage Agreement that included a “Privacy Policy and Security Statement” addendum in which Scottrade represented that it:

  • “maintain[s] physical, electronic and procedural safeguards that comply with federal regulations to guard your nonpublic personal information;”
  • “offers a secure server and password-protected environment . . . protected by Secure Socket Layer (SSL) encryption;” and
  • protects personal information from unauthorized access and use by using “security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.”

Plaintiff’s consolidated class action complaint alleged, in part, that Scottrade breached its contractual obligations by not stopping the data breach. Specifically, plaintiff Kuhns alleged that a portion of the account fees he paid were “used for data management and security,” but “one or more data thieves . . . transferred, sold, opened, read, mined and otherwise used [his] PII, without his authorization, to their financial benefit and his financial and other detriment.”

On Scottrade’s motion, the Missouri district court dismissed the complaint, concluding that plaintiffs lacked Article III standing because they had not suffered an “injury in fact.” On appeal, the Eighth Circuit reversed, albeit on different grounds.

The Eighth Circuit concluded that Mr. Kuhns did have Article III standing to assert his breach of contract claim based on his allegation that a portion of the fees he paid to Scottrade were “used to meet Scottrade’s contractual obligations to provide data management and security to protect his PII.” Kuhns’ allegation that the data breach diminished his bargain and caused him injury was therefore sufficient to give him standing.

Yet, while the court agreed with Kuhns that he had Article III standing, it dismissed his complaint pursuant to Rule 12(b)(6) for failure to state a claim.

First, the court found that the statements in Scottrade’s Privacy Policy and Security Statement addendum “were in the nature of contract recitals.” At most, those statements could provide a basis for a fraud claim (which plaintiffs did not assert) but they could not provide a basis for a breach of contract claim.

Second, even assuming arguendo that the representations could form the basis for a breach of contract claim, plaintiffs’ complaint failed to identify any “applicable law or regulation” that Scottrade allegedly violated. And, plaintiff’s claim that “Scottrade did not maintain sufficient security measures and procedures to prevent unauthorized access” was insufficient because it did not “assert more than the mere possibility of misconduct.”

Third, the court found it notable that Kuhns did not dispute that no customer affected in the breach had suffered identity theft or financial loss. According to the court, “[m]assive class action litigation should be based on more than allegations of worry and inconvenience.”

Finally, the court found pleading deficiencies with plaintiff’s claims for breach of implied contract, unjust enrichment, declaratory judgment, and breach of Missouri’s Merchandising Practices Act.

Alleruzzo v. SuperValu, Inc.

The SuperValu matter arose out of two data breaches that affected grocery stores operated by the defendants. During two periods in 2014, hackers installed malicious software onto defendants’ network, which allowed the hackers to access customer names, credit/debit card numbers, expiration dates, CVV numbers, and PINs.

Plaintiffs’ complaint alleged that the hackers were able to access the network because of insufficient information security practices, including using default or easily guessed passwords, failing to lock out users after several failed login attempts, and not using network firewalls.

The named plaintiffs were 16 individuals who allegedly shopped at defendants’ affected stores during the relevant time frame and paid with a debit or credit card. Plaintiffs all alleged that they had been injured because they were forced to spend time monitoring their accounts for illegal activity. However, only one plaintiff, David Holmes, specifically alleged that a fraudulent charge appeared on his credit card statement.

The district court dismissed the complaint on the basis that plaintiffs had failed to allege an injury in fact sufficient for Article III standing. On appeal, the Eighth Circuit reversed, in part, concluding that, although the other plaintiffs did not have Article III standing, Mr. Holmes did.

In reaching that conclusion, the appellate court held that, with the exception of Mr. Holmes, plaintiffs’ complaint failed to allege that their credit card information was misused and had insufficiently pled a “substantial risk” of future identity theft. The court specifically rejected plaintiffs’ reliance on a 2007 Government Accountability Office Report, which they cited for the premise that they were at a substantial risk for identity theft. For example, the court found that the report concluded that compromised credit/debit card information, such as the information that was allegedly stolen here, “generally cannot be used alone to open unauthorized new accounts.” Therefore, the report did not provide a factual basis for plaintiffs’ claim that they were at risk for future debit/credit card fraud.

Likewise, the court rejected plaintiffs’ claim that they had suffered an injury because they had to spend time monitoring their accounts for fraudulent activity. Quoting the Supreme Court’s decision in Clapper v. Amnesty International USA, the court found that plaintiffs could not “manufacture standing by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending.”

Conversely, the Eighth Circuit found that Mr. Holmes did have standing based on his allegation that he had incurred a fraudulent charge. The court also found that Mr. Holmes had met his “relatively modest burden” of alleging that the injury was fairly traceable to defendants’ data breaches because Holmes used his card at an affected store and became an identity theft victim after the breaches occurred.

The Eighth Circuit’s decisions in Scottrade and SuperValu add to the growing list of federal appellate court decisions that have considered Article III standing and Rule 12(b)(6) arguments arising out of data breaches. For example, last month the U.S. Court of Appeals for the D.C. Circuit reinstated a data breach class action filed against CareFirst BlueCross BlueShield (read our prior Alert here).

These decisions often turn on fact-specific circumstances such as the size of the data breach, how the loss occurred (such as employee error or illegal hacking), the type of PII lost or stolen, and whether the information already has been misused. In light of these decisions, companies that collect, process, or store sensitive information should anticipate and prepare for litigation as soon as they discover any cyber incident involving these types of information.

 

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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