Galaria v. Nationwide: Data Breach Plaintiffs Standing Strong in the Sixth

by Patterson Belknap Webb & Tyler LLP
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This week, in the first post-Spokeo circuit court decision to address standing in a data-breach class action, the Sixth Circuit joined the Seventh Circuit in holding that plaintiffs whose sensitive personal information has been obtained by hackers have Article III standing to sue based on the risk of future fraud and identity theft.

The plaintiffs in Galaria v. Nationwide Mutual Insurance Co., Nos. 15-3386/3387 (6th Cir. Sept. 12, 2016) (unpublished) are a class of 1.1 million customers and potential customers of Nationwide Mutual Insurance Co. whose personal information (including names, dates of birth, and social security numbers) was stolen by hackers from Nationwide’s computer network in an October 2012 breach.  Plaintiffs sued Nationwide for violating the Fair Credit Reporting Act and for common-law torts, including negligence and bailment.

As in several similar recent cases, the question for the Sixth Circuit was whether plaintiffs had cleared the Article III standing bar.  As the Supreme Court made clear earlier this year in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), plaintiffs lack standing unless they allege that defendants’ conduct has caused them injury that is “concrete” and “actual or imminent, not conjectural or hypothetical.”  Id. at 1548.  In Galaria, a split Sixth Circuit panel ruled that plaintiffs had sufficiently demonstrated standing at the motion to dismiss stage by alleging that the Nationwide hack had subjected them to significantly heightened risk of fraud and identity theft.  Notably, plaintiffs cited a study showing that, in 2011, recipients of data-breach notifications were 9.6 times more likely to experience identity fraud, and that about one in five such individuals did in fact experience fraud.  The panel also based its standing decision on plaintiffs’ allegations that they had borne costs, in both time and money, associated with mitigating the risk, including purchasing credit reporting services and monitoring their credit reports and bank statements.  Even though plaintiffs made no allegations regarding actual incidences of fraud or identity theft, the court found their claimed injury was not merely “hypothetical”: “There is no need for speculation where Plaintiffs allege that their data has already been stolen and is now in the hands of ill-intentioned criminals. . . . Where a data breach targets personal information, a reasonable inference can be drawn that the hackers will use the victims’ data for . . . fraudulent purposes . . . .”

The Galaria decision follows the path laid out by the Seventh Circuit, which, in 2015 and 2016 decisions, held that plaintiffs have standing where hackers have accessed their sensitive private information.  See Lewert v. P.F. Chang’s China Bistro, Inc., 819 F.3d 963 (7th Cir. 2016); Remijas v. Neiman Marcus Group, LLC, 794 F.3d 688 (7th Cir. 2015).  We have discussed the P.F. Chang’s and Neiman Marcus decisions in prior posts.  Galaria – in which plaintiffs did not allege any actual fraud or identity theft – is arguably even more plaintiff-friendly than the Seventh Circuit decisions, in which at least some members of the plaintiff class could point to specific misuse of their data.  (In the Neiman Marcus case, 9,200 of the 350,000 credit cards that had been exposed in the hack were known to have been used fraudulently, while in the P.F. Chang’s case, one of the named plaintiffs – but not the second – alleged fraudulent transactions connected to a potentially exposed credit card.)

In contrast to the Sixth and Seventh Circuits, the Third Circuit, in another data-breach case, held that plaintiffs’ allegation of an increased risk of identity theft was too speculative to establish standing.  See Reilly v. Ceridian Corp., 664 F.3d 38, 43 (3d Cir. 2011).  But the Sixth Circuit – perhaps seeking to avoid the appearance of a circuit split that might attract Supreme Court review – distinguished Reilly: there, the Sixth Circuit noted, plaintiffs had not alleged that the hacker had ever “read, copied, or understood” the personal data stored on defendant’s system, or even that the hack was “intentional or malicious.”

The Galaria decision raises a question many breached entities have asked since the Neiman Marcus decision: what remedial measures, if any, should they offer to victims of the breach?  Nationwide sent a letter advising members of the plaintiff class to monitor their bank statements and credit reports, and offered a year of free credit monitoring and identify-fraud protection.  Like the Seventh Circuit, the Sixth Circuit used Nationwide’s efforts to mitigate potential harm as evidence of the seriousness of the risk of fraud, noting that “Nationwide seems to recognize the severity of the risk.”  As we have discussed, in light of these decisions, companies that have suffered a data breach should consider that any efforts they make to mitigate risk to their customers may well be used against them if they are sued.

The dissent in Galaria, by Judge Alice Batchelder, skipped over the injury element of standing and instead focused on the causation element, which requires that the claimed injury be “fairly traceable to the challenged action of the defendant.”  The majority found that plaintiffs had sufficiently pleaded causation by alleging that Nationwide had failed to “establish and/or implement appropriate administrative, technical and/or physical safeguards to ensure the security and confidentiality” of plaintiffs’ data, and that this failure caused plaintiffs’ injury.  Judge Batchelder found those allegations conclusory: “The complaints simply allege that hackers were in fact able to access the plaintiffs’ personal information.  From that fact, the complaints conclude that Nationwide failed to protect that information.  But plaintiffs make no factual allegations regarding how the hackers were able to breach Nationwide’s system, nor do they indicate what Nationwide might have done to prevent that breach but failed to do.”

We will continue to monitor the evolving post-Spokeo standing landscape.

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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