Plaintiffs’ Lawyer Predicts $1 Billion Settlement in Data Breach Case – But Where’s the “Harm”?

by Orrick - Trust Anchor
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This week, a high profile plaintiffs’ firm (Edelson) stated that “if done right,” the data breach class actions against Equifax should yield more than $1 billion in cash going directly to more than 143 million consumers (i.e., roughly $7 per person).

No defendant to date has paid anything close to $1 billion.  In fact, the largest class settlements in breach cases hardly get close:  Target Stores paid $10 million (cash reimbursement for actual losses) and The Home Depot paid $13 million (cash reimbursement for actual losses + credit monitoring).  Will Equifax be different?

Part of the answer revolves around the increasingly debated role and importance of “consumer harm” in resolving data breach disputes.

Federal Trade Commission Guidance

While the courts have taken varying positions on “harm” – both in the context of threshold standing to sue, as well as on 12(b)(6) motions to dismiss (see e.g., Neiman Marcus, P.F. Chang’s, Nationwide, Barnes & Noble) – the FTC took a troubling turn when it sued D-Link Systems, in a closely watched case in federal court in California, which we reported on here.  D-Link is a Taiwanese company that makes routers and web cams.

In D-Link, the FTC alleged that the company engaged in an “unfair” practice in violation of Section 5 of the FTC Act because it failed to adequately protect its products against “widely known and reasonably foreseeable risks of unauthorized access.”  Importantly, the FTC did not allege any exploitation of these vulnerabilities by attackers or any actual unauthorized access to consumer information (i.e., no data breach was alleged).  Earlier this month, the Court dismissed the FTC’s unfairness claim because the FTC failed to allege facts establishing a likelihood of substantial harm to consumers.[1]

Chairwoman Ohlhausen’s View on the Role of Consumer Harm

On the same day that the court in D-Link issued its order on the defendant’s motion to dismiss, FTC Chairwoman Maureen Ohlhausen spoke (again) about consumer harm concepts, this time in a speech to the Federal Communications Bar Association.  Her remarks provide helpful insights and a rational perspective on this critical issue.

In her comments about the role of consumer harm in FTC enforcement decisions, Chairwoman Ohlhausen began by affirming that consumer injury is not just an element of unfairness claims, but the Government “does the most good with the fewest unintended side effects when it focuses on stopping substantial consumer injury instead of expending resources to prevent hypothetical injuries.”  She then identified five classic consumer injury scenarios.  Perhaps mindful of the Court’s pending decision in D-Link, she was careful to note that “not all of these types of injuries, standing alone, would be sufficient to trigger liability under the FTC Act.”

  • Deception or Subverting Consumer Choice:  The hallmark of deceptive practices claims, a consumer is injured if he/she would have chosen differently or if his/her privacy choices are subverted and the consumer does not get the benefit of his/her choice.
  • Financial:  Direct financial injury is connected to fraudsters using consumers’ private data to steal from the consumer, or causing direct losses that result from identity theft and/or fraudulent charges on a consumer’s credit card.  Indirect losses may be sustained by consumers in a data breach setting where the consumer spends time and money reporting identity theft and/or loss of an otherwise useful asset.
  • Health and Safety:  Consumers’ physical and mental well-being can be put into jeopardy as a result of data leaked, when (for example) stalkers use information to surveil or harass individuals or where the disclosure of personal information invites threats and harassment.
  • Unwarranted Intrusion:  Individuals are subjected to unwanted privacy intrusions, such as when surveillance software is unknowingly installed on their computer or mobile device or when individuals are contacted at home, despite them not wanting to be so contacted.
  • Reputational Injury:  Information that is leaked or lost can embarrass or reflect negatively on an individual’s reputation, for example if information about a medical condition or mental health issue is revealed.

These five categories of harm demonstrate the FTC’s commitment to a broad construct of what kinds of business behavior can cause consumer injury.  That said, Chairwoman Ohlhausen made clear that the type of injury at issue is not the only inquiry; the magnitude of the injury, the potentiality (likelihood) of the injury, and whether any aspect of the injury has already materialized, are all similarly important considerations.[2]

After reviewing the Court’s disposition on D-Link’s unfairness claim, and Chairwoman Ohlhausen’s recent remarks, a mega-settlement in Equifax does not appear to be on the horizon.  No special indicators in Equifax suggest a more direct or more substantial financial injury to consumers than in prior (major) breach cases.  Nor was consumer choice subverted by Equifax’s security-related actions, or consumer health, safety or reputation placed at risk.  Certainly, there has been an unwarranted intrusion into personal information belonging to millions of consumers, but the Equifax incident is simply the most recent breach in a long line of incidents that have affected billions of records.

Still, the teachings from D-Link, Chairwoman Ohlhausen, and Equifax, should not be ignored, and there is significant room for companies to mitigate risk: security-related, litigation-oriented, and PR/brand-focused.

Takeaways

At an absolute minimum, organizations should consider doing the following:

  • Conduct periodic penetration tests and/or vulnerability assessments as part of a comprehensive security program to identify potential security vulnerabilities;
  • Carefully review any consumer-facing disclosures or representations about the nature and strength of security related to all products or services, and make sure that they align with the organization’s current security posture;
  • Add layered security reviews to reduce legal and regulatory risk by confirming that any identified “holes” (vulnerabilities) were not exploited by searching for potential indicators or compromise, and by taking advantage of enhanced logging around identified vulnerabilities until they are remediated; and
  • Always proactively address the “well-known” exploits and vulnerabilities; and always implement routinely available security patches

 

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[1] The FTC also alleged garden variety deception claims based on apparently misrepresentations made by D-Link regarding the nature and strength of security measures for its router and web cam products.  The Court largely kept the deception claims intact on the defendants’ motion to dismiss.

[2] The Court in the D-Link case appears to have, in essence, balanced similar factors in dismissing the FTC’s unfairness claim against D-Link.  The FTC had alleged that D-Link failed to address “easily preventable” security issues, such as not maintaining confidentiality of the private key used for software updates, and not deploying free, available software that would have secured mobile app login credentials, among other things.  And, as noted above, there was no alleged data breach or actual consumer injury – rather, only the mere potential for injury.  In this context, the Court explained that the “absence of concrete facts makes it just as possible that [D-Link’s] are not likely to substantially harm consumers . . . the FTC cannot rely on wholly conclusory allegations about potential injury to tilt the balance in its favor.”

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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