Seventh Circuit Reinstates Barnes & Noble Data Breach Class Action

by Ballard Spahr LLP

The U.S. Court of Appeals for the Seventh Circuit has reinstated a data breach class action filed against Barnes & Noble (B&N).  The litigation, styled as Dieffenbach v. Barnes & Noble, Inc., now heads back to the U.S. District Court for the Northern District of Illinois, which previously dismissed the complaint three times for lack of standing and/or failure to state a claim.

The lawsuit stems from a September 2012 data breach in which “skimmers” gained access to the payment card readers in B&N stores and siphoned off customer names, payment card numbers, expiration dates, and PINs.  “Skimming” is an ‘old school’ hacking technique involving tampering with the PIN pad terminals to exfiltrate the payment card data that runs through them when a card is swiped.  Payment card data was skimmed from PIN terminals in 63 B&N stores, located in 9 states.

The plaintiffs filed a putative class action in March 2013, five months after B&N disclosed the breach (again, ‘old school’ — it is now standard practice for class actions to be filed within hours of the public announcement of a major data breach).  As relevant here, they alleged claims for:  (1) breach of implied contract (to secure payment card data); (2) violation of the Illinois Consumer Fraud & Deceptive Practices Act (ICFA); (3) violation of the California Security Breach Notification Act (DBNA); and (4) violation of the California Unfair Competition Act (UCA).  In September 2013, the district court dismissed the original complaint without prejudice for lack of standing, holding that the plaintiffs alleged no economic loss tied to the breach.

The district court entertained a motion to dismiss the amended complaint in October 2016. In between these two motions to dismiss, the Seventh Circuit decided Remijas v. Neiman Marcus Group, 794 F.3d 688 (7th Cir. 2015), reversing the dismissal of a payment card data breach class action on standing grounds. (See our Alert here.)  In light of this new circuit precedent, the district court held that the B&N plaintiffs satisfied the standing requirement, based on allegations of future substantial risk of identity theft and their lost time and money spent to protect against it.  The district court nonetheless again dismissed the complaint without prejudice for failure to state a claim because the plaintiffs did not allege “any cognizable damages,” a required element of each claim.

A different judge of the same district court subsequently dismissed a second amended complaint in June 2017, again concluding that the plaintiffs failed to allege any “economic or out of pocket damages caused by the data breach.”  The district court rejected, as legally insufficient, alleged injuries including diminution in value of the plaintiffs’ personal information, the lost value of their time and cell phone minutes spent rectifying fraudulent charges (later reimbursed), and the cost of credit monitoring renewed “in part” because of the breach.

The Seventh Circuit vacated the district court’s dismissal order, holding that the second amended complaint satisfied federal pleading standards as to the alleged injuries resulting from the data breach.  At least at the pleading stage and under the particular claims asserted, the Court saw no real distinction between alleging a cognizable injury for standing and for Rule 12(b)(6) purposes.  Instead, the Court characterized the dismissal under Rule 12(b)(6) for lack of injury – instead of under Rule 12(b)(1) for no standing – as simply “a new label for an old error.”

In the Seventh Circuit’s view, alleging an injury-in-fact for standing purposes will also satisfy the requirement of alleging a cognizable injury and entitlement to damages – at least under the substantive claims presented in the B&N case.  The Court explained that “the federal rules [of civil procedure] do not require plaintiffs to identify items of loss (except for special damages).”  Federal Rule of Civil Procedure 8(a)(3) does not require a plaintiff to allege the details of the injury.  Rule 54(c) entitles a plaintiff to any relief available under law, regardless of whether such relief is pled in a complaint.  Although Rule 9(g) requires specific allegations about the details of “special damages,” neither party alleged that the identified losses were such.

Turning to the facts and the state law claims, the Court noted the following injuries alleged by the two named plaintiffs: (1) a 3-day delay in restoration of one plaintiff’s bank account funds and loss of access to her funds during this period; (2) time spent with police and the bank to mitigate the actual and prospective fraud; (3) deactivation of the other plaintiff’s credit card for several days; (4) a $17.99 per month charge for credit monitoring one plaintiff renewed as a result of the breach; and (5) one plaintiff’s failure to receive the benefit of her bargain with B&N.

These alleged injuries were sufficient under the DBNA claim, because that law creates a statutory right to damages for its violation.  The first two injuries likewise sufficiently pled the statutory injury of “lost money or property” under the UCA claim.  The monthly credit monitoring charge was “a form of actual damages,” as required by the Illinois CFA.

There are at least a few silver linings in the decision for data breach defendants.

Perhaps most importantly, the Court recognized that a failure to receive the full benefit of a bargain (or alleged diminution in the value of a good or service due to failed data security) is not a “loss” that can support damages, at least where there is no “defect” alleged in the purchased goods, and no alleged promises of “a particular level of security, for which [the plaintiff] paid.”  This statement should help defendants defeat the “diminished value” arguments that are now very popular with the plaintiff’s bar in similar circumstances. (See, e.g., our recent post on car hacking litigation.)

The Court also was careful to note that its decision was founded on the liberal pleading requirements that must be applied at the Rule 12(b)(6) stage, and that it had not considered the merits of the claims.  It likewise expressed doubt as to whether that the suit should be certified as a class action, because both the state laws and potential damages “are disparate.”

Finally (FINALLY!), the Court noted that “Barnes & Noble was itself a victim” that suffered economic injuries, and that “Plaintiffs may have a difficult task showing an entitlement to collect damages from a fellow victim of the data thieves.”  In the end, the Court noted, none of the state laws at issue expressly make “merchants liable for failure to crime-proof their point-of-sale systems.”

As we have noted in the past, different courts across the country are reaching different conclusions about whether data breach class actions are sufficiently pled to proceed beyond the initial motions to dismiss under both Rule 12(b)(1) (standing) and Rule 12(b)(6) (judgment as a matter of law).  As it has been since Remijas, the Seventh Circuit remains the friendliest circuit for data breach class action plaintiffs — but it’s company is quickly growing.  What remains to be seen is whether other courts will follow the Seventh Circuit’s lead in rejecting motions to dismiss data breach class actions under Rule 12(b)(6), as they have on standing-based motions under Rule 12(b)(1).

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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