Standing Only Gets You So Far. Scottrade Offers Tactics To Win The Data Breach Class Action War

by Orrick - Trust Anchor
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A recent skirmish about standing in data breach class actions (this time in the Eighth Circuit), involving securities and brokerage firm Scottrade, suggests that, even if plaintiffs win that limited question, there are other key battles that can win the war for defendants.  As we reported with Neiman Marcus, P.F. Chang’s, Nationwide, and Barnes & Noble, the Eighth Circuit’s decision in Kuhn v. Scottrade offers important proactive steps that organizations should consider taking that can mitigate post-breach litigation exposure.
 

Background

Between late 2013 and early 2014, hackers gained access to Scottrade’s customer databases and made off with personal information of more than 4.6 million users.  Scottrade’s Brokerage Agreement provided that customers would pay fees and commissions on purchase and sale of securities on a per-order basis.  The Brokerage Agreement included an addendum privacy policy and security statement describing how Scottrade would “protect [] personal and financial information that [it] collect[ed] in the course of providing financial services.”  It also specifically stated that Scottrade would “maintain physical, electronic and procedural safeguards that comply with federal regulations to guard [] nonpublic personal information,” and offer “a secure server and password-protected environment . . . protected by Secure Socket Layer (SSL) encryption.”  After Scottrade notified customers in October 2015, the plaintiff sued claiming, among other things, breach of contract and breach of implied contract.  The district court dismissed the claims for lack of standing and a single plaintiff appealed.

Yes on Standing, but Still No Claim

On appeal, the Eighth Circuit held that the plaintiff had standing regarding breach of contract and contract-related claims based on allegations that he did not receive the full benefit of his bargain with Scottrade.  Citing earlier precedent, the court explained that “a party to a breached contract has a judicially cognizable interest for standing purposes, regardless of the merits of the breach alleged.”

The court, however, dismissed the contract claims for failure to state a claim for several reasons, including:

  • The representations of security measures and conditions that Scottrade would maintain were in the nature of contract recitals, and even if Scottrade failed to meet them, they did not establish basis to bring a breach of contract claim (though they could form the basis of a fraud in the inducement or similar claim);
  • Plaintiff failed to establish any law, regulation, or specific affirmative promise that Scottrade breached regarding its security practices;
  • Plaintiff did not allege that any specific portion of his brokerage services fees went towards data protection. The Brokerage Agreement provided that customers would pay on a per-order basis, thus, it was not plausible that the failure of Scottrade’s security measures diminished the benefit of their bargain; and
  • Plaintiff did not allege a damage that is an element of a breach-of-contract claim.

Takeaways

The Scottrade decision highlights—yet again—that standing is not, and will not be, the final battleground for data breach class actions.  Organizations can proactively lay groundwork to make early dismissal arguments on other grounds by thinking carefully about the context and nature of statements they make about security measures.  Here are some things to keep in mind for organizations that collect or store personal information:

  • Carefully consider whether, and to what extent, you make data security representations in agreements with customers. Consider the context of such representations, and whether better placed in an online security statement, rather than in the agreement.  This can be effective for financial institutions (like securities and brokerage firms) subject to the Graham-Leach-Bliley Act and/or Regulation S-P that are required to adopt reasonably designed policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information and disclose those policies and procedures to customers yearly.
  • Even when making data security representations only in applicable privacy or security statements, consider including applicable warranty disclaimer language and merger clauses to forestall implied breach-of-contract claims and breach-of-warranty claims.
  • Most critically, regularly audit and review data security representations against current security controls and planned improvements to ensure you are doing what you said you would do, and that upcoming changes will not render any statements inaccurate.

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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