Seventh Circuit Applies Spokeo and Requires Actual Injury to Establish Article III Standing in FACTA Case

On December 13, 2016, the Seventh Circuit Court of Appeals became the first post-Spokeo circuit court to address the issue of Article III standing in a putative class action brought for an alleged violation of the Fair and Accurate Credit Transactions Act (“FACTA” or “the Act”), 15 U.S.C. § 1681c(g), which is itself an amendment to the Fair Credit Reporting Act (“FCRA”). Generally, FACTA prohibits a vendor or retailer who accepts a credit or debit card as a means of payment from printing more than the last five (5) digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction. 15 U.S.C. § 1681c(g)(1). Willful violations of the Act could subject a defendant to any actual damages sustained by the consumer, or statutory damages of not less than $100.00 and not more than $1,000.00. 15 U.S.C. § 1681n(a). The Act also provides for the potential recovery of punitive damages along with reasonable attorney’s fees and costs. Id. Thus, per the plain language of the statute, actual damages are not necessarily a precondition for a FACTA suit. Aggregated statutory damages in a class claim, as one might imagine, could prove ruinous for a defendant.

In Spokeo v. Robbins, the United States Supreme Court held that a plaintiff could not establish Article III standing by relying solely on a “bare procedural violation” divorced from any real-world harm, because “Article III standing requires a concrete injury even in the context of a statutory violation.” In the five months since Spokeo was decided however, district court decisions as to whether a plaintiff may enjoy standing to bring actions premised upon statutory violations alone have been far from consistent.

In Meyers v. Nicolet Restaurant of De Pere, the Seventh Circuit dismissed a plaintiff’s putative class claim for lack of Article III standing, as he sought only those damages that are statutorily provided-for under FACTA. More specifically, Mr. Meyers alleged that, after dining at Nicolet Restaurant of De Pere, he was given a receipt that did not truncate the expiration date of his credit card. He subsequently filed suit on behalf of all customers who had similarly been provided with receipts that were not compliant with FACTA’s requirements. While Mr. Meyers admitted seeking only statutory damages, he argued that standing was conferred upon him because, in enacting FACTA, Congress granted him the legal right to receive a receipt that truncated his credit card’s expiration date. The Seventh Circuit disagreed, finding it significant that Mr. Meyers discovered the violation immediately, and that no one ever saw the violative receipt. The Seventh Circuit found it difficult to imagine how the presence of the expiration date could have increased the risk that Mr. Meyer’s identity would be compromised, and accordingly held that, without a showing of injury apart from the failure to truncate a credit card’s expiration date, the injury-in-fact requirement under Article III could not be satisfied.

While district courts continue to interpret Spokeo in cases implicating various “no-injury” consumer and privacy statutes, this decision provides defendants with additional grounds to potentially move for dismissal. Conversely, plaintiffs are sure to use it is a roadmap to creatively tailor pleadings to establish an injury in fact.

The Seventh Circuit’s opinion in Meyers v. Nicolet Restaurant of De Pere can be found here.

Wendy’s May Face Liability for Failing to Upgrade Payment Systems

As was previously reported, October 1, 2015 signaled a fraud “liability shift” between credit card issuers and merchants, in which liability for fraudulent credit card transactions began falling on whichever party used the lower level of security and compliance with EMV standards. While merchants are not required to adopt EMV technology (which reads chip cards, as opposed to the less secure magnetic strip cards), in the event of a data breach, their failure to do so can now render them responsible for the costs associated with the fraudulent use of stolen credit card information. This liability shift has created a very strong incentive for merchants to implement EMV chip card readers.

For companies that have not opted to make the EMV transition, lawsuits may begin to abound. One of the first suits targeting a retailer for its failure to keep up with industry standards was filed on February 8, 2016, in the wake of a possible data breach at the nationwide fast food chain, Wendy’s.

On January 27, 2016, Wendy’s announced that it was investigating a possible breach of its point of sale systems, after the company was alerted of “unusual activity” involving customers’ credit or debit cards at some of its locations. Wendy’s hired a cybersecurity firm to investigate the potential breach – which involved transactions in late 2015 – who discovered malware designed to steal customer payment data on computers that operate Wendy’s payment processing systems in certain locations.

An Orlando, Florida man purporting to be a victim of the Wendy’s breach initiated a class action lawsuit against the company on February 8, 2016, claiming that Wendy’s “lackadaisical” and “cavalier” security measures allowed his debit card data to be stolen and used to purchase nearly $600.00 of merchandise from various retailers. The lawsuit alleges that Wendy’s could have prevented the breach, yet maintained a system that was insufficient and inadequate to protect customers’ data. An attorney representing the plaintiff suggested that Wendy’s failed to incorporate technology allowing for use of chip-enabled cards, and that the lawsuit may expose the danger of failing to adopt such a system.

The threat of similar class action litigation may serve as a wake-up call for retailers who have failed or otherwise delayed in implementing up-to-date security measures. The suit, Jonathan Torres vs. The Wendy’s Company, can be found here.

Illinois Appellate Court Finds Increased Risk of Harm from Data Breach Insufficient to Confer Standing

As has been previously reported here, a series of recent federal court decisions has suggested a trend in data breach litigation – that an increased risk of harm will be sufficient to satisfy the injury-in-fact requirement for Article III standing. In fact, less than three weeks ago, the Seventh Circuit Court of Appeals revived a previously-dismissed data breach class action lawsuit, ruling that plaintiffs did not have to wait until hackers actually committed identity theft in order to establish standing. On August 6, 2015, the Illinois Appellate Court held exactly the opposite.

In Maglio v. Advocate Health and Hospitals Corporation, several plaintiffs sued Advocate Health and Hospital after computers containing patients’ personal information were stolen. 2015 IL App (2d) 140782 (August 6, 2015). Plaintiffs did not allege that their personal information was used in any unauthorized manner as a result of the burglary, but they claimed that they faced an increased risk of identity theft and identity fraud. Advocate Health moved to dismiss the complaint, arguing that mere stolen information is insufficient to establish standing, because an increased risk of identity theft and/or identity fraud is too speculative to constitute cognizable injury-in-fact.

Affirming the trial court’s dismissal of the action, the Illinois Appellate Court agreed with the defendant’s argument, concluding that the increased risk of harm arising out of a data breach is inadequate to confer standing on consumers. The Illinois Appellate Court noted the similarity between Illinois’ and federal standing principles, and relied for the most part on federal decisions, including Clapper v. Amnesty International USA, Inc., 133 S.Ct. 1138 (2013) – a case which the Seventh Circuit interpreted as not completely foreclosing on the use future injuries to support Article III standing. Yet, in stark contrast to recent federal court decisions, the Illinois Appellate Court opined that where no identity theft had yet occurred, the elevated risk of such harm was too speculative and conclusory to be considered a distinct and palpable injury.

The plaintiffs in Maglio also tried to achieve standing by alleging that they suffered emotional injury as a result of the data breach, such as anxiety, and that their privacy had been invaded. Again, the court found such allegations to be speculative and therefore insufficient, absent allegations of actual disclosure of personal information.

We expect to see fewer data breach class actions being filed in Illinois state courts – long criticized as plaintiff-friendly venues – and an uptick in federal court filings. The full opinion is available here.

Seventh Circuit Revives Consumer Class Action Relating To Neiman Marcus Data Breach

On Monday July 20, 2015, the Seventh Circuit Court of Appeals weighed in on the hotly-contested issue of standing in data breach class action litigation. In so doing, the Court reversed the district court’s dismissal of a consumer class lawsuit against luxury department store Neiman Marcus, holding that the plaintiffs had successfully alleged the concrete, particularized injuries necessary to support Article III standing.

This lawsuit arose in January of 2014, when Neiman Marcus publicly disclosed that it had suffered a major cyberattack, in which hackers collected the credit card information of approximately 350,000 customers. Soon after this disclosure was made, a number of consumers filed a class action lawsuit in the United States District Court for the Northern District of Illinois, alleging that Neiman Marcus put them at risk for risk for identity theft and fraud by waiting nearly a month to disclose the data breach. In September 2014, the district court dismissed the case, ruling that both the individual plaintiffs and the class lacked standing under Article III of the Constitution.

On appeal, the Seventh Circuit analyzed the injuries the Neiman Marcus consumers claimed to have suffered in order to determine whether they constituted the type of “concrete and particularized injury” required to establish standing. In this instance, plaintiffs alleged lost time and money spent in protecting against fraudulent charges and future identity theft, as well as two “imminent injuries:” an increased risk of future fraudulent charges and greater susceptibility to identity theft. The Seventh Circuit ultimately determined that these allegations sufficiently established standing, as they showed a “substantial risk of harm” from the Neiman Marcus data breach. Importantly, the Court explained that the Neiman Marcus customers did not have to wait until hackers actually committed identity theft or credit-card fraud to obtain class standing, as there was an “objectively reasonable likelihood” that such an injury would occur. The full opinion is available here.

This ruling is consistent with decisions from several other courts across the country. See, e.g., In re Sony Gaming Networks and Customer Data Security Breach Litigation, 996 F.Supp.2d 942 (S.D. Cal. 2014); Moyer v. Michaels Stores, Inc., No. 14 C 561, 2014 U.S. Dist. LEXIS 96588, 2014 WL 3511500 (N.D. Ill. July 14, 2014); In re Adobe Systems Inc. Privacy Litigation, No 13-cv-05226-LHK, 2014 U.S. Dist. LEXIS 124126, 2014 WL 4379916 (N.D. Cal. Sept. 4, 2014); Michael Corona, et al. v. Sony Pictures Entertainment, Inc., No. 2:14-cv-09600-RGK-E (C.D. Cal. June 15, 2015). Earlier this year, in a comprehensive article on standing in data breach cases (available here), our firm questioned whether opinions of this nature were indicative of a trend or anomalies. The Seventh Circuit’s ruling this week and the Central District of California’s ruling in Corona last month suggest it is in fact a trend. If the trend continues, consumers nationwide may find it easier to survive a motion to dismiss based on a lack of standing.

Please continue to monitor our blog for the latest news on data breach litigation and other privacy laws.

Target Ends Dispute With Mastercard Over 2013 Data Breach

4-20Following the highly publicized data breach affecting Target retail stores in 2013, the retail giant has agreed to pay up to $19 million to MasterCard credit card issuers worldwide to compensate them for the costs of canceling accounts, creating new accounts, and issuing new cards. MasterCard is urging card issuers to accept the deal, which calls for Target to pay the card issuers by the end of the second quarter.

In late 2013, Target suffered a massive data breach in which 110 million customer records were stolen, which included 40 million credit card numbers. In an attempt to be proactive, Target informed financial institutions about credit cards that may have been compromised and offered free credit counseling to its consumers to combat the onslaught of litigation that was to follow. As a result of the breach, which was highly publicized, many other retail establishments became victims of their own data breaches, spurring numerous lawsuits nationwide.

Apart from individual consumers filing class action lawsuits across the country against Target, credit card issuers, which include banks, credit card companies, and other financial firms, incurred hard costs of cancelling accounts and issuing replacement cards with new account numbers. While individual consumers filing data breach lawsuits had to overcome Clapper in arguing that an injury-in-fact did occur instead of speculative damages, credit-card issuers and financial institutions had actual damages to move forward on their claims. As a result, Target has negotiated a deal only with MasterCard to this point.  It is possible that Target is also negotiating a similar agreement with Visa.


Image courtesy of Flickr by Mike Mozart

Security Threatening Dating Apps and its Affect on Employers

PVCY BLOG_online datingIBM released a study this month after reviewing 41 percent of the most popular dating apps for cyber security. According to the study, 60 percent of the apps are “vulnerable to potential cyberattacks that could put personal user information and organizational data at risk.” The study showed that hackers could have access to users’ locations, photos, contacts, microphone, billing information, and even the ability to change one’s dating profile. Even more concerning, the study revealed that 50 percent of companies have employees who use dating apps on their work devices, putting potentially confidential company information at risk.

Companies and online daters should be aware of the security risks these apps may pose. Companies may want to consider policies prohibiting or limiting the use of dating and other potentially risky apps on work devices to prevent exposure to confidential company information. Online daters should remember to keep their profiles vague, review app permissions regularly, and delete their profiles once they have found that special someone.  Those who do not use dating apps should consider similar self-protective privacy measures when using any app.  At a minimum, companies and their employees should have a set policy and procedure in place to counter the risks associated with these personal apps to prevent the potential breach or loss of both personal and company information.

With Data Breach Class Actions on the Rise, Clapper Provides a Viable Defense

With recent data breaches at Home Depot, Target, Jimmy John’s, eBay, Neiman Marcus, P.F. Chang’s, Goodwill Industries, CNET, and others, there has been a resultant explosion of cybersecurity litigation.  Despite the rise in this area of litigation, data breach lawsuits still have to overcome a major hurdle – the standing requirement enunciated in Clapper v. Amnesty Int’l USA, 133 S.Ct. 1138 (2013).

PVCY BLOG_targetIn Illinois, a number of such lawsuits were filed in the wake of Advocate Medical Group’s revelation that four laptops were stolen from its offices, containing the unencrypted personal health information of more than 4 million patients.  In one such putative class action, Vides v. Advocate Health and Hospitals Corp., the state court followed the rationale of Clapper in rejecting the plaintiffs’ argument that an increased risk of identity theft is sufficient in and of itself to satisfy the “injury-in-fact” requirement necessary to establish standing.

In Vides, the plaintiffs’ theories of liability included common law negligence, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, violation of the Illinois Personal Information Protection Act, public disclosure of private facts, and intentional infliction of emotional distress.  The court found that none, including the purported statutory violations, were adequate to confer plaintiffs standing, and that the damages asserted were too speculative to establish an injury in fact.  In coming to that conclusion, Judge Mitchell Hoffman reasoned that there are a number of variables that would have to be answered in the affirmative to establish an injury in fact, such as whether a person’s data was actually taken, whether that data was sold or transferred, whether anyone attempted to use the person’s data, and whether they succeeded in using it.  Because the plaintiffs could not allege that a threatened injury was certain as a result of the breach, the suit was dismissed in its entirety.

In coming to this ruling, the court noted that courts across the country had rejected the argument that risk of harm could equate to an injury in fact sufficient to satisfy Article III of the U.S. Constitution.  In its survey of law on data breach class actions across the country, the court also distinguished Seventh U.S. Circuit Court of Appeals decisions holding that the mere increased risk of identity theft was sufficient to confer standing, since these decisions predated Clapper.  Therefore, Clapper remains a tenuous obstacle for data breach lawsuits to overcome.

While the Clapper decision provides an excellent defense to data breach lawsuits, cybersecurity litigation remains on the rise.  As such, companies should continue to be proactive in assessing their internal systems and procedures to prevent any data breaches from occurring.

Image courtesy of Flickr by Mike Mozart