Keeping the Data-Breach Headlines In Perspective

[Audrey McNeil <audrey () riskbasedsecurity com>]

http://www.jdsupra.com/legalnews/keeping-the-data-breach-headlines-in-29514/

> From the Sony Pictures settlement, to the Ashley Madison debacle, data
breaches are making big headlines of late. And when it comes to one case in
particular — the data breach at luxury retailer Neiman Marcus (Remijas v.
Neiman Marcus, No. 14-3122 (7th Cir. July 20, 2015; http://bit.ly/1UXX8NV)
— some would-be experts are spinning a misleading, black-and-white
storyline. As you may remember, the 2013 data breach exposed the credit
card data of 350,000 Neiman Marcus customers. This led to fraudulent
charges occurring in 9,200 of those customer accounts. In short order, a
class-action lawsuit followed in which customers sought $5 million in
damages. While a district court dismissed the case — in part because
customers had been reimbursed for the false charges in question — the U.S.
appeals court reversed that dismissal in late July.

This ruling, according to the pundits, represented a tipping point toward
victims of cyber fraud, and one that, as they saw it, may lead to a wave of
successful class-action lawsuits filed across the country. To be sure, data
breaches are a significant problem and certainly represent a liability
risk. However, let’s take a closer look at the precise meaning and context
of the Neiman Marcus ruling. Do the pundits truly appreciate the procedural
context in which the court reviewed the case? Are they accounting for the
most important part of any class-action lawsuit — class certification?

In the Neiman case, after all, the primary issue under consideration was
standing. The district court had granted the defendant’s motion to dismiss,
based on the well-worn argument that the plaintiffs’ alleged injuries were
not sufficiently “concrete” to establish standing, citing the U.S. Supreme
Court’s 2013 case, Clapper v. Amnesty International, 638 F. 3d 118 (Feb.
26, 2013) (http://1.usa.gov/1MtrGrv).Clapper held that, in order to
establish Article III standing, plaintiffs must allege they are at imminent
risk of suffering a concrete injury. The Seventh Circuit disagreed with the
district court, but not with the Supreme Court’s ruling in Clapper, and
remanded the case for further proceedings.

The Neiman Marcus Case
The facts alleged in Neiman are important. Neiman does not dispute that
some 350,000 cards (some Neiman store cards, and some non-Neiman,
bank-issued credit and debit cards) were compromised. Of vital importance
is the allegation (which again, Neiman does not dispute) that 9,200
customers have already incurred fraudulent charges on their credit cards.
At least two of the four named class representatives are in that category
of customers. Further, the plaintiffs allege several kinds of injury they
claim to have actually suffered: 1) lost time and money resolving the
fraudulent charges; 2) lost time and money protecting themselves against
future identity theft; 3) financial loss from overpaying for Neiman Marcus
merchandise they would not have purchased had they known of the store’s
careless approach to cybersecurity; and 4) lost control over the value of
their personal information. The plaintiffs also allege that they have
standing based on two imminent injuries: 1) an increased risk of future
fraudulent charges; and 2) greater susceptibility to identity theft. The
Seventh Circuit addressed the two alleged imminent injuries first and then
the four asserted actual injuries. For the purpose of dissecting whether
the Neiman opinion really offers any sort of earth-shattering departure
from past cases, we think it makes sense to look at the alleged injuries in
reverse.

First, with regard to “the 9,200,” the Seventh Circuit noted that the
plaintiffs conceded “that they were later reimbursed [for the fraudulent
charges] and that the evidence does not yet indicate that their identities
(as opposed to the data) have been stolen.” But, the court noted that, as
the plaintiffs have alleged, “there are identifiable costs associated with
the process of sorting things out” — the aggravation and loss of value of
the time needed to set things straight (get replacement cards, etc.), to
reset payment associations after credit card numbers are changed, and to
pursue relief for unauthorized charges. The court noted that Neiman had
challenged the standing even of these class members. But the court gave
that argument short shrift, stating simply, “we see no merit in that
point.” At least at the pleading stage, the court held that this alleged
actual injury was sufficient to confer Article III standing. In our view,
there is nothing particularly novel or surprising about this ruling.

Second, with regard to the alleged actual injury of “lost time and money
protecting against future identity theft,” the Seventh Circuit affirmed one
of the holdings in Clapper that “mitigation expenses do not qualify as
actual injuries where the harm is not imminent” and plaintiffs “cannot
manufacture standing by incurring costs in anticipation of non-imminent
harm.” But, the Neiman court cautioned against overstating Clapper in this
regard and distinguished the facts of Clapper vis-à-vis the case before it.

Clapper was addressing speculative harm based on something that may not
even have happened to some or all of the plaintiffs. In this case, Neiman
Marcus does not contest the fact that the initial breach took place. An
affected customer, having been notified by Neiman Marcus that her card is
at risk, might think it necessary to subscribe to a service that offers
monthly credit monitoring. It is telling in this connection that Neiman
Marcus offered one year of credit monitoring and identity-theft protection
to all customers for whom it had contact information and who had shopped at
their stores between January 2013 and January 2014. It is unlikely that it
did so because the risk is so ephemeral that it can safely be disregarded.
These credit-monitoring services come at a price that is more than de
minimis. For instance, Experian offers credit monitoring for $4.95 a month
for the first month, and then $19.95 per month thereafter. That easily
qualifies as a concrete injury.

Even more significant to the issue of whether Neiman is a watershed case,
the Neiman court pointed out that its analysis on this point is consistent
with the First Circuit’s 2011 ruling in Anderson v. Hannaford Bros. Co.,
659 F. 3d 151 (http://bit.ly/1OhW7kN), “where the First Circuit held before
Clapper that the plaintiffs sufficiently alleged mitigation expenses —
namely, the fees for replacement cards and monitoring expenses — because
under Maine law, a plaintiff may ‘recover for costs and harms incurred
during a reasonable effort to mitigate, regardless of whether the harm is
nonphysical.’”

Regarding the last two allegations of actual harm — overpayment for Neiman
goods because the retailer failed to invest in adequate security and loss
of value of the plaintiffs’ private information — the Neiman court declined
to definitively rule on these issues, stating that it need not decide
whether those allegations were sufficient to support standing on their own,
but viewed these claims as “dubious” support for standing.

Future Harm
So, with regard to “the 9,200,” the court found actual injury that
supported standing. But the allegations with respect to the remaining
proposed class members were merely that unreimbursed fraudulent charges or
identity theft may happen in the future, and that these injuries are likely
enough that immediate preventive measures are necessary. That might sound
pretty speculative, perhaps calling for the Clapper treatment. So why did
the Seventh Circuit not limit the class to just “the 9,200”?

First, the Neiman court correctly noted that Clapper does not completely
foreclose allegations of future harm to establish Article III standing, if
that harm is “certainly impending.” Clapper held that “allegations of
possible future injury are not sufficient.” But, Clapper also notes that
previous Supreme Court cases “do not uniformly require plaintiffs to
demonstrate that it is literally certain that the harms they identify will
come about. In some instances, we have found standing based on a
‘substantial risk’ that the harm will occur, which may prompt plaintiffs to
reasonably incur costs to mitigate or avoid that harm.

Neiman Marcus contended that the allegations related to the class members
beyond “the 9,200” — that unreimbursed fraudulent charges and identity
theft may happen in the future, and that these injuries are likely enough
that immediate preventive measures are necessary — were too speculative to
serve as injury-in-fact. It argued that all of the plaintiffs would be
reimbursed for fraudulent charges because that is the common practice of
major credit card companies. But the plaintiffs contend that, just like
“the 9,200,” the remaining class members must spend time and money
replacing cards, fighting off fraudulent charges and monitoring their
credit score.

Importantly, the Neiman court noted: “This reveals a material factual
dispute on such matters as the class members’ experiences and both the
content of, and the universality of, bank reimbursement policies.” The
court also noted that “zero liability” for fraudulent charges is not a
requirement of federal law, leaving open the possibility that the
plaintiffs could ultimately prove that “zero liability” was not necessarily
guaranteed. The Neiman court also agreed with the plaintiffs’ argument that
the risk that plaintiffs’ personal data will be misused by the hackers who
breached Neiman’s systems is immediate and very real, specifically relying
on the allegations in plaintiffs’ complaint that: 1) the hackers
deliberately targeted Neiman Marcus in order to obtain their credit card
information; and 2) the information was actually stolen. Based on these
allegations, the Neiman court found an “objectively reasonable likelihood”
that the class members outside of “the 9,200” would suffer the same types
of injuries that the 9,200 have already allegedly suffered. Thus, the court
held that “[a]t this stage in the litigation, it is plausible to infer that
the plaintiffs have shown a substantial risk of harm from the Neiman Marcus
data breach.”

In our view, none of this is particularly unreasonable, novel or
inconsistent with Clapper, or the First Circuit’s earlier holding in
Hannaford Bros. What is somewhat unique about the Neiman breach is that the
plaintiff class includes 9,200 members who have allegedly already suffered
actual harm. It is the allegations with respect to “the 9,200” — the
“identifiable costs associated with the process of sorting things out” —
and the lack of certainty that fraudulent credit card charges will
necessarily be reimbursed for the remaining class members that appear to
have convinced the Neiman court that the remaining members of the class
face a substantial risk of concrete injury.

Standing and Class Certification In Data Breach Cases
Neiman is not even close to the first data breach case in which a proposed
plaintiff class has gotten over the standing hurdle. As noted, that also
occurred in Hannaford Bros. It also occurred in, among other cases, Lambert
v. Hartman, 517 F.3d 433 (6th Cir., 2008) (http://bit.ly/1QJD3Kw), Resnick
v. AvMed, 693 F.3d 1317 (11th Cir., 2012) (http://bit.ly/1FjEnm7),
Pisciotta v. Old National Bancorp, 499 F. 3d 629 (7th Cir., 2007) (
http://bit.ly/1OA7kwj) and Krottner v. Starbucks Corp., 628 F. 3d 1139 (9th
Cir., 2010) (http://bit.ly/1iSORif).

To be sure, all of these cases pre-dated the Clapper ruling. But if Neiman
is significant for any reason, it is to show that anyone who thought that
Clapper set forth a completely new framework for Article III standing was
simply mistaken. The District Court for the Southern District of
California, in In Re Sony Gaming Networks and Customer Data Security
Litigation, 966 F. Supp. 2d 942 (S.D. Calif., Jan. 21, 2014) (
http://bit.ly/1JdYEoh), already persuasively set forth in its opinion just
last year that this would be an over-reading of Clapper.

Rather, Neiman is just the latest in a long string of cases which show
that, while Article III standing is a significant hurdle for plaintiffs to
overcome in any data breach class action, it is not an insurmountable one.
The standing analysis depends on the facts of the particular case (as well
as, perhaps, some artful pleading).

However, there has still never been a court that has certified a class in a
data breach case. And in Neiman, all the Seventh Circuit did was remand the
case for further proceedings. That’s the same procedural history that
occurred in Hannaford Bros. But, even if class action plaintiffs make it
getting over the standing hurdle, they still need to overcome the even more
significant hurdle of class certification. Some in 2011 also saw the
appellate court’s decision in Hannaford Bros. as a harbinger in data breach
litigation. But the same district court that originally granted the
defendants’ motion to dismiss based on standing (and was reversed)
ultimately dismissed the case at the class certification stage, because the
plaintiffs failed to establish predominance. Under Fed. R. of Civ. P. Rule
23(b)(3), the party proposing class certification must show that the
“questions of law or fact common to class members predominate over any
questions affecting only individual members.” Every data breach case that
has thus far survived a motion to dismiss based on standing has either been
settled or has been dismissed for a failure to establish predominance.
There can be little doubt that, when it’s time for the Neiman plaintiffs to
meet their burden at the class certification stage, the Seventh Circuit’s
revelation of “a material factual dispute on such matters as the class
members’ experiences and both the content of, and the universality of, bank
reimbursement policies” will once again be front and center. The
individualized issues of whether class members have been reimbursed for all
authorized charges or actually spent any time monitoring their credit
reports may very well be viewed by the district court as predominating over
the questions of fact common to the class. Many a proposed class action has
been doomed at the class certification stage by the possibility that
separate “mini-trials” on factual circumstances that would necessarily be
distinct for each member of the class would threaten to overwhelm the
benefits of class certification. Ultimately, the Neiman case may be no more
significant than Hannaford Bros.

_______________________________________________
Dataloss Mailing List (dataloss () datalossdb org)
Archived at http://seclists.org/dataloss/
Unsubscribe at http://lists.osvdb.org/mailman/listinfo/dataloss
For inquiries regarding use or licensing of data, e-mail
        sales () riskbasedsecurity com 

Supporters:

Risk Based Security (http://www.riskbasedsecurity.com/)
YourCISO is an affordable SaaS solution that provides a comprehensive information security program that ensures focus 
on the right security.  If you need security help or want to provide real risk reduction for your clients contact us!