United States: Federal Court Dismisses Action Brought By Data Breach Plaintiffs For Failure To Demonstrate Injury Under Clapper

[Jake Kouns <jkouns () opensecurityfoundation org>]

http://www.mondaq.com/unitedstates/x/261594/Data+Protection+Privacy/Federal+Court+Dismisses+Action+Brought+By+Data+Breach+Plaintiffs+For+Failure+To+Demonstrate+Injury+Under+Clapper

On September 3, 2013, the U.S. District Court for the Northern
District of Illinois dismissed a class action complaint arising from a
credit card "skimming" attack suffered by Barnes & Noble in 2012. U.S.
District Judge John W. Darrah held that plaintiffs failed to
demonstrate standing under Article III of the U.S. Constitution, and
therefore could not proceed with their complaint for breach of
contract, violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act ("ICFA"), invasion of privacy, violation of the
California Security Breach Notification Act, and violation of the
California Unfair Competition Act. The Barnes & Noble Pin Pad decision
highlights the ongoing challenges faced by plaintiffs in data breach
litigation to articulate injury both for purposes of Article III
standing and in order to state a claim for relief.

Barnes & Noble uses PIN pads to process its customers' credit and
debit card payments at retail stores. On October 24, 2012, Barnes &
Noble announced it had experienced a security breach, whereby
so-called "skimmers" potentially stole customer information
transmitted through PIN pad devices at sixty-three Barnes & Noble
retail locations in nine states, including Illinois and California.
"Skimming" is a form of electronic hacking that enables the
unauthorized collection of credit and debit card data. Approximately
six weeks after learning of the attack (according to the complaint),
Barnes & Noble publicly announced the breach and published a notice on
its website instructing its customers to take precautions against
identity theft and fraud.

Four customers who had made purchases at Barnes & Noble stores located
in Illinois and California brought suit in the wake of the
announcement. The plaintiffs asserted a wide variety of damages due to
the security breach, including: an increased risk of identity theft,
untimely and inadequate notification of the security breach, improper
disclosure of plaintiffs' personal identification information ("PII"),
invasion of privacy, expenses incurred and time lost to mitigate the
increased risk of identity theft or fraud, deprivation of the value of
their PII, anxiety and emotional distress, and overpayment for Barnes
& Noble products due to security measures the company failed to
provide. One plaintiff also alleged she suffered a fraudulent charge
on her credit card after the security breach.

Relying on the Supreme Court's decision earlier this year in Clapper
v. Amnesty International, Judge Darrah granted Barnes & Noble's motion
to dismiss for lack of standing. At the outset, the court explained
that to establish standing under Clapper, a plaintiff must demonstrate
that they have suffered an "injury in fact" that is "certainly
impending," and that allegations of possible future injury fail to
meet the test outlined by the Supreme Court. Judge Darrah then
reviewed the injuries asserted by plaintiffs, holding each of them
insufficient under Clapper.

The court began its analysis by explaining that a mere increased risk
of identity theft or fraud fails to establish standing under Clapper
because speculation of future harm does not constitute actual injury.
While plaintiffs argued that Clapper only required a "substantial
risk" of injury, Judge Darrah held that plaintiffs' allegations also
fell short of this test. The court similarly disposed of plaintiffs'
statutory claims, explaining that even if plaintiffs could show that
Barnes & Noble violated the statute in question, any such violation
would be insufficient to establish standing without actual injury.

With respect to plaintiffs' supposed loss of privacy and improper
disclosure of their PII, the court held that the plaintiffs had not
sufficiently alleged that their PII was disclosed in the security
breach. Citing Clapper, the court further held that expenses incurred
to mitigate an increased risk of identity theft or fraud cannot
establish standing in the context of non-imminent harm. Similarly,
Judge Darrah explained that emotional distress in the wake of a
security breach is insufficient to establish standing, particularly
absent any imminent threat to the plaintiffs' PII.

The court dismissed the plaintiffs' argument that they had been
deprived of the value of their PII, noting that the plaintiffs did not
allege they had the ability to sell their information. The judge
similarly was not persuaded that the plaintiffs suffered injury by
overpaying for Barnes & Noble products in light of security measures
the company failed to provide, noting that plaintiffs did not allege
that Barnes & Noble charged higher prices for transactions using
credit cards. Finally, the court held that the sole plaintiff who
alleged a fraudulent charge failed to plead actual injury because she
did not allege that she was not reimbursed for the charge.

The Barnes & Noble Pin Pad opinion highlights the significant hurdle
now imposed by Clapper for data breach plaintiffs. While numerous
courts have dismissed data breach actions for failure to state a claim
due to lack of injury, Barnes & Noble Pin Pad suggests that data
breach cases post-Clapper increasingly will be decided on standing
grounds, and that speculation of future harm will not suffice. To the
extent such claims continue to survive Article III scrutiny, Judge
Darrah's injury analysis also undermines the likelihood such
allegations will be held sufficient to state a claim for relief.
Furthermore, the opinion suggests that even where a data breach
plaintiff alleges actual misuse of information, the allegations will
not constitute cognizable injury where the plaintiff fails to allege
that he or she was not reimbursed for the charges. Finally, as Article
III applies to all data breach matters brought in federal court, the
impact of Judge Darrah's injury analysis reaches well beyond the
causes of action asserted in Barnes & Noble Pin Pad, and will extend
to other claims, such as negligence and negligent misrepresentation,
frequently asserted in the data breach context.
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