. . . a data breach class action. 

Hackers and plaintiffs’ lawyers could combine to make 2014 the year when class actions concerning theft of sensitive information proliferate.  On this 11th Day of Privacy, we look ahead at the prospects for privacy class actions in the coming year.

When asked why he robbed banks, the notorious bank robber Willie Sutton apocryphally replied, “Because that’s where the money is.”  No matter its provenance, Sutton’s legendary dictum guides computer hackers and class counsel alike.  Both target sectors of commerce deemed likely to yield a lucrative payday.  As the hackers know, “[t]here is plenty of money to be made on the black market selling stolen credit card numbers, which can go for as little as a quarter or as much as $45 each.”  Plaintiffs’ lawyers have had more difficulty monetizing data breaches, with problems relating to proof of injury to class members often resulting in outright dismissal or denial of motions to certify privacy class actions.  The decisions of the First Circuit and the district court in the Hannaford data breach class action establish that the threat of identity theft and risk of damage to credit associated with targeted attacks by hackers can be treated as cognizable injuries for consumers whose data is stolen.  That precedent, combined with increasing assaults on financial data by online criminals, may make 2014 a significant year for privacy class action activity.

The Growing Threat

The recent theft of credit card data of as many as 40 million holiday shoppers at Target stores across the country is but the latest breach involving financial data.  It is not even the largest – the 2007 theft of data from T.J. Maxx took credit card information for 90 million customers, while the 2009 Heartland Security Systems data breach compromised 130 million credit card numbers.  These incidents starkly demonstrate how audacious cyberattacks can imperil vast troves of sensitive data.

The threats are both structural and technological.  Kroll’s 2014 Cyber Security Forecast  identifies challenges to maintaining data security arising from weaknesses in vendors’ security processes and procedures and threats from malicious insiders.  But the bigger issue may be the difficulty in staying ahead of determined hackers.  Even with robust and state-of-the-art security procedures, businesses that handle sensitive data cannot be assured that criminals will be unable to find their way in.  As the New York Times reports:

Security experts said that even if Target had installed the most cutting-edge security — and it’s not clear how Target was protecting this data — it would not be shocking if hackers found a way in.

“It’s a game of cat and mouse,” said Steven M. Elefant, a managing director of Soaring Ventures, who was chief security officer at Heartland Payment Systems when it was breached in 2009. “We’re dealing with sophisticated bad guys that have many ways to attack.”

The vexing persistence of targeted data breaches, despite increasingly sophisticated data protection practices, augurs continuing exposure to class action claims by individuals whose information is compromised by hackers.  As night follows day, class action lawsuits promptly follow data breaches.  In just a single week following disclosure of the Target data breach, class actions were filed against Target in Minnesota, California, Oregon, Illinois, and Massachusetts.

Potential Changes In The Legal Landscape

Damages issues have long frustrated would-be plaintiffs alleging claims arising from theft of data.  Where data is stolen in connection with theft of hardware – e.g., a laptop containing customer data that is stolen from a locked car – it has proved difficult for plaintiffs to establish that there is a significant risk that their data will be accessed or misused.  Conversely, where hackers target retailers’ credit card data, it can be presumed that they are doing so in order to access and misuse credit card accounts.  In most cases, however, card issuers do not pass on fraudulent charges to customers, so most users do not suffer direct financial harm.  While there remains a smaller risk that credit card information can be used to perpetrate identity theft, or that fraudulent charges might harm customers’ credit ratings, courts have typically treated such injury as too speculative to support a claim for relief.

The First Circuit’s 2011 decision in Anderson v. Hannaford Bros. Co., 659 F.3d 151 (1st Cir. 2011), marked a change in the way courts treat the risk of identity theft or injury to credit ratings in targeted data breach cases.  Because hackers had targeted the Hannaford system with the express purpose of obtaining credit card and debit card numbers in order to incur fraudulent charges, the First Circuit deemed it reasonable for plaintiffs to expend money to purchase credit insurance or new credit cards.

Anderson remains a minority decision.  Most courts that have addressed the issue have continued to treat such injuries as too remote or speculative to support a legal claim.  And the ruling in Andersondid not eliminate damages issues on remand that would preclude class certification, as the trial court concluded that proof of whether it was reasonable for a particular class member to pay for credit insurance or identity theft protection was too individualized to be tried on proof common to the class as a whole.  Nonetheless, the decision in Anderson has opened the door to plaintiffs in data breach cases to argue that their claims should not be dismissed.

Will trial courts walk through that door?  If the number and breadth of targeted data breaches continues to grow in the coming year, the scope of the problem could make it difficult for courts to resist.  As retailers, vendors, card issuers and consumers acquire more hard-earned real world experience with the consequences of large-scale data theft, the potential consequences of such breaches will become less speculative.  Legal response requirements, combined with voluntary response programs implemented by companies that are targeted for data theft, could indeed render fears about the consequences of data theft speculative or insubstantial.  If not, future class actions will be likely to allege more particularized and concrete harms to individuals whose data is stolen.  An increase in the volume of data breach litigation in the coming year will decide whether the types of injuries recognized in Anderson will be actionable in courts throughout the United States.