Canada: Data Breach: Hackers Are The "Real Villains" & Minimal Harm To The Class

In a recent development in data breach class actions in Canada, Justice Perell of the Ontario Superior Court of Justice, while approving the class settlement in Lozanski v The Home Depot, Inc., denied payments sought by the representative Plaintiffs (the "Honoraria") and substantially reduced counsel fees payable pursuant to the settlement. He did so given his findings that the class had suffered minimal damages, that the action itself was "speculative" and "weak", and that the real villains were the hackers and not the defendant.

Background to the Case

In this case, the Defendants (a consortium of Home Depot entities, collectively referred to as "Home Depot") were the subject of a data-breach wherein criminal intruders hacked into Home Depot's payment card system using custom-built malware. Certain types of customer information, including credit card information, were potentially impacted by the breach. Upon discovering the breach, Home Depot:

  • Notified the Office of the Privacy Commissioner of Canada and the equivalent bodies in Alberta, British Columbia and Quebec. It was determined by all offices that Home Depot had not violated any of Canada's privacy laws;
  • Issued a press release, published notices in The Globe and Mail and La Presse and sent over 500,000 emails directly to Canadian customers notifying them that some customers' payment card information may have been compromised;
  • Assured its customers that they would not be responsible for fraudulent charges on their accounts and offered them free credit monitoring, identity theft insurance and credit repair services.

Representative Plaintiffs nonetheless brought various class actions in Canada as a result of the data breach. The parties ultimately negotiated a national settlement of these actions and sought Court approval for that settlement. As we have previously written about, in Ontario a class plaintiff must seek judicial approval of any proposed class settlement. The decision in this case relates to the parties' motion to approve the terms of the national class action settlement.

Key Terms of the Settlement

The parties sought approval of the following key settlement terms:

  • No wrong-doing on the part of Home Depot;
  • Class members' release of their claims against Home Depot;
  • Home Depot's creation of a non-reversionary Settlement Fund of $250,000 for the documented claims of Canadians whose payment card information and/or email addresses were compromised as a result of the data breach. This Settlement Fund was designed to provide compensation for: (1) the risk of a fraudulent charge on one's credit card; (2) the risk of identity theft; and (3) the inconvenience of checking one's credit card statement. Any class member with documented losses (such as a fraudulent charge on their credit card or time spent remedying issues related to the data breach) could be reimbursed up to $5000 from the Settlement Fund;
  • Home Depot's payment of free credit monitoring for class members up to $250,000;
  • Home Depot's payment of an honorarium to each of the representative Plaintiffs;
  • Home Depot's payment of notice and administrative costs relating to the settlement of up to $200,000;
  • Home Depot's payment of the Plaintiffs' counsel fees, taxes and disbursements up to $406,000.

Pursuant to the proposed settlement, Home Depot faced a potential cost of upwards of a million dollars.

Diminished Value of the Settlement

While the Court ultimately approved the settlement, it valued it at only $400,000, comprised of the Settlement Fund and approximately $150,000 in notice and administration costs. The Court further held that in all likelihood the Settlement Fund would not be taken up by damage claims made by class members, and that Home Depot would be able to set-off some of the notice and administration costs against its unused balance.

Justice Perell found that there was likely to be little draw down on the Settlement Fund for two reasons. First, there was minimal risk of fraudulent charges to class members' credit cards because of the sophisticated safeguards developed by credit card companies. Moreover, in the instance of any fraud, the losses would almost always be absorbed by credit card companies or the retailers. In this case there was no evidence that any of the class members absorbed a fraudulent charge. Second, the Court found that there was little risk that the data breach, including the disclosure of the email addresses, would actually increase the risk of identity theft since the data stolen would be inadequate to allow a criminal to fabricate another's identity. Finally with respect to the inconvenience damages associated with having to check one's credit card statements, the Court found that credit card holders are already obliged to check their statements and thus, they would suffer no inconvenience damages.

Honoraria

The Court denied any honoraria to the representative Plaintiffs on the basis that such amounts should not be routinely awarded, and that the circumstances in which they should be awarded, namely: hardship to the representative plaintiffs; extensive involvement and contribution to the conduct of the action; and real risk of exposure to a cost award, were not present in this case.

Class Counsel Fee

Justice Perell also reduced the counsel fee sought to $120,000. In doing so he relied on his finding that the case against Home Depot was "speculative at the outset and ultimately . . .[had] proven to be very weak." He found that there was "no reason to think that [Home Depot] needed or was deserving of behaviour modification" which is implicated with a high costs award. Further, given that he had valued the settlement at approximately $400,000 it would be disproportionate to award class action counsel the same amount in fees. Justice Perell emphasized that class counsel should not anticipate that every class action reasonably brought will be remunerative or profitable, and that the ultimate goal of fee approval is to arrive at a fee that is just in the circumstances. Given that Justice Perell had been prepared to dismiss this case without any benefit to class members, the circumstances mitigated against a higher fee award.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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