United States: Issuer Banks’ Claims In Target Data Breach Litigation Survive Motion To Dismiss

Last Updated: December 5 2014
Article by Kevin M. McGinty

Federal District Judge Paul Magnuson has ruled that banks that issued credit and debit cards to customers whose data was stolen in the December 2013 Target data breach could continue to litigate claims against Target for negligence and violation of Minnesota's Plastic Security Card Act ("MPCSA"), Minn. Stat. § 325E.64.  The claims of the issuer banks originated in multiple lawsuits that were among the 71 separate actions filed nationwide that the federal Judicial Panel on Multidistrict Litigation consolidated for pretrial proceedings in the District of MinnesotaThe December 2 ruling is significant both for its conclusion that Target owed a duty of care to issuer banks with respect to data security and for its rejection of Target's argument that the MPSCA should not apply to all Target transactions nationwide, but instead should be limited to transactions that occurred in Minnesota stores.  The decision does not, however, eliminate challenges that the issuer banks are likely to face both with respect to proving their allegations and obtaining certification of a plaintiff class.

The claims of the issuer banks arise from their particular role in the credit and debit card payment system.  Issuer banks provide payment cards to customers for use in making purchases, and ultimately pay retailers for any purchases made with those cards.  In the ordinary course, the issuer banks then recoup the cost of such purchases from their customers, either by billing the customers monthly for their purchases (for credit cards) or immediately debiting the customers' bank accounts (for debit cards).  Card issuers, however, generally do not require card holders to pay for fraudulent charges made with their credit or debit cards.  As a result, the issuer banks bore losses arising from fraudulent charges that were made using payment card information stolen from Target.  Their lawsuit seeks to recover those losses from Target.

The Target data breach was caused by malware that hackers placed on Target's point-of-sale ("POS") terminals.  The hackers infiltrated the Target POS system by compromising password protected access that a Target heating and air conditioning vendor had to Target's online billing and payment system, which then allowed the hackers to access Target's broader information system network.  Using the malware on the POS terminals, the hackers were able to record card information as each card was swiped, then store the stolen data elsewhere on Target's servers for later transmission to the hackers' servers in Russia. The issuer banks' consolidated complaint alleges that Target failed to take adequate steps to project against infiltration of its network and placement of malware on the POS terminals.  The complaint pleads four grounds for recovery; negligence, negligent omission to disclose material facts (specifically, the purported absence of adequate security systems to prevent a data breach), violation of the MPCSA and negligence per se (based on violation of the MPCSA).  Target moved to dismiss all four counts.

Target moved to dismiss the negligence claim on the ground that Target does not, as a matter of law, owe any duty of care to the issuer banks with respect to a third party data breach.  Target argued that where harm is caused by a third party – in this case, the hackers who stole the data – a duty to protect another from such harm only arises where there is a special fiduciary-like relationship between the parties.  The court agreed that Target and the issuer banks did not have such a relationship.  But Judge Magnuson was persuaded by the issuer banks' argument that the risk of a data breach was a foreseeable harm that gave rise to a general duty of care owed by Target to the issuer banks.  Referring (without citation) to the complaint's quotation of a Bloomberg article reporting that Target had turned off a security software function that might have automatically deleted the malware used to steal the data, the court found that such allegation "is itself sufficient to plead a direct negligence case . . . ."   Finding that the issuer banks "have plausibly alleged that Target's actions and inactions . . . caused foreseeable harm to" the issuer banks, the court concluded that the complaint pleaded an actionable claim for negligence arising from the data breach.

Target advanced two arguments for dismissal of the MPCSA claim, which proscribes retention of payment card data (including the card number, security (or "CVV") number and any PIN for a debit card) for more than 48 hours.  First, Target challenged application of the MPCSA to transactions occurring in stores outside of Minnesota.  Second, Target argued that a claim for injury arising from violation of the MPCSA only applies where the breach involves data stored on a retailer's computer system in violation of the MPCSA and not, as was the case here, the data was stolen at the POS terminals.  Judge Magnuson rejected both arguments.

On the question of whether the MPCSA applies to non-Minnesota transactions, the court found that the plain language of the statute made its data retention practices applicable to any person or entity "conducting business in Minnesota."  Minn. Stat. § 325E.64, subd. 2.  Target, as a Minnesota company, falls within the scope of the statute, which otherwise contains no territorial limitations on its applicability.  The court also rejected the argument that application of the MPCSA outside of Minnesota violated the so-called "dormant Commerce Clause" of the United States Constitution, finding that the statute does not impermissibly impose or result in differential treatment of in-state and out-of-state economic interests.  See Jones v. Gale, 470 F.3d 1261, 1267 (8th Cir. 2006).

As to Target's second argument for dismissal of the MPCSA claim, Judge Magnuson agreed that "there is no dispute that the hackers who stole Target's customers' data did so by installing malware on Target's computer servers that read the data from customers' credit and debit cards at the moment those cards were swiped in Target's stores."  Plaintiffs, however, argued that the hackers stored the stolen payment card data on Target's servers for more than 48 hours before uploading the data to servers in Russia,  thereby violating the MPCSA.  The issuer banks also alleged, citing reports about Target's practice of creating customer profiles, that Target had a practice of keeping customers' financial data for 60 to 80 days.  The issuer banks further claimed that the hackers could not have obtained all of the payment card data (including CVV numbers) without accessing separately stored payment card data.  Without addressing the question of whether data that hackers parked on hijacked space on Target's servers could be considered to have been "retained" by Target for purposes of the MPCSA, the court concluded that the allegations that Target itself retained data elsewhere – and that such data was accessed by hackers – were sufficient to state a claim under the MPCSA.  This finding also required denial of Target's motion to dismiss the issuer banks' negligence per se claim, which rested on the invalidity of the MPCSA claim.

The court did grant Target's motion to dismiss the negligent misrepresentation claim.  Judge Magnuson rejected Target's argument that failure to disclose alleged data security deficiencies would not have been material to issuers of payment cards.  The court agreed, however, that the issuer banks had failed to allege that they had relied to their detriment on such omission. The court allowed the issuer banks leave to replead that claim to allege any facts they believed would establish such reliance.

Denial of the motion to dismiss does not resolve the merits of the claims alleged in the complaint, but merely allows the issuer banks to go forward with discovery and to seek certification of a plaintiff class.  Target will have an opportunity to resist class certification and to seek summary judgment dismissing the case after discovery is concluded.  It remains to be seen whether the issuer banks will be able to substantiate the allegations that allowed them to survive the motion to dismiss.  For example, the allegation that Target retains "financial data" concerning customers equates Target's creation of customer profiles with retention of credit card data, a conclusion that does not necessarily follow from the information reported about that practice.  Should allegations that Target purposefully violated MPCSA by retaining payment card data prove unfounded, plaintiffs' MPCSA claim will then turn on the question of whether a hacker's use of a retailer's server space to store card data can expose that retailer to liability under the MSPCA.  As previously stated in this blog, such a theory, if adopted, would make the MPCSA a strict liability statute under which a business that implements systems and practices that comply with the MPCSA can nonetheless be held liable for violation of the statute if criminals use that business's computer systems to store stolen data without its knowledge or consent.

The issuer banks also are likely to face significant obstacles at the class certification stage.  In a similar case brought in 2007 in connection with the TJX data breach, a federal judge in Massachusetts judge denied a motion to certify a class of card issuer banks to recover losses alleged to have been caused by that data breach.   In particular, the court found that individualized issues of fact and law predominated as to (i) reliance on alleged misrepresentations as to security of the TJX system; and (ii) whether damages claimed by the banks arose from the data breach or from other fraudulent causes that are endemic to the credit and debit card industry.  The first of those issues would be present in the Target case in the event that the issuer banks successfully amend their negligent misrepresentation claim to prove reliance.  The second issue will be present irrespective of what claims are sought to be certified.  Absent a basis to establish which fraudulent charges are attributable to the data breach through proof common to the class as a whole, the issuer banks will find it difficult to obtain class certification on their claims against Target.

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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Kevin M. McGinty
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