United States: Consumer Claims Survive Motion To Dismiss In Target Data Breach Class Action

A recent ruling by Federal District Judge Paul Magnuson will permit most of the consumer claims in the Target data breach litigation to survive Target's motion to dismiss.  This most recent ruling follows on the heels of the court's December 2 decision partially denying Target's motion to dismiss consolidated complaint of the banks that issued the credit and debit cards that were subject to the breach.  The late 2013 data theft that gave rise to the consumer and issuer bank claims was caused by malware placed by hackers on Target's point-of-sale ("POS") terminals.  The malware allowed the hackers to record and steal payment card data as customers' credit or debit cards were swiped.  In the consolidated consumer complaint, 117 named plaintiffs allege that Target wrongfully failed to prevent or timely disclose the data theft.  Plaintiffs also contend that Target failed to disclose the purported insufficiency of Target's data security practices.  The consumers assert claims under the laws of 49 states and the District of Columbia for negligence, breach of contract, breach of data notification statutes and violation of state unfair trade practice statutes.  The consumer complaint also purports to assert those claims on behalf of a putative plaintiff class consisting of every Target customer whose credit or debit card information was stolen in the data breach.The court's latest ruling rejected arguments by Target as to standing and damages that would have required dismissal of the consumer claims in their entirety.  The court did state, however, that Target can revisit the question of whether plaintiffs had sustained actionable injuries after discovery has concluded.  And, even though most of the consumer Plaintiffs' claims survive, the court did rule that that certain of the claims alleged under particular states' laws should be dismissed.  As is true of the court's denial of Target's motion to dismiss the issuer banks' consolidated complaint, the denial of the motion to dismiss does not resolve the merits of the surviving consumer claims.  Like the surviving issuer bank claims, the consumer claims that were not dismissed will now be the subject of extensive discovery and further motion practice relating to class certification and summary judgment.

Court rejects Target's arguments on standing and injury:  As is common in data breach cases, Target's primary ground for seeking dismissal of the consumer claims was lack of standing due to the absence of actionable consumer injury.  In its motion to dismiss, Target argued that none of the plaintiffs had alleged a present injury sufficient to establish "case or controversy" standing under Article III of the United States Constitution.  Specifically, Target contended that none of plaintiffs' alleged present injuries either constituted a present harm to plaintiffs or was fairly traceable to the theft of payment card data.  Target's central argument was that allegations that unauthorized charges had been made on plaintiffs' payment cards did not plead actionable injury because plaintiffs did not – indeed, likely could not – allege that such charges had not been or would not be reimbursed by the card issuing banks.  Target further argued that other alleged injuries could not fairly be traced to theft of payment card data because they could only have arisen from unrelated conduct (such as identity theft resulting from a plaintiff's stolen social security number) or were not fairly traceable to the data theft itself (such as loss of access to funds based on plaintiffs' own voluntary closing of accounts).

The court gave these arguments cursory treatment.  Judge Magnuson disagreed with Target's injury analysis, finding that "Plaintiffs have alleged injury" in the form of "unlawful charges, restricted or blocked access to bank accounts, inability to pay other bills, and late payment charges or new card fees."  Target contended that such alleged injuries are insufficient to confer standing because "Plaintiffs do not allege that their expenses were unreimbursed or say whether they or their bank closed their accounts . . . ."  The court rejected this argument, stating that Target had "set a too-high standard for Plaintiffs to meet at the motion-to-dismiss stage."  In so ruling, however, Judge Magnuson merely deferred to another day a decision on whether the injuries alleged were indeed fairly traceable to the alleged wrong doing.  Despite concluding that Plaintiffs' allegations were "sufficient at this stage to plead standing," the court nonetheless stated that, "[s]hould discovery fail to bear out Plaintiffs' allegations, Target may move for summary judgment on the issue."  Thus, it remains open to Target to show that neither Plaintiffs nor putative class members suffered injuries fairly traceable to the data breach.

The court's finding that Plaintiffs had alleged actionable injuries also supported its denial of Target's request that the Court dismiss claims asserted under 26 state consumer protection laws that required allegation of pecuniary injury.  Similarly the court rejected Target's argument that Plaintiffs' negligence claims should be dismissed for failure to allege cognizable damages.

Court dismisses some state consumer protection law claims; most survive.  Plaintiffs brought unfair or deceptive trade practice claims under the consumer protection statutes of 49 states and the District of Columbia.  The court dismissed claims under Wisconsin law because the subject statute contains no private right of action.  The court also dismissed claims asserted on behalf of absent class members under the consumer protection laws of Alabama, Georgia, Kentucky, Louisiana, Mississippi, Montana, South Carolina, Tennessee and Utah, finding that the laws of those states, which preclude the assertion of consumer protection claims by means of a class action, "define the scope of the state-created right" and preclude certification of a class to pursue such claims (quoting Shady Grove Orthopedic Assocs. v. Allstate Ins. Co., 559 U.S. 393, 423 (2010)).  Otherwise, as noted above, Judge Magnuson found that plaintiffs' allegations, including their allegations of injury, asserted actionable class and individual claims under the remaining states' consumer protection statutes, and declined to dismiss such claims.

Certain data breach notice claims survive motion to dismiss.  Plaintiffs asserted claims against Target under the date breach notification statutes of 38 states, alleging that Target had failed to disclose the data breach as soon as required under those laws.  As with plaintiffs' other claims, the court rejected as premature Target's argument that plaintiffs had not alleged any actionable damages flowing from alleged violations of state data breach notification statutes.  Certain of Target's arguments for dismissal based on statutory language prevailed.  Plaintiffs conceded that the data breach statutes in Florida, Oklahoma, and Utah did not permit a private right of action, and voluntarily withdrew those claims.  Where the applicable statutes provided only for enforcement by the state attorney general (as is true in Arkansas, Connecticut, Idaho, Massachusetts, Minnesota, Nebraska, Nevada and, Texas), the court dismissed Plaintiffs' claims.  Where the remedies available under other states' laws were non-exclusive or ambiguous –as was the case in Colorado, Delaware, Iowa, Kansas, Michigan and Wyoming – the court declined to dismiss Plaintiffs' claims.  Where applicable state laws were silent as to the authority to enforce the enactment, the court inferred a private right of enforcement in all states except Rhode Island, where controlling authority holds that if a statute does not expressly provide for a private cause of action, such a right cannot be inferred.  As to all other states, the court agreed with plaintiffs' argument that there is either a permissive cause of action or that there is a private right to enforce data breach notification statues under applicable state consumer protection statutes.

Negligence claims survive where not barred under the economic loss doctrine:  Actual damages is a required element of a common law negligence claim.  The court's rejection of Target's argument that Plaintiffs had failed to allege actionable injury precluded dismissal of Plaintiffs' negligence claims in their entirety for failure to plead damages.  Under certain states' laws, however, the so-called "economic loss doctrine" requires dismissal of claims for negligence where the alleged injury consists solely of economic loss rather than personal injury or property damage.  Following state authority, the court invoked the economic loss doctrine to dismiss negligence claims based on the economic loss rule under Alaska, California, Georgia, Illinois, Iowa and Massachusetts law.  The court declined to dismiss negligence claims under District of Columbia, Idaho and New Hampshire law, holding that precedent in those jurisdictions required additional factual development to determine whether there exists any special duty that would vitiate the economic loss doctrine.  Finally, the court held that the facts pleaded in the Complaint satisfied the exception to the economic loss doctrine applicable under New York and Pennsylvania law where there is a duty to protect from the specific harm alleged.

Breach of implied contract claims survive:  Judge Magnuson held that the existence of an implied contract turns on issue of fact that cannot be resolved at the motion to dismiss stage because "a jury could reasonably find that a customer's use of a credit or debit card to pay at a retailer may include the implied contract term that the retailer "will take reasonable measures to protect the information" on those cards (citing In re Hannaford Bros. Customer Data Sec. Breach Litig., 613 F. Supp. 2d 108, 119 (D. Me. 2009)).

Breach of contract claim dismissed without prejudice:  The Complaint alleges that Target violated the terms of the card agreement for the Target REDcard, in which Target states that it "use[s] security measures that comply with federal law."  The Complaint, however, fails to specify the federal law with which Target purportedly failed to comply.  Accordingly, the court dismissed that claim without prejudice, allowing Plaintiffs leave to replead that claim to specify, if possible, the state law that had been violated.

Bailment claim dismissed:  A common law bailment claim consists of wrongful failure to return tangible property entrusted to another.  Plaintiffs, however, do not and cannot allege that stolen payment card information was given to Target with expectation of return. Therefore, the court dismissed Plaintiffs' bailment claim with prejudice.

Unjust enrichment claim survives:  Plaintiffs claim that Target is liable for unjust enrichment because it knowingly received or obtained something of value which in equity and good conscience it should not have received.  This claim is based on two theories.  The first is an "overcharge" theory claiming that Target charges an unearned premium for data security.  The second theory states that class members would not have shopped at Target had Target disclosed alleged deficiencies in its data security.  The court rejected the first theory as unsupported as a matter of law, but concluded, without citation to authority, that the "'would not have shopped' theory . . . is plausible and supports their claim for unjust enrichment."

Significant obstacles remain for consumer claims:  The court's refusal to accept Target's injury arguments at the motion to dismiss stage does not eliminate Plaintiffs' burden to prove that consumers suffered actionable losses.  Because consumers generally do not have to pay for fraudulent charges on their payment cards, such activity will not provide a basis to establish cognizable damages.  Nor is the cost of credit monitoring or other activities associated with avoiding identity theft or adverse credit history likely to provide grounds for proving actionable damages.  A majority of courts that have addressed the issue have held that such costs are not actionable as a necessary and reasonable consequence of a payment card data breach.  And even where fraud mitigation costs have been treated as cognizable injury – as was the case in Anderson v. Hannaford Bros. Co., 659 F.3d 151 (1st Cir. 2011) the court nonetheless denied plaintiffs' motion for class certification because questions of whether individual consumers' remedial actions were reasonable and what such actions reasonably should have cost could not be determined without taking testimony from every member of the class, thereby raising highly individualized issues of fact and law that would preclude trying class members' claims through proof common to the class as a whole.  The parties will have the opportunity to grapple with these issues after discovery has concluded.

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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