United States: 2nd Circuit Hears Data Breach Argument: Is Fear Of Harm Sufficient For Article III Standing?

The 2nd Circuit recently heard oral argument in Whalen v. Michael Stores, Inc., No. 16-260, a data breach case involving credit card data. Whether or not the 2nd Circuit follows the 7th Circuit's lead (established in the Neiman Marcus and P.F. hang's decisions) will likely have far reaching consequences for the development of Article III standing jurisprudence in data breach cases.

The data breach in Whalen resulted from malware that skimmed credit and debit card information from point of sale terminals, capturing credit and debit card numbers and the associated expiration dates. The plaintiff filed a class action lawsuit seeking damages related to the 2013 payment card breach at Michael Stores. Although the plaintiff alleged that cardholders' names were also captured, Michael Stores' investigation revealed that cardholders' names, addresses and PINs were not compromised.

Prior to Michael Stores' disclosure of the breach, a credit card bearing the plaintiff's American Express account number was physically presented in Ecuador for two transactions on consecutive days. The plaintiff, who shopped at Michael Stores in the United States, did not plead that the charges were processed to her account (as opposed to being declined on the spot) or that she ever had any liability whatsoever for either of the attempted uses of her American Express. Plaintiff's card was cancelled the same day as the second attempted fraudulent transaction. No further attempts involving the compromised card number were made.

The district court dismissed the plaintiff's complaint for lack of Article III standing, holding that she had not alleged any actual harm.

What is Article III standing?

Article III standing is a threshold requirement to invoke a federal court's jurisdiction. It is established by showing the plaintiff's injury: (1) is concrete, particularized to her and actual or imminent; (2) fairly traceable to the defendant's action; and (3) can be redressed by a favorable ruling.

Previous cases have examined the nexus between a data breach and actual injury to a plaintiff, which, in the context of a data breach, can be a complex analysis. In general, to establish standing a plaintiff must show more than a "highly attenuated chain of possibilities," but what more must be shown? Actual misuse of the stolen data resulting in financial loss borne by a plaintiff is pretty clear; but what about a situation where there is only a likelihood of misuse or a risk of financial harm? And do incidental costs, such as the loss of time to reset security passwords or greater vigilance in reviewing account statements, constitute sufficient harm?

Did the Whalen plaintiff have standing?

In Whalen, the court noted the plaintiff's failure to allege that she suffered any unreimbursed charges. Furthermore, citing the Supreme Court's decision in Clapper (which held that plaintiffs "cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending"), the district court in Whalen found the plaintiff could not create standing by alleging lost time and money associated with credit monitoring, particularly because her card was cancelled.

The district court was similarly unmoved by her allegations of future harm, finding any increased threats of identity theft and fraudulent charges too remote to constitute an injury-in-fact. The plaintiff's card was quickly cancelled and she had not suffered any fraudulent charges or other harm in the intervening two years. The court explicitly distinguished Neiman Marcus, stating a "critical distinction" was that thousands of Neiman Marcus customers had suffered fraudulent charges.

In her appellate brief, the plaintiff argued that the district court misapplied Clapper, given that her credit card information had unquestionably been targeted and subsequently used, thus avoiding the speculative chain of events that plagued the Clapper plaintiffs. She further argued that her case fell squarely within Neiman Marcus and P.F. Chang's, two cases decided by the 7th Circuit, both of which generally held that the theft of customers' credit card information was enough to satisfy Article III standing, and that the 7th Circuit's rationale in those cases should be followed.

The oral argument

The 2nd Circuit panel was active from the very outset of oral argument. Judge Guido Calabresi was quite vocal in his belief that standing was satisfied because the plaintiff was subject to up to $50 of liability for fraudulent charges under 15 U.S.C. § 1643 at the very moment her credit card information was compromised. To him, the fact that no such liability was ever imposed was immaterial.

The other judges on the 2nd Circuit panel, however, expressed considerable skepticism at the plaintiff's contention that every cardholder of a targeted data breach (as opposed to an inadvertent breach, such as a lost laptop containing the same data) enjoyed Article III standing.

In an attempt to bolster her argument of actual harm, the plaintiff invoked the costs the putative class incurred in obtaining credit monitoring services. The Court, though, reminded the plaintiff that unless she bore those expenses herself, they were immaterial to her standing.

The Court returned to the issue of the plaintiff's liability for fraudulent charges and whether American Express was contractually obligated to absolve the plaintiff or whether it was simply its voluntary policy to do so. In light of the plaintiff's uncertainty, the Court asked for supplemental briefing on the issue. In that briefing, the plaintiff conceded she had not alleged she was subject to $50 in liability for fraudulent charges, but argued the American Express policy was outside the pleadings and should not have been considered by the district court. Whether the resolution of the Court's question will carry the day for either party remains to be seen.

Key takeaways

While we await the 2nd Circuit's decision, there are a couple of immediate takeaways on the issue of standing in data breach class actions to be gleaned from the oral argument in Whalen:

  1. Focus the court's attention on the harm allegedly suffered by the class representatives. Harm suffered solely by absent class members cannot be used to manufacture Article III standing for class representatives.
  2. Educate the court on what is — and, more importantly — is not possible to do with compromised credit card data. "Identity theft" can be an amorphous term. Care should be taken to explain the varying risk factors accompanying a loss of payment card data (including the distinctions between debit and credit cards) versus the loss of personally identifiable information such as Social Security numbers.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions