United States: Kentucky Federal Court Brushes Aside Pre-Emptive Attack On Class Allegations In Phishing Case, Rejects Out-Of-The-Box Defense Strategy

Brushing aside apparent flaws in a proposed class definition, a federal court in Kentucky declined to dismiss class allegations against North Carolina-based pharmacy services provider Pharm-Save Inc. (Pharm-Save) stemming from a W-2 phishing scam.

In its Dec. 1, 2017, decision denying in part Pharm-Save's motion to dismiss, U.S. District Judge Thomas B. Russell declined to consider Pharm-Save's comprehensive challenge to the plaintiffs' proposed class definition – and the legal sufficiency of the class allegations in general – and reserved determination of those issues until the plaintiffs move to certify the class. Savidge, et al. v. Pharm-Save, Inc., 3:17-CV-00186-TBR (W.D. Ky. Dec. 1, 2017) [ECF 26].

The lawsuit, originally filed in Kentucky state court in March 2016, arose from a phishing scam in which hackers tricked a company employee into unwittingly sending W-2 forms to a fake email address the hackers had hijacked to pose as a Pharm-Save executive. These types of scams have become increasingly widespread, with more than 175 reports of W-2 phishing attacks in 2016 alone. As the complaint notes, the IRS issued an alert before the Pharm-Save attack warning payroll and HR professionals about the emerging scheme

Plaintiffs Andrea Savidge and Beth Lynch filed suit on behalf of a putative class consisting of "all persons . . . who were the victims of a data security breach that occurred on or about March 3, 2016, wherein their sensitive and personal data was compromised." Pharm-Save promptly moved to dismiss all claims under Rule 12(b)(6) of the Federal Rules of Civil Procedure, and – taking a strategic tact not often employed by class defendants – asked the court to also dismiss the class allegations.

Courts often decide whether or not to certify a class after the plaintiffs move for certification under Rule 23, and usually after some discovery has taken place. The plaintiffs bear the burden of proving that the elements of Rule 23(a) and (b) have been met.

Nothing in Rule 23, however, prevents a defendant from pre-emptively seeking dismissal of class claims before the plaintiffs move for certification. In fact, Rule 23(c)(1)(A) explicitly directs courts to consider class certification "at an early practicable time after a person sues or is sued as a class representative[.]" This means that a defendant who perceives deficiencies in class allegations can request dismissal of those allegations based on the pleadings alone, without waiting for discovery or plaintiffs' motion to certify. An increasingly common tactic among defense counsel is to move to strike class allegations under Rule 23(d)(1)(D). On a motion to strike, the standard is whether the complaint itself demonstrates that class certification is improper. Pharm-Save took a different route, however, basing its challenge to the class claims on its Rule 12(b)(6) motion to dismiss, where the complaint's "well pleaded" allegations are accepted as true and all reasonable inferences are drawn in the plaintiffs' favor.

Arguably, by affirmatively moving to dismiss the class claims rather than waiting to oppose the plaintiffs' motion for certification, Pharm-Save shifted the burden onto itself to show that Rule 23's requirements cannot be met as a matter of law. Indeed, at least one Kentucky federal court has adopted this view. Schilling v. Kenton Cty., Ky., No. CIV.A. 10-143-DLB, 2011 WL 293759, at *4 (E.D. Ky. Jan. 27, 2011) ("The moving party has the burden of demonstrating from the face of the plaintiffs' complaint that it will be impossible to certify the class as alleged, regardless of the facts plaintiffs may be able to prove."). But most authorities adhere to the sounder view that the named plaintiff has the burden of showing the propriety of certification regardless of the vehicle through which the defendant chooses to challenge the class allegations.

In Pharm-Save's case, the court held that it was "premature" to decide the certification issue, and reserved its determination until the plaintiffs move for certification and Pharm-Save opposes it. The court did so notwithstanding Pharm-Save's comprehensive attack on the facial sufficiency of the class allegations, which centered largely on the widely discussed issue of standing. Specifically, Pharm-Save argued that the class definition, as proposed, would include large numbers of individuals who suffered no real harm from the data breach and therefore lacked standing to participate in the lawsuit. The class must be redefined, the company argued, to include only individuals who actually suffered monetary damage from the phishing scam. But even this redefined class was unascertainable because it would be impossible to identify every individual who suffered monetary damage from the breach without making extensive factual findings, negating the purpose of a class action altogether. For example, Pharm-Save pointed out that Ms. Savidge was the only plaintiff on whose behalf the hackers allegedly filed a fraudulent tax return – a unique experience that renders her claim of damages atypical of the class and exemplifies the type individualized inquiry that would overwhelm the case.

While Pharm-Save's motion did not pan out, the company may have notched some strategic points that could strengthen its position later. For one thing, its argument likely helped educate the court as to what Pharm-Save sees as fatal flaws in the proposed class, and this view will persist through discovery and an eventual motion for certification by the plaintiffs. Further, the court's rejection of Pharm-Save's challenge to class certification does not curtail its right to reassert those attacks when the plaintiff moves for certification. And since Pharm-Save was filing a motion to dismiss the other claims, there was no downside in arguing to redefine or even strike the class allegations. In short, win or lose, a pre-emptive challenge to class allegations merits serious consideration from defense counsel.

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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