Does Free Credit Monitoring Do More “Harm” Than Good?

The Seventh Circuit reinstates the Neiman Marcus data breach class action lawsuit after finding that increased risk of future fraudulent charges and greater susceptibility to identify theft are sufficient for standing.

Last week, the Seventh Circuit revived the Neiman Marcus data breach class action in an opinion that not only distinguished the Supreme Court’s Clapper decision, but, did something no court has done previously:  turned the company’s offer of free credit monitoring and identity protection services into evidence that consumers’ fear of injury from this breach is not too “speculative” to halt litigation.  This grave development should be carefully considered by companies in planning and responding to data breaches.

Background

Neiman Marcus’s data breach unfortunately mirrored the experiences of many large retailers in the United States that also suffered sophisticated cyberattacks during the 2013 holiday season.  In mid-December 2013, Neiman Marcus received reports that some of its customers were seeing fraudulent charges on their credit cards.  An ensuing investigation identified malware attributable to an unauthorized intrusion between July 16, 2013 and October 30, 2013.  The attack exposed 350,000 credit cards, 9,200 of which had indeed been used by criminals to make fraudulent charges.  There was no evidence that Social Security numbers or birth dates had been compromised.

Neiman Marcus issued broad notification about the incident, out of an abundance of caution, to all customers who had shopped at its stores between January 2013 and January 2014, and for whom it had maintained physical or email addresses.  In addition, while there was no evidence that Social Security Numbers were compromised, Neiman Marcus offered all notified customers the opportunity to enroll in 12 months of complimentary credit monitoring and identity theft protection services.

Court Distinguishes Clapper

In reversing the district court’s dismissal, the Seventh Circuit closely analyzed the contours of Clapper v. Amnesty Intʹl USA, 133 S. Ct. 1138 (2013), an oft-cited cited case that companies have used to obtain dismissals of data breach class actions in federal courts across the country on grounds that plaintiffs failed to allege imminent, non-speculative harm necessary to satisfy Article III standing requirements.

According to the Court, Clapper did not foreclose “any use whatsoever of future injuries,” but rather, required that alleged harm either “already ha[d] occurred” or was “certainly impending” to establish sufficient standing to sue.  Unlike in Clapper, where human rights organizations alleged speculative risks about possible government surveillance, there was no dispute that (a) Neiman Marcus had suffered a data breach, (b) credit card information was exposed, (c) the cards belonged to 350,000 customers, and (d) 9,200 of those cards had been used to make fraudulent charges.  The Seventh Circuit punctuated the key inquiry as to whether there was a substantial risk of fraudulent charges and ID theft by asking and answering its own question:  “Why else would hackers break into a store’s database and steal consumers’ private information?  Presumably, the purpose of the hack is, sooner or later, to make fraudulent charges or assume those consumers’ identities.”

Offer of Credit Monitoring Reinforces Finding of “Concrete” Injury

In addition to the imminent risks of fraud and ID theft, the Court also considered whether the time and expenses already incurred to protect against such risks conferred standing upon the plaintiffs.  Refusing to “overread” Clapper, the Seventh Circuit again linked these mitigation expenses to the uncontested fact that Neiman Marcus had suffered a breach involving credit cards, reasoning as follows:

It is telling in this connection that Neiman Marcus offered one year of credit monitoring and identity‐theft protection to all customers for whom it had contact information and who had shopped at their stores between January 2013 and January 2014. It is unlikely that it did so because the risk is so ephemeral that it can safely be disregarded. These credit‐monitoring services come at a price that is more than de minimis. For instance, Experian offers credit monitoring for $4.95 a month for the first month, and then $19.95 per month thereafter.

In other words, the Court effectively used Neiman Marcus’ decision to broadly offer free credit monitoring as a concession that plaintiffs faced non-speculative and imminent risk of harm, warranting their mitigation expenses.  According to the Seventh Circuit, “[t]hat easily qualifies as a concrete injury.”[1]

Conclusion

In the wake of a cyberattack, companies are driven by a host of legal, ethical, and public relations considerations, to name a few.  Offering credit monitoring and identity protection services has become a standard practice in the cyber playbook, largely to preserve or win back loyalty by demonstrating the company’s commitment to its customers or employees.  Indeed, consumers and employees often expect free credit monitoring or identity theft protection, regardless of the nature or scope of the information compromised.[2]

However, offering these services may send an unintended signal, for example where the breach does not involve Social Security Numbers or other data used for identity theft (e.g., medical information).  In that situation, a company may face questions such as:  “Was more data compromised than the company reported?”  or “Does the company have evidence of identity theft attributable to the breach?” or “Are consumers at real risk of identity theft?”  This is not to say the scales should tip in favor of foregoing a credit monitoring remedy.  If, for example, the forensic investigation identifies evidence that the attacker accessed Social Security Numbers or health care information, then credit monitoring can be a valuable tool for mitigating unauthorized attempts to open new credit or loans, and to anticipatorily reimburse expenses that individuals may otherwise incur.  But after the Seventh Circuit’s decision in Neiman Marcus, companies are well-advised to understand that the decision to offer such a remedy may inadvertently help build a prospective plaintiff’s standing to sue, and create confusion among customers.  Accordingly, the Neiman Marcus decision, at a minimum, calls for incident response teams to exercise more thoughtful, cost-benefit analyses before offering a remedy to affected parties, because it may in some situations do more “harm” than good.

 

[1]  The Court expressed doubt regarding plaintiffs’ other claims for damages based on (1) paying a premium (overpaying) for Neiman Marcus products because the store failed to invest in adequate security, and (2) violations of rights grounded in losing private information.  The Court did not address Neiman Marcus’s 12(b)(6) motion for failure to state a claim, which will be considered on remand by the district court.

[2]  Credit monitoring services generally monitor activity on credit reports for at least one of the big three credit bureaus (Experian, TransUnion, Equifax) to alert consumers to new credit lines or collection amounts being added to credit records, which requires a Social Security number.  Identity protection/monitoring services differ by company, but are generally designed to monitor activity across different websites and online services, including so-called “darkweb” sites where personal information is bought and sold.