Keep Reading: Standing Affirmed, but Barnes & Noble Data Breach Class Action Halted

It was about time for data breach defendants to get a win. The District Court for the Northern District of Illinois delivered one to Barnes & Noble in its long-running class action that stems from a breach suffered in 2012. Plaintiffs’ case was dismissed in its entirety on a motion to dismiss under Rule 12(b)(6). This development—just days after the Sixth Circuit in Nationwide had aligned itself with the Seventh Circuit’s Neiman Marcus and P.F. Chang’s decisions that found standing to sue for breach plaintiffs—shows that the legal battle over “harm” may start with standing, but goes nowhere absent alleged damages that tightly match the substantive elements of each claim.

Background

In 2012, criminals tampered with “PIN pad terminals” at approximately 63 Barnes & Noble stores located in nine states and allegedly stole payment card information for hundreds of thousands of customers. Barnes & Noble notified affected individuals approximately six weeks after discovering the incident. Class plaintiffs sued, alleging claims under Illinois and California law for breach of (implied) contract, the Illinois deceptive practices statute, invasion of privacy, violation of statutory data breach notification rules, and unfair competition.

Class plaintiffs amended their complaint after an initial dismissal for lack of standing. The key, updated allegations were as follows: (a) Barnes & Noble had access to the stolen payment card data, (b) the criminal hacker had disclosed the stolen information, (c) the breach caused plaintiffs to incur reasonably foreseeable costs to address identity theft, (d) one plaintiff who was already a subscriber to identity theft protection services had continued to spend money on identity theft protection services after learning of the breach, and (e) plaintiffs overpaid for their book purchases because they were denied the privacy protections that Barnes & Noble promised, but did not provide. Barnes & Noble moved (again) to dismiss for lack of standing under Rule 12(b)(1) and for failure to state a claim under Rule 12(b)(6).

Analysis

Standing

Citing the Seventh Circuit’s decisions in Neiman Marcus and P.F. Chang’s, the District Court held that plaintiffs had established standing to sue. Specifically, plaintiffs sufficiently alleged “injury in fact.” The hackers tampered with the PIN pads to steal customer PII; plaintiffs used their cards at the affected Barnes & Noble stores; the hackers made unauthorized charges on the stolen cards; and plaintiffs devoted time and money to prevent identity theft. Collectively, these allegations demonstrated that the plaintiffs incurred cognizable injuries for standing purpose when they took steps to protect themselves from a “substantial risk” of fraudulent charges.

Failure to State a Claim

While plaintiffs won the battle on standing, they lost the case when the court turned to consider Barnes & Noble’s motion under Rule 12(b)(6). In short, even though the harms alleged met the standing requirement, none of the plaintiffs’ alleged harms were cognizable under the various asserted legal theories.

Specifically, the plaintiffs failed to plead “any economic or out-of-pocket damages that were caused by the breach.” For example, as to the breach of contract claims, the court found no precedent for the theory that an overpayment for goods at Barnes & Noble, or an alleged loss of value in one’s personal information, is recoverable in a contract action. And no court has upheld compensation for “anxiety” in the context of a breach of contract claim. Similarly, the Illinois deceptive practices claim failed because there are no “actual damages” available under the statute for either (a) fraudulent charges (because banks reimburse them), or (b) an increased risk of future identity theft (because both are not “present harm in and of themselves”). The court also rejected plaintiffs’ argument that the purchase of identity theft protection services was sufficient to confer standing. Though the court seemed to acknowledge that such out-of-pocket expenses could potentially constitute damages sufficient to confer standing, the court noted that the named plaintiff had purchased the identity theft protection services before the breach. Thus, these expenses could not be causally attributed to the breach. Finally, on the claim that Barnes & Noble did not notify individuals “in the most expedient time possible,” the court held that the six‑week delay in notifying individuals was “insufficiently prompt” under California law, but still dismissed the claim because there was no allegation that the plaintiffs were harmed because of the delay in notification.

What Does this Mean?

This decision, along with the Third Circuit’s recent refusal to review the dismissal of a negligence claim in a data breach action (also under the economic loss doctrine), offers defendants more than a silver lining in an otherwise down year. As the Barnes & Noble decision makes clear, the harm that satisfies standing does not “double” for the actual-injury requirement embedded in the substantive claims that plaintiffs typically assert. This means that while some post-breach actions (e.g., offering credit monitoring) may create challenges to defeating class action litigation on standing grounds, they may not negatively impact the ability to obtain early dismissal on more substantive grounds. In other words, standing does not present the final battleground for data breach plaintiffs.

However, the decision does present one very concerning development. The timing requirements for notification in most states are fairly flexible—from “as soon as practicable” to “the most expedient time possible, without unreasonable delay.” Although many states provide for an upper limit deadline on when notification must be made, most of these states also allow for some flexibility in the timing for organizations to determine the scope of the breach. Here, the Court held at the pleading stage that the “nearly six weeks” it took Barnes & Noble to provide the required notice was insufficiently prompt to satisfy the “most expedient time possible” standard under California law. This signals that courts may not appreciate how long a forensic investigation takes, or that they consider six weeks the upper bounds on what is reasonable for notification to be made. That said, organizations should not rush to notify; that creates its own potential issues. What it does mean is that organizations should focus on preparation efforts, such as creating an incident response plan and conducting simulations regularly, so that when an incident hits, their response is as efficient as possible.