Litigation Alert: The Fourth Circuit Limits Standing to Bring Data Breach Cases

The U.S. Court of Appeals for the Fourth Circuit has made it more difficult to establish Article III standing in data breach cases both at the pleading stage and at summary judgment by requiring plaintiffs to allege and show that data thieves intentionally targeted the personal information that is stolen in a data breach. The decision in the case, Beck, et. al. v. McDonald, et. al., No. 15-1395, came down on February 6, 2017.

Privacy Act of 1974

The Privacy Act of 1974 governs the collection, maintenance, use, and dissemination of personally identifiable information about individuals that is maintained in systems of records by federal agencies. The Privacy Act provides that: “No agency shall disclose any record which is contained in a system of records by any means of communication to any person, or to another agency, except pursuant to a written request by, or with the prior written consent of, the individual to whom the record pertains,” and under other limited exceptions articulated in the statute. 5 U.S.C. § 552a(b).

Background: Court Considers Whether Data Breaches Caused Actual Damages

On February 11, 2012, a laptop containing the unencrypted personal information of 7,400 patients, including names, birthdates, the last four digits of social security numbers, and physical descriptors (such as age, race, gender, height and weight), was likely stolen from the William Jennings Bryan Dorn Veteran Affairs Medical Center. Dorn VAMC officials notified every patient whose information was on the missing laptop and offered each one year of free credit monitoring. Richard Beck filed a putative class action complaint on behalf of the 7,400 patients alleging that the data breach constituted negligence and a violation of the Privacy Act which caused “embarrassment, inconvenience, unfairness, mental distress and threat of current and future substantial harm from identity theft and other misuse of their personal information.” Beck further alleged that the threat of identity theft caused him to monitor his account statements and purchase credit monitoring services. Beck also brought a claim for injunctive relief under the Administrate Procedure Act to require the VA to account for all the records in the possession of the Dorn VAMC and destroy any improperly maintained records.

The district court dismissed Beck’s negligence claim at the pleading stage but allowed the Privacy Act and APA claims to go forward. After extensive discovery, the defendant again moved to dismiss and, in the alternative, filed for summary judgment. The district court granted the defendants’ motion to dismiss, finding that the plaintiffs’ fear of harm from future identity theft was too speculative to confer standing because it was “contingent on a chain of attenuated hypothetical events and actions by third parties independent of defendants.” It further rejected the plaintiffs’ attempt to “create standing by choosing to purchase credit monitoring services or taking any other steps to mitigate the speculative harm of future identity theft” because these measures were taken solely “to mitigate a speculative future harm.” The district court also ruled that, in the alternative, the defendants were entitled to summary judgment on the merits because the plaintiffs had not suffered any actual damages.

In July 2014, four boxes of pathology reports containing the identifying information of 2,000 patients, including names, social security numbers, and medical diagnoses, were misplaced or stolen. Dorn VAMC officials notified the affected individuals and offered them one year of free credit monitoring. Beverly Watson filed a putative class action complaint on behalf of the 2,000 patients alleging claims similar to those raised by Beck. The district court dismissed the complaint, holding that the plaintiff lacked Article III standing because she had not alleged “any actual or attempted misuse of her personal information,” rendering her allegation that her information would eventually be misused as “speculative.” It also rejected Watson’s allegations that any costs incurred to fend off identity theft constituted an injury-in-fact. For the purposes of the appeal, the Fourth Circuit consolidated the Beck and Watson cases.

Fourth Circuit Decision Centers on Question of Hypothetical Future Harm, Circuits Split on Injury-In-Fact

The Fourth Circuit affirmed the decisions of both district courts, concluding that the plaintiffs had failed to establish a non-speculative, imminent injury-in-fact for purposes of Article III standing. Citing Clapper v. Amnesty Int’l USA, 133 S. Ct. 1138, 1147-48, 1151 (2013), the Fourth Circuit explained that “threatened injury must be certainly impending to constitute injury in fact,” and a plaintiff may not “manufacture standing merely inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending.” Beck, at 13, 14.

Turning to the allegations in the cases, the Fourth Circuit considered the plaintiffs’ allegations of the increased risk of future identity theft. The court acknowledged that there was a circuit split concerning whether this risk constituted an injury-in-fact, with the Sixth, Seventh and Ninth Circuit recognizing that the plaintiffs could establish standing at the pleading stage based upon allegations of this threatened injury; while, the First and Third Circuits rejected such allegations as insufficient. However, the Fourth Circuit found that the Sixth, Seventh and Ninth Circuit decisions supported the dismissal of the plaintiffs’ claims as “too speculative” because, in those decisions, the plaintiffs had alleged that the data thief had intentionally targeted the personal information compromised in the data breaches. See id., at 18. Indeed, in one of the decisions, a named plaintiff had alleged actual misuse or access of that personal information by the thief. See id. In contrast, the Beck and Watson plaintiffs, even after extensive discovery, had failed to uncover any evidence that their stolen information had been accessed or misused in any way. See id., at 19.

The Fourth Circuit then explained that, under Clapper, 133 S. Ct. at 1150 n.5, standing could also be established based on a showing that there was “substantial risk” that harm would occur, which would prompt a party to reasonably incur costs to mitigate or avoid that harm; but, the plaintiffs had fallen short of that standard. See id., at 21. Addressing the plaintiffs’ allegation that 33% of health-related data breaches resulted in identity theft, the court noted that, even accepting those allegations as true, over 66% of veterans affected by the breaches in the present cases would suffer no harm. In addition, the Fourth Circuit declined to infer the existence of a substantial risk of harm of future identity theft from the Dorn VAMC’s offer of credit monitoring for the affected individuals, holding that “[t]o adopt such a presumption would surely discourage organizations from offering these services to data-breach victims, lest their extension of goodwill render them subject to suit.” Id., at 22.

Next, the Fourth Circuit addressed the allegation that the plaintiffs suffered an injury-in-fact because they incurred or would incur the cost of measures to guard against identity theft. The court rejected these allegations as costs the plaintiffs incurred “in response to a speculative threat” and held that “these self-imposed harms cannot confer standing.” Id., at 23.

Finally, the Fourth Circuit examined the plaintiff’s allegations under the APA that Dorn VAMC’s “inadequate actions or inactions [would] repeatedly harm every veteran” and Dorn VAMC would never comply with the Privacy Act without court action. Although it found that the plaintiffs’ data breaches allegations were “disconcerting,” the court nonetheless held that the plaintiffs lacked standing to seek injunctive relief because “[t]he most that can be reasonably inferred from the plaintiffs’ allegations regarding the likelihood of another data breach at Dorn VAMC is that the plaintiffs could be victimized by a future data breach,” and such allegations were simply “not enough.” Id., at 25.

Takeaways: Beck Raises the Bar for Establishing Standing in Data Breach Cases

Beck represents a significant departure from the recent trend of appellate decisions concerning standing in data breach cases. The Sixth Circuit in Galaria and the Seventh Circuit in Neiman Marcus and P.F. Chang’s found that plaintiffs could plead an injury-in-fact sufficient to confer Article III standing by alleging that their personal information was stolen and they faced an increased risk of identity theft and had incurred mitigation costs in response to that risk. The Sixth and Seventh Circuits also found that a company’s offer to provide free credit monitoring and identity theft protection to its customers following a data breach established that the company recognized that the risk of future harm from the breach was substantial.

Beck raises the bar (at least in the Fourth Circuit) for what plaintiffs needed to allege and show to establish standing in the data breach context. Plaintiffs cannot rely on any mitigation costs they might incur to supplement their allegations of “speculative” harm and manufacture standing. Nor can they rely on a company’s offer of free credit monitoring after a breach to demonstrate a substantial risk of harm. Instead, plaintiffs must now allege and show that their personal information was intentionally targeted for theft in a data breach as evidenced by the misuse or accessing of that information by the data thieves. Beck further exacerbates a division among the circuit courts concerning whether the increased risk of identity theft coupled only with the plaintiffs’ mitigation costs following a data breach are sufficient to confer Article III standing. This division may be not resolved unless and until the Supreme Court decides to weigh in on the issue.