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

[Audrey McNeil]

http://www.lexology.com/library/detail.aspx?g=374c1bad-cc4e-4a52-aca5-
094120b0d5d3

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.
MacDonald, 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).

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.
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