The Data Breach Legal Limbo on Consumers’ Ability to Sue Hacked Companies

By: Nicole Kardell

The first of the year is a good time to make assessments, resolutions and predictions. We have some recommendations for companies that store and process consumer data: It is a good time to assess the strength of your data security measures and resolve to meet industry standards where you fall behind, because we predict continued pressure on companies to reduce the risk of data breaches or face legal liability.

Data breaches are a common occurrence. The Identity Theft Resource Center reported that there were some 1,202 breaches in the 11 months to November 2017, up ten percent from 2016. But breach frequency does not make company complacency okay. Companies need to be vigilant to protect against data breaches as the stakes for failing to safeguard personal data could get higher. While companies float in a legal limbo of whether their customers can successfully sue them when personal data is compromised (more below), growing pressure from activists and politicians, as well as pressure from foreign jurisdictions, provides good incentive for companies to ensure they are doing what is necessary to protect consumers’ personal data in their possession.

The extent to which companies may be found liable to consumers for data breaches is as clear as mud. Companies have found themselves in legal limbo over the past few years from a question still unresolved by the courts: what level of harm must a consumer suffer to successfully sue a company that has been hacked? Is it enough that there was just a hack? Do the hackers need to be nefarious? Does the data need to be sold or otherwise misused?

These questions were tackled, but left open largely, by the Supreme Court in its 2016 decision in Spokeo v. Robins. They are important to address as they get at a key constitutional provision known as “standing”, which establishes a party’s ability to bring suit against another party. (“Standing” means that a plaintiff must establish he or she has experienced a harm that is concrete, particularized and actual or imminent, in order to file suit against a defendant. It is a requirement under Article III of the U.S. Constitution.)

In Spokeo, the high court ruled that a plaintiff must allege a concrete injury and cannot rely on statutory violations. Otherwise, a court will throw the case out for lack of standing. So what is a concrete injury in a consumer data breach case? If a consumer has not been hurt yet by identity theft, how close to the risk of harm must he or she come to establish standing?

Federal circuit courts around the country have treated the issue differently (hence all the confusion). Several federal circuits, including those covering Washington D.C, Illinois, Michigan, and Ohio, have held that any risk of future harm is enough. Courts covering New York, Pennsylvania, Virginia, and Missouri have ruled that there must be something more than just an assumed threat of future harm. The Ninth Circuit, which includes California, is due to rule on the issue this year.

There is hope that the Supreme Court may chime in again and bring clarity and consistency to the issue. Health insurer CareFirst has pitched the Supreme Court to address the disparate holdings. The insurer was the defendant in a D.C. Circuit case in which the court held plaintiff policyholders satisfied standing requirements by alleging a substantial risk that their personal information could be misused, even if no such misuse had yet occurred. In its appeal to the high court, CareFirst requested the court clarify that any alleged future injury—any “substantial risk”—must be imminent.

The health insurer’s argument seems perfectly on point: Article III requires an actual or imminent harm. If the plaintiffs’ compromised data has not yet been misused, and it is anyone’s guess whether it will be misused, where is the Article III standard met? The D.C. Circuit and other federal circuits that are allowing through data breach cases on the theory of assumed “ill” intentions of data hackers are oversimplifying the concept of injury. And if these more lax standards prevail, companies whose data is hacked (by the way, who are also victims of data breaches, and not the perpetrators!) are sure to face a significant uptick in class actions.

It remains to be seen which way the Supreme Court will fall …. or even if the Court will take up the CareFirst petition. And it remains to be seen how other federal circuits will treat the issue in the absence of a Supreme Court ruling. As mentioned, the Ninth Circuit, which is one of the more influential circuits, will be ruling soon on the matter in the case Theresa Stevens et al. v. Zappos.com Inc.

But this legal confusion is no reason for companies to rest on their limbo laurels or to adopt a wait-and-see approach. What is clear outside the court system is that pressure is growing on companies to commit to sound data security measures. Consumer activist groups like EPIC (the “Electronic Privacy Information Center”) are lobbying in all directions for enhancements to the protection of personal information. Prominent politicians like Senator Patrick Leahy are working on legislation to establish baseline data security standards and to increase company liability. Then there is the impending E.U. General Data Protection Regulation that institutes data security requirements for companies who control or process the data of E.U. residents – even if the companies are U.S.-based (and the penalties for non-compliance are staggering).

The trend is towards responsible data stewardship, regardless of what standards are established by the courts. Companies will do well to ensure they meet industry standards and consumer expectations. Just what are those industry standards? That’s the potentially billion-dollar question that requires consulting an expert, maybe even us.