This article by counsel member David Cohen and associate Ani-Rae Lovell was published by Law360 on April 24, 2017.
A common tactic in defending federal consumer data breach litigation is challenging the plaintiff’s standing on a motion to dismiss. Specifically, defendants contest whether the plaintiff suffered an actual or imminent injury from the breach sufficient to create a “case or controversy” under Article III of the U.S. Constitution. Most such challenges are “facial” — that is, defendants argue that the complaint fails to plausibly plead an actual or imminent injury. These facial challenges are frequently successful. They are not, however, a defendant’s only option for seeking dismissal on standing grounds. A recently decided district court case, Foster v. Essex Property Inc., No. 5:14-cv-05531-EJD, 2017 WL 264390 (N.D. Cal. Jan. 20, 2017), demonstrates an additional avenue for challenging standing in data breach litigation — a so-called “factual” challenge to standing, which is based on evidence. Defendants should not overlook this potentially powerful tool when assessing their options for seeking early termination of the litigation.
Facial Attacks on Standing in Data Breach Litigation
Any private plaintiff in federal court bears the burden of demonstrating the “irreducible constitutional minimum of standing” — (1) an injury in fact; (2) caused by the defendant’s conduct; (3) that is redressable by a favorable court decision.1 To attack standing on a motion to dismiss, a defendant may bring either a facial or factual challenge.2 A facial challenge is resolved solely based on the well-pleaded facts alleged by the plaintiff, which a judge takes as true for purposes of resolving the motion, and reasonable inferences from those allegations.3 But a factual challenge is resolved based on evidence. The defendant may submit affidavits or declarations introducing facts from outside of the pleadings that disprove the plaintiff’s allegations.4 In response, a plaintiff has the opportunity to respond with her own evidence.5
Standing has proven a crucial threshold issue in consumer data breach litigation. Even in cases where plaintiffs have suffered direct losses from identity theft or fraud, it can be difficult, if not impossible, to establish that the fraudulent losses at issue were caused by the breach. Moreover, where the breach is of payment card data, consumers tend to be fully reimbursed for fraudulent charges, due to the card brands’ zero liability policies. And many plaintiffs have experienced no fraud at all. Plaintiffs therefore frequently resort to alleging a risk of future harm — either the increased risk of future harm itself, or harm stemming from present expenditures meant to mitigate the risk of future harm (such as purchasing credit monitoring). Defendants have had a great deal of success in arguing that such harms are insufficient to warrant Article III standing under the holding of the 2013 U.S. Supreme Court case Clapper v. Amnesty International. Clapper rejected allegations of “possible future injury” where the threatened injury was not “certainly impending” and of mitigation costs incurred in reaction to future injury that is itself not cognizable: Plaintiffs “cannot manufacture standing by incurring costs in anticipation of non-imminent harm.” 6
Most of these successful attacks on standing in data breach litigation have been facial challenges, underscoring that such challenges are frequently viable.7 But there have been exceptions. Most notably, the Sixth and Seventh Circuits recently found that alleged risks to consumer data breach plaintiffs of future harm, when coupled with efforts by the plaintiffs to mitigate that risk, met the Clapper standard under the circumstances of those cases. The first of these opinions — the 2015 Seventh Circuit opinion Remijas v. Neiman Marcus Group LLC — arose out of a 2013 cyberattack on Neiman Marcus Group Inc. stores, with approximately 350,000 payment cards allegedly compromised. Reversing the district court, the Seventh Circuit held that the plaintiffs—not just certain consumers who had allegedly already experienced credit-card fraud but also some who had not — had sufficiently pleaded Article III standing. The court reasoned that given allegations that “hackers deliberately targeted” Neiman Marcus to obtain payment-card data, stole the data, and then misused 9,200 of the stolen card numbers, “it is plausible to infer that the plaintiffs have shown a substantial risk of harm.” Ultimately, while the court acknowledged the possibility that plaintiffs would ultimately be unable to prove they faced such a risk, the plaintiffs “had no such burden at the pleading stage.” In 2016, the Sixth Circuit in Galaria v. Nationwide Mutual Insurance Co. and the Seventh Circuit in Lewert v. P.F. Chang’s China Bistro Inc. found the risk of future harm and mitigation costs sufficiently pleaded to survive facial challenges in decisions that largely mirrored the Neiman Marcus reasoning.8
Factual Attacks on Standing — Foster v. Essex Property
Even in the wake of Neiman Marcus, P.F. Chang’s and Nationwide, facial attacks on standing remain a powerful tool for many data breach defendants. Such attacks are not, however, defendants’ only option for seeking early dismissal. A recent decision from the Northern District of California illustrates how a so-called “factual” challenge to standing can succeed. In Foster v. Essex Property, a couple alleged violations of several California state laws after a real estate company’s internal computer system suffered a security breach. The couple, Mark and Akiko Foster, rented an apartment from Essex Property Inc. Essex is a real estate trust involved in the development and management of properties in California and Seattle. The Fosters alleged Essex required certain personal identifying information, including names, addresses, emails, birthdays, credit and debit card numbers, employment information, and Social Security numbers, as well as authorization to conduct credit checks, in order to rent an apartment. That information, the Fosters allege, was stored on Essex’s internal computer system. Essex’s internal computer system suffered a security breach, allegedly exposing the plaintiffs’ personal identifying information to “cybercriminals” who made fraudulent charges on plaintiffs’ credit cards and exposed them both to an increased risk of fraud and identity theft.
Essex moved to dismiss the Fosters’ claims. Rather than merely arguing that the plaintiffs’ allegations in the pleadings were insufficient to establish Article III standing, the defendant’s motion to dismiss included two declarations from Essex managers.
One declaration from Essex’s IT manager explained that Essex’s internal computer system was the only system breached, and the couple’s credit card information was not initially stored on the internal system nor transferred to that system at any point. He concluded, therefore, that it was impossible for the attack on Essex’s internal network to cause or aid unauthorized credit charges to the couple’s credit cards.
A second declaration from a customer care and collections manager disclosed that the plaintiffs did not provide their credit or debit card information on their rental application, they did not pay their deposit with a card, and they did not pay their rent with a card either. Further, any credit report information retained by Essex was printed and stored in a paper file, not on an electronic network.
The plaintiffs did not counter with any of their own evidence.
Weighing the evidence in those declarations against the plaintiff’s allegations, the court found the plaintiffs failed to establish Article III standing. The declarations, the court found, disproved any particularized and concrete injury as well as causation between the breach and any alleged harms. If the information was never stored on the system, it could not have been stolen by criminals through a breach of that system.
Foster illustrates that defendants should not overlook the potential for a factual challenge to standing in data security breach litigation. Such challenges may be viable where, as in Foster, the premise of the plaintiffs’ theory of harm — that his or her data was stolen in the breach — can be readily disproven.9 But defendants can also consider factual challenges in a broader variety of contexts. Where only payment card data was stolen, for instance, defendants can consider offering evidence of the zero-liability policies of the major payment card brands providing that consumers will be reimbursed for any fraudulent payment card charges.10
Of course, before bringing a factual challenge, defendants should weigh potential downsides. A factual motion to dismiss may be more costly. Defendants will have to prepare a declaration or affidavit, requiring an internal investigation. However, following a data breach, internal, forensic investigations are likely already being conducted, so obtaining evidence for a factual challenge may not require any additional resources. A defendant’s use of a factual challenge may also prompt the plaintiff to request discovery from the defendant. But depending on the context, the company may have viable objections to such requests. Moreover, as Foster illustrates, the upside of a factual challenge can be significant — it may eliminate the case entirely.