In an important decision on standing in data breach cases, the United States District Court in Minnesota issued an Order last week denying Target’s attempt to dismiss all claims brought by financial institutions.  The card issuing banks complaint alleges Target (1) was negligent in failing to have sufficient security in place to prevent hacking of customer data; was (2) violated and was negligent per se for violating Minnesota’s Plastic Security Card Act (the Act); and (3) is liable for negligent misrepresentation in failing to advise the plaintiffs of the insufficient security measures.

Target moved to dismiss the negligence claims on the grounds it had no duty and did not breach any duty to the plaintiffs because there was no special relationship between the parties, and the harm if any, was an unforeseeable result of a third party’s (the hackers’) conduct.  The court disagreed and found that plaintiffs had sufficiently alleged that, whether premised upon the hackers’ conduct or Target’s own alleged disabling of a security feature and failing to react to warning signs in its system, the harm to the card issuers was a foreseeable consequence.  In addition, the court found the existence of a duty was bolstered by legislative intent under the Act, which was designed to protect customer data associated with cards, such as those issued by plaintiffs.

With respect to the omission claim, i.e. Target’s purported failure to advise of security deficiencies and its disabling a security feature, the court found that plaintiffs had adequately pled Target’s knowledge of facts unknown to plaintiffs and specific claims that Target had misled the adequacy of its security in public representations (including Target’s online Privacy Policy and Target’s agreement to comply with Visa and MasterCard Operating Regulations).  However, the court noted that plaintiffs had failed to specifically allege reliance on the omissions, and, instead, only asserted they had suffered injury.  In light of the need to specifically plead the element of reliance, the court granted Target’s motion on this claim, with leave to for plaintiffs to amend their complaint to add facts/claims of reliance on the omissions.

With respect to the statutory claims, the Act prohibits the retention of cardholder data by persons or businesses conducting business in Minnesota and, following a data breach involving violation of the statute, requires reimbursement of costs to the card issuer.  The court found Target’s argument that the Act only applies to Minnesota transactions to be without merit, stating “it applies equally to Minnesota companies’ data retention practices with respect to in-state and out-of-state transactions.”.

Target’s other arguments on the statute are more interesting and create a debate between the parties as to whether the hackers’ theft of data from the cards’ magnetic stripe (though allegedly stored by Target servers prior to transmission to the hackers) versus the theft of data maintained by Target itself result in a violation of the Act regarding retained data.  While the resolution of that issue will eventually be determined if the case is adjudicated on the merits, the court found that, for purposes of the present motion, plaintiffs allegation that Target stored the information for longer than permitted under the Act, which increased the scope of the breach, was sufficient to state a claim upon which relief can be granted.

In sum, the claims pass muster (at least at the pleading stage), and the financial institutions have standing to proceed.