The U.S. Court of Appeals for the Second Circuit added its voice to the chorus of circuit courts of appeal to hold that allegations that defendants included the first six and last four digits of a plaintiff’s credit card number on their receipts in violation of the Fair and Accurate Credit Transactions Act were, on their own, insufficient to satisfy the concrete injury requirement necessary for Article III standing. Every circuit court to have confronted similar factual allegations in FACTA cases has found that they fail to establish standing. The September 19 decision in Katz v. The Donna Karan Company is also significant in that it permits parties to introduce extrinsic evidence in statutory violation cases when the district court is making a determination on standing.

The Fair and Accurate Credit Transactions Act

FACTA was a 2003 amendment to the Fair Credit Reporting Act and provides that “no person that accepts credit cards or debit cards for the transaction of business shall print more than the last five digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.” 15 U.S.C. 1681c(g)(1). Willful noncompliance with FACTA entitles consumers to “any actual damages sustained by the consumer as a result of the failure or damages of not less than $100 and not more than $1,000.” 15 U.S.C. 1681n(a)(1)(A).

Background

In January and February 2014, the plaintiff in the case visited Donna Karan’s stores twice, made purchases each time and was given receipts that contained the first six digits of his credit card number as well as the last four. Later in February 2014, the plaintiff filed a complaint, alleging that these receipts violated FACTA’s requirement that businesses print no more than the last five digits of a credit card number on their receipts.

The district court dismissed the complaint, finding that it failed to allege a willful, knowing or reckless violation of FACTA. Following the Supreme Court’s decision in Robins v. Spokeo, the Second Circuit vacated the district court’s decision and remanded the case to allow the plaintiff to re-plead his claim to comport with the pleading standard set forth in Spokeo.

On remand, the district court dismissed the complaint with prejudice, finding that the plaintiff had failed to establish that defendants’ alleged FACTA violation presented a material risk of harm to the statute’s underlying interests of identity theft protection and, therefore, constituted a concrete injury sufficient for Article III standing.

Second Circuit Decision

The Second Circuit began its analysis by explaining that “the critical question for standing purposes is ‘whether the particular procedural violations alleged … entail a degree of risk sufficient to meet the concreteness requirement,” … which in turn depends on “whether the particular bare procedural violation may present a material risk of harm to the underlying concrete interest Congress sought to protect” in enacting the statutory requirement. The Second Circuit also held that the question of whether a bare procedural violation presented a material risk of harm to a concrete interest could be either a question of law or a question of fact.

Turning to the record in the case, the Second Circuit observed that the defendants had made a fact-based challenge in their motion to dismiss that referenced evidence outside the pleadings. Specifically, in support of their argument that the plaintiff’s allegations did not establish a material risk of identity theft, the defendants had cited to a website which explained that the first six digits of a credit card number only identified the card issuer and did not disclose any information about the cardholder. In siding with defendants, the district court also cited to several other district court decisions which found an absence of a real risk of identity theft stemming from the printing of the first six digits of a credit card number on a receipt. Although the plaintiff argued that the inclusion of any digits other than the last five of a credit card number increased the risk of a brute force cryptological attack designed to ascertain the full number, the plaintiff elected not to supplement the record with any additional evidence.

The Second Circuit rejected the plaintiff’s argument, finding that “the bare procedural violation in question did not raise a material risk of harm of identity theft.” However, the court emphasized that it was not resolving whether all allegations of “bare procedural violations” of FACTA would fail to establish standing, and that it was up to the district courts to make such determinations on a case and fact specific basis.

Finally, the Second Circuit held that where a case is dismissed for lack of standing, the dismissal cannot be entered with prejudice as “Article III deprives federal courts of the power to dismiss [the] case with prejudice,” and ordered the case to be remanded with instructions to amend the judgment to enter a dismissal without prejudice.

Takeaways

The implications of Katz are twofold. First, under Katz, district courts in statutory violation case (at least in the Second Circuit) may consider extrinsic evidence when they determine whether the plaintiffs’ allegations establish the existence of a concrete injury sufficient to confer Article III standing. Defendants no longer need rely solely on plaintiffs’ allegations (and the inferences from those allegations) in their motions to dismiss for lack of standing. Instead, they may introduce additional evidence that the procedural violations of federal statutes alleged in plaintiffs’ complaints do not increase the material risk of harm to the interests that Congress sought to protect with the underlying statutes.

Second, Katz further reinforces the limitations on Article III standing imposed by Spokeo on statutory violation cases and provides defendants in FACTA lawsuits with additional ammunition to challenge complaints that are premised solely on a procedural violation of the statute. Coupled with Crupar-Weinmann v. Paris Baguette Am. and Meyers v. Nicolet Rest. of De Pere, Katz narrows standing to bring cases based solely upon procedural FACTA violations. Unless they can allege “potential real-world harm” caused by a procedural FACTA violation, plaintiffs in the Second and Seventh Circuit will find it difficult to survive a motion to dismiss based on lack of standing.

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