Overview

Standing requirements have forced many a data breach action to stand down. Can a plaintiff have a claim (and on behalf of a massive class) when plaintiff hasn’t suffered any harm? For those polling the Circuits, the Ninth Circuit votes “yes.” And because no good deed goes unpunished, the Court interpreted defendant’s helpful advice to consumers as an “acknowledgment” of the harm.

For years, district courts in the Ninth Circuit have debated whether the mere risk of future identity theft originating from a data breach constitutes an injury sufficient to confer Article III standing following the United States Supreme Court’s decision in Clapper v. Amnesty Int’l USA, 133 S.Ct. 1138 (2013). On March 8, 2018, in In re Zappos.com, Inc., Customer Data Security Breach Litig., Case No. 16-16860 (9th Cir. 2018), the Ninth Circuit concluded that it did. The Court found that, notwithstanding the Supreme Court’s decision in Clapper, its prior decision in Krottner v. Starbucks, 628 F.3d 1139 (9th Cir. 2010) – that the threat of future harm was sufficient to confer standing – remains the law in the Ninth Circuit.

In In re Zappos, the plaintiffs alleged that in 2012 hackers breached the servers of online retailer Zappos.com. The hackers allegedly stole the names, account numbers, passwords, email addresses, billing and shipping addresses, telephone numbers, and credit and debit card information for more than 24 million customers. While some of the plaintiffs alleged that the hackers actually used their stolen information to conduct financial transactions, other plaintiffs did not. Judge Robert C. Jones of the District of Nevada dismissed the claims of those plaintiffs who “failed to allege instances of actual identity theft or fraud” on the basis that they lacked Article III standing. Those plaintiffs appealed.

In re Zappos is the first time the Ninth Circuit considered whether Krottner could be reconciled with the Supreme Court’s later decision in Clapper. In Krottner, the Ninth Circuit found that allegations of an “increased risk of future identity theft” resulting from the theft of a laptop represented a “credible threat of real and immediate harm” sufficient to establish Article III standing. In Clapper, however, the Supreme Court found that the “objectively reasonable likelihood” that plaintiffs’ communications would be the subjects of governmental surveillance authorized by the Foreign Intelligence Surveillance Court did not rise to the level of a “certainly impending injury” necessary to establish Article III standing. Clapper thus undermined Krottner.

In In re Zappos, however, the Ninth Circuit reasoned that Krottner and Clapper were not “clearly irreconcilable” and, thus, Krottner remained good law. First, the Court noted that unlike in Clapper, the alleged injury in Krottner was not based on a “speculative multi-link chain of inferences” because “the Krottner laptop thief had all the information he needed to open accounts or spend money in the plaintiffs’ names.” Second, the analysis of standing in Krottner did not involve any “national security or separation of powers concerns” as it did in Clapper. And third, since Clapper, the Supreme Court has emphasized that allegations of a future injury may establish Article III standing when there is a “substantial risk that the harm will occur.”

Operating within the Krottner framework, the Ninth Circuit decided that, while the information stolen in In re Zappos was not the exact same type as that stolen in Krottner, “the sensitivity of the stolen data” was “sufficiently similar.” The Court reasoned that “the information taken in the data breach still gave hackers the means to commit fraud or identity theft.” Notably, the Court relied upon Zappos’s own breach notice in reaching this conclusion, finding that Zappos itself effectively acknowledged the substantial risk of harm “by urging affected customers to change their passwords on any other account where they may have used ‘the same or a similar password.’” As a result, the Court concluded that the plaintiffs had alleged an injury sufficient to confer Article III standing.

With its decision in In re Zappos, the Ninth Circuit picks a side in the Circuit split and joins the circuit courts that have concluded that the threat of future harm is sufficient for purposes of Article III standing, including the D.C., Sixth, and Seventh Circuits. See, e.g., Attias v. Carefirst, Inc., 865 F.3d 620 (D.C. Cir. 2017), cert. denied, No. 17-641, 2018 WL 942459 (U.S. Feb. 20, 2018); Galaria v. Nationwide Mutual Ins. Co., 663 Fed.Appc. 384 (6th Cir. 2016); Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688, 693 (7th Cir. 2015). Conversely, the Second, Fourth, and Eighth Circuits have determined that plaintiffs must allege an actual injury in the form of fraudulent charges or the opening of fraudulent financial accounts based upon their stolen information to establish Article III standing; general allegations of an increased risk of identity theft is not enough. See, e.g., Whalen v. Michaels Stores, Inc., 689 Fed.Appx. 89 (2d Cir. May 2017); Beck v. McDonald, 848 F.3d 262 (4th Cir. 2017); In re SuperValu Customer Data Security Breach Litig., 870 F.3d 763 (8th Cir. 2017).

Key Takeaways

Companies should take note of the Court’s decision in In re Zappos for a variety of reasons. Although data breach cases often involve consumers who did not actually experience fraudulent charges or identity theft, the Ninth Circuit allowed such consumers to overcome the standing hurdle ― at least at the motion to dismiss stage. But the Court was quick to point out that “as litigation proceeds beyond the pleading stage, the Complaint’s allegations will not sustain Plaintiffs’ standing on their own.” Accordingly, while plaintiffs may be able to survive a motion to dismiss on allegations that a data breach put them at risk of a future harm, Article III standing may still prove to be a strong defense on summary judgment.

Additionally, the decision particularly impacts companies that suffer a breach that triggers a notification requirement under state law. For example, California statutes mandate that certain victims of data breaches issue statements warning consumers about risks to their online accounts or data. But in In re Zappos, the Court relied upon the language from this statutory notice issued by Zappos to support the Court’s finding that plaintiffs had Article III standing. Thus, companies subject to data breaches should pay close attention to the precise language used in the notices they issue to evaluate the potential impact on plaintiffs’ standing arguments.