Insurers providing privacy liability coverage were collectively breathing a sigh of relief last week given a decision from the California Court of Appeals. Interpreting the California Confidentiality of Medical Information Act (CMIA), the court in Regents of the Univ. of Cal. v. Superior Court of Los Angeles County, No. B249148 (Cal. Ct. App. October 15, 2013) significantly limited the ability of plaintiffs to obtain nominal statutory damages of $1,000 per patient under CMIA. For the past several years, CMIA was pretty much the best game in town when it came to data breach litigation. Although enacted in 2008, CMIA was only over the past several years successfully used by plaintiffs’ counsel to obtain settlements previously unattainable post-breach. The CMIA “statutory damages” bonanza reaped by class counsel was significant – the prospect of such damages allowed counsel to overcome Article III and other “lack of injury” arguments, potentially allowed for class certification even with an otherwise uneven plaintiff pool, and created an early incentive to settle on the part of a defendant – and its insurer – given the potential size of an award.
It is no surprise CMIA was the bane of a good number of network security and privacy insurers – it led to settlements that would not have otherwise occurred. The Regents decision is noteworthy given it was the first appellate court to decide the availability of CMIA statutory damages and rejected the notion that mere negligence coupled with disclosure could trigger statutory damages. This is a major departure from how the law was interpreted by the lower courts and instantly dried up a good part of the statutory damages manna drunk by plaintiffs’ counsel.
The facts of the case would provide a nice law school hypothetical – a doctor’s home is burglarized and his encrypted external drive is stolen – and, just for good measure, he cannot locate the note card containing the drive’s password. Was there unauthorized access to the stolen information? A CMIA private right of action allowing for statutory damages turns on whether “negligence results in unauthorized or wrongful access to the information.” It is easy to assume when someone may have also stolen the password located near a stolen hard drive that the theft will result in an unauthorized access – especially when the stolen drive is never found.
After reviewing the statute’s legislative history and related laws, the Court of Appeals strictly construed the statute to allow for nominal, or statutory damages of $1,000 – but only when there was actual “unauthorized or wrongful access to the information.” Given that the class plaintiff was unable to allege her information was improperly viewed or otherwise accessed, the superior court was ordered to have the case dismissed.
In effect, the Court of Appeals significantly neutered CMIA by requiring actual improper access to a patient’s medical information. In most likely breach scenarios, ID theft and “actual access” can go hand in hand. Armed with evidence of potential or actual ID theft, most plaintiffs’ counsel would withstand some level of motion practice – with or without CMIA. In other words, the benefits derived from CMIA’s availability of nominal damages may have dwindled to some potential commonality assistance during a class certification motion.
Although it remains to be seen whether insurers will lower healthcare privacy premiums due to this one decision, one thing is certain – claims adjusters will have “a little” extra free time on their hands.