Third Circuit reinstates data breach case alleging FCRA violation

On January 20, 2017, the Third Circuit reversed the dismissal of a putative class action filed against Horizon Healthcare Services, Inc. (“Horizon”).  The suit was brought after two laptops containing personally identifiable information were stolen in 2013 from Horizon’s Newark offices.  The four named Plaintiffs filed suit on behalf of themselves and 839,000 other Horizon customers whose unencrypted personal information was stored on those laptops.  Plaintiffs alleged willful and negligent violations of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681, et seq., claiming that Horizon inadequately protected their personal information.

The District Court dismissed the suit under Fed. R. Civ. P. 12(b)(1) for lack of Article III standing.  According to the lower Court, none of the Plaintiffs had claimed a cognizable injury because, although their personal information had been stolen, none of them had adequately alleged that the information was actually used to their detriment.

According to the Third Circuit, in light of the congressional decision to create a remedy for the unauthorized transfer of personal information, an alleged violation of FCRA gives rise to an injury sufficient for Article III standing purposes.  And, even without evidence that the Plaintiffs’ information was in fact used improperly, the alleged disclosure of their personal information created a de facto injury. Accordingly, the Court ruled that all of the Plaintiffs suffered a cognizable injury, and the Complaint should not have been dismissed under Fed. R. Civ. P. 12(b)(1).  The fact that Horizon offered credit monitoring and identity theft protection services to those affected was not of any import to the majority or concurring opinion.

Reviewing the matter de novo, the Third Circuit first recognized that FCRA was enacted in 1970 “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” In Re: Horizon Healthcare Services Inc. Data Breach Litigation, No. 15-2309, Slip Op. at 8 (3d Cir. January 20, 2017) (citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52 (2007)). With respect to consumer privacy, the statute imposes certain requirements on any “consumer reporting agency” that “regularly … assembl[es] or evaluat[es] consumer credit information . . . for the purpose of furnishing consumer reports to third parties.” 15 U.S.C. § 1681a(f).  Id.  And, any such agency that either willfully or negligently “fails to comply with any requirement imposed under [FCRA] with respect to any consumer is liable to that consumer.” Id.  (citing 15 U.S.C. §§ 1681n(a) (willful violations); 1681o(a) (negligent violations)).  See also Id. at 27 (“But with the passage of FCRA, Congress established that the unauthorized dissemination of personal information by a credit reporting agency causes an injury in and of itself – whether or not the disclosure of that information increased the risk of identity theft or some other future harm.”); Id. at 29, n. 20 (“Congress has elevated the unauthorized disclosure of information into a tort. And so there is nothing speculative about the harm that Plaintiffs allege.”).

Horizon did not challenge the validity of any of the Plaintiffs’ factual claims as part of its standing motion – arguing instead that that the allegations of the Complaint, even accepted as true, are insufficient to establish the Plaintiffs’ Article III standing.  Id. at 13.  This is significant given that the Third Circuit was only hearing the standing issue and not the substantive motion to dismiss.  See Id. at 13, n. 9 (“In its 12(b)(6) motion, which is not before us, Horizon questions whether it is bound by FCRA. In particular, Horizon suggests that it is not a “consumer reporting agency” and therefore is not subject to the requirements of FCRA. . . . Because we are faced solely with an attack on standing, we do not pass judgment on the merits of those questions. Our decision should not be read as expanding a claimant’s rights under FCRA. Rather, we assume for purposes of this appeal that FCRA was violated, as alleged, and analyze standing with that assumption in mind. Likewise, our decision regarding Article III standing does not resolve whether Plaintiffs have suffered compensable damages.”) (emphasis added).

It was this alleged substantive FCRA violation – which again was assumed to exist for purposes of its standing ruling, that ultimately caused the Third Circuit to find in favor of plaintiffs.     See Id. at 22, n. 16 (“Again, whether that injury is actionable under FCRA is a different question, one which we are presently assuming (without deciding) has an affirmative answer. See supra note 9.”); Id. at 28 – 29 (“So the Plaintiffs here do not allege a mere technical or procedural violation of FCRA. They allege instead the unauthorized dissemination of their own private information – the very injury that FCRA is intended to prevent.”) (footnotes omitted).

In reviewing the allegations found in the Complaint, the Third Circuit reasoned that the “trifle of injury” necessary to determine standing was met by virtue of the alleged FCRA violation.  Id. at 15.  Moreover, it found that its prior recent cases of In re Google Inc. Cookie Placement Consumer Privacy Litigation, 806 F.3d 125 (3d Cir. 2015) and In re Nickelodeon Consumer Privacy Litigation, 827 F.3d 262 (3d Cir. 2016) reconciled with such a result.  Id. at 22 (“In light of those two rulings, our path forward in this case is plain. The Plaintiffs here have at least as strong a basis for claiming that they were injured as the plaintiffs had in Google and Nickelodeon.”).

In a strong nod to what it perceived to be the stare decisis injury-in-fact precedents rendered prior to the Supreme Court’s decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), the Third Circuit reconciled that decision with the following:  “Although it is possible to read the Supreme Court’s decision in Spokeo as creating a requirement that a plaintiff show a statutory violation has caused a “material risk of harm” before he can bring suit, id. at 1550, we do not believe that the Court so intended to change the traditional standard for the establishment of standing.”  Id. at 24See also Id. at 25 (“Spokeo itself does not state that it is redefining the injury-in-fact requirement. Instead, it reemphasizes that Congress “has the power to define injuries,” 136 S. Ct. at 1549 (citation and internal quotation marks omitted), “that were previously inadequate in law.” Id.”).

In Re: Horizon Healthcare Services Inc. Data Breach Litigation is an important decision for numerous reasons – not the least of which is the fact the Third Circuit is one of the most influential circuit courts in the country.  First, notwithstanding the fact Defendant is a health insurer, in their Complaint, the Plaintiffs successfully asserted for standing purposes Horizon is also a consumer reporting agency.  This is significant given that the very first count of Plaintiffs’ Complaint claims that Horizon committed a willful violation of FCRA.  And, FCRA permits statutory damages for willful violations. See 15 U.S.C. § 1681n(a) (“Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer in an amount equal to the sum of … 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. . . .”).

In other words, counsel recognized that statutory damages are a necessary predicate to successfully pursuing a class action based on a data breach claim and that merely alleging that a company is a consumer reporting agency will now be sufficient to get in the courthouse.   Even though retail breaches may be too difficult a stretch, there is nothing stopping class counsel from branching out from health insurers.   In the future, defense counsel may be forced to simply forego the previously successful standing motions and go straight to a Fed. R. Civ. P. 12(b)(6) substantive motion.   And, given that such motions are quite difficult to win, the end result may be many more “cost of suit” settlements ranging significantly upward.

This decision may ultimately end up being more noteworthy for the concurring opinion of Judge Shwartz.   According to Judge Shwartz, there was no reason to even rely on FCRA to reverse the lower court’s decision.  According to Judge Shwartz, the mere “loss of privacy” was sufficient to demonstrate injury in fact.  See Id. at 1, n. 4 (Shwartz, J., concurring) (“Plaintiffs allege that the theft of the laptops caused a loss of privacy, which is itself an injury in fact.”).    Moreover, the lack of encryption was deemed the efficient cause of this loss.  Id. at 5, n. 4 (Shwartz, J., concurring) (“I also conclude that Plaintiffs have sufficiently alleged that the injury was traceable, in part, to the failure to encrypt the data, and am satisfied that if proven, the injury could be redressable.”).

Judge Shwartz was not persuaded that there was sufficient reconciliation with prior cases or that there was even the need to have such reconciliation based on her view of the law.  Id. at 5, n. 3  (Shwartz, J., concurring) (“My colleagues view In re Google Cookie Placement Consumer Privacy Litigation, 806 F.3d 125 (3d Cir. 2015), and In re Nickelodeon Consumer Privacy Litigation, 827 F.3d 262 (3d Cir. 2016), as providing a basis for Plaintiffs to assert that a violation of the FCRA, without any resulting harm, satisfies the injury-in-fact requirement.  I do not rely on the possible existence of a statutory violation as the basis for standing, and am not persuaded that these cases support that particular point.”).   As a result, Judge Shwartz’ concurring opinion will likely be heavily cited by plaintiffs in data breach cases involving unencrypted data whether or not there are any possible FCRA violations.

All in all, January 20, 2017 was a very good day for class counsel pursuing data breach litigation.