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Second Circuit Rules Individuals Have Standing To Sue For ‘Increased Risk’ Of Identity Theft – Litigation, Mediation & Arbitration

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Earlier this week, the United States Court of Appeals for the
Second Circuit held that where personal information is disclosed
without authorization, impacted individuals may have standing to
sue if they can show an “increased risk” of identity
theft or fraud, even if this hasn’t yet happened. The court,
which had not before decided if plaintiffs could establish standing
based on the risk of future identity theft or fraud
resulting from the unauthorized disclosure of their data,
articulated a non-exhaustive three-factor test: (1) whether the
data was compromised as part of a targeted attack intended to
obtain the plaintiff’s data; (2) whether at least some part
of the compromised data set was misused (even if the
plaintiff’s data was not); and (3) whether the type of data
at issue is likely to cause a risk of perpetual identity theft or

The case, McMorris v. Carlos Lopez &
Assocs., LLC
, No. 19-4310, ____ F.3d ____, 2021 WL
1603808 (2d Cir. Apr. 26, 2021), involved an inadvertent mass email
where one of the defendant’s employees sent a spreadsheet
containing 130 current and former employees’ Social Security
numbers, home addresses, dates of birth, telephone numbers,
educational degrees and dates of hire to all of the company’s
65 employees. Three employees whose information was circulated
brought a putative class action against their employer alleging
state-law negligence claims and consumer protection violations. The
plaintiffs did not allege that the disclosure of their personal
information had resulted in identity theft, fraud or misuse by any
third party. They also did not claim that anyone outside the
company had obtained their information.  Instead, the
plaintiffs claimed they faced an “imminent risk” of
identity theft, which forced them to take mitigation steps,
including purchasing identity theft protection services, canceling
credit cards and spending time assessing if they should apply for
new Social Security numbers (although they had not actually applied
for the new Social Security numbers).

To have constitutional standing to bring a federal suit, a
plaintiff must allege: (1) an actual injury that is concrete,
particularized, and actual or imminent; (2) that the injury was
caused by the defendant; and (3) that the injury  is likely to
be redressed by the requested relief.  Defendants moved to
dismiss the case for lack of standing and argued that a risk of
future identity theft was too speculative to be a concrete,
particularized, imminent injury. Before the motion could be
decided, the parties reached an agreement to settle the case.
However, the district court ordered further briefing on standing
before it would hold a hearing to consider the fairness of the
class action settlement, and ultimately dismissed the case for lack
of standing instead of approving the settlement. Plaintiffs
appealed, arguing they had standing based on an “imminent
risk of suffering identity theft.” They also argued that the
mitigation measures they had taken equaled actual harm, supplying
an independent basis for standing.

When analyzing the question of standing based on the risk of
future identity theft or fraud from the disclosure of personal
data, the Second Circuit surveyed the law in other federal
circuits. It noted “no court of appeals has explicitly
foreclosed plaintiffs from establishing standing based on a risk of
future identity theft,” but acknowledged courts had found
lack of standing based on the facts of particular cases.
McMorris, 2021 WL 1603808, at *3.1

The Second Circuit therefore characterized its decision as one
that “join[s] . . . sister circuits that have specifically
addressed the issue in holding that plaintiffs may establish
standing based on an increased risk of identity theft or fraud
following the unauthorized disclosure of their data.” 
Id. at *3.  The Second Circuit put forward a
“non-exhaustive” list of factors that courts should
consider when assessing standing in the context of unauthorized
disclosure of data:

  1. Whether the data was compromised as a result of a targeted
    attack intended to obtain plaintiffs’ data;

  2. Whether some portion of the compromised data set has already
    been misused, even if the plaintiffs’ data was not; and

  3. Whether the compromised data is of a type that is “likely
    to expose plaintiffs to a perpetual risk of identity theft or
    fraud” once exposed. 

Applying these factors, the Second Circuit determined plaintiffs
did not have standing to sue because they “failed to show
that they are at a substantial risk of future identity theft or
fraud.” Id. at *5. (It is worth remembering that the
trigger for the lawsuit was an accidental all-employee email that
contained a spreadsheet with employee personally identifiable
information.) The court quickly disposed of the first factor
– targeted attack – because there was none. As for the
second factor – evidence of misuse – the court noted
that plaintiffs did not allege any facts suggesting their data was
misused. Regarding the third factor – the likelihood of
perpetual identity theft or fraud – the court recognized that
Social Security numbers, coupled with names, addresses and dates of
birth “might put Plaintiffs at a substantial risk of identity
theft or fraud.”  Id. at *6. But, because
plaintiffs did not allege “any other facts suggesting that
the PII was intentionally taken by an unauthorized third party or
otherwise misused,” the sensitivity of the data, standing
alone, was not sufficient to establish an injury in fact. For this
reason, the court ultimately found plaintiffs lacked Article III

On one hand, McMorris poses clear hurdles for data
breach class actions in the Second Circuit because it will be
difficult for plaintiffs to plead sufficient facts showing that the
purpose of any given cyberattack was to target their data.
(It would be easier to make this showing in financially motivated
cyberattacks.) On the other hand, given the ubiquity of data
breaches and inadvertent emails, it should not be particularly
difficult for plaintiffs to allege that some portion of a
compromised data set has already been misused. For example, a
plaintiff whose personal data was compromised and who later
receives an early fraud warning from their credit card issuer could
plausibly allege misuse. And depending on the type of data at
issue, McMorris may spur even more class actions because
of the court’s recognition that the sensitivity of the data
exposed, by itself, may be enough to establish standing. Finally,
the three-factor test gives courts plenty of leeway because no one
factor is dispositive.


1.  For example, in In re SuperValu, Inc.,
870 F.3d 763, 773 (8th Cir. 2017), the Eighth Circuit found certain
plaintiffs lacked standing to sue because they failed to allege
that their disclosed credit card information had been misused, but
declined to hold that evidence of misuse following a data breach
was necessary to establish standing. Similarly, in Tsao v.
Captiva MVP Rest. Partners, LLC,
986 F.3d 1332, 1340 (11th
Cir. 2021), the Eleventh Circuit held “evidence of actual
misuse is not necessary for a plaintiff to establish standing
following a data breach.”  However, in Reilly v.
Ceridian Corp.
, 664 F.3d 38, 45 (3d Cir. 2011), the Third
Circuit held that “in data breach cases where no misuse is
alleged . . . there has been no injury[.]”). The Second
Circuit noted that the Reilly court did not “reject
the ‘increased-risk’ theory altogether,” and
instead distinguished analogous cases on their facts.
McMorris, 2021 WL 1603808, at *3 n2.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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Source: on 2021-05-04 03:52:30

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