Data Breach Victims Grounded: Third Circuit Affirms Dismissal of Putative Class Action Based on Economic-Loss Doctrine and Absence of Explicit Contractual Obligations

The Third Circuit’s recent decision affirming the district court’s dismissal of a proposed class action in its entirety highlights the difficulties faced by Plaintiffs pursuing data-security class actions in situations where the claims are not based upon explicit contractual language. This is an important decision for defense counsel to keep in mind in considering options to get rid of a class action before it takes off.

Plaintiffs were former employees and customers of Benecard, a prescription benefit administration services company, who provided Benecard with personal information, including social security numbers and dates of birth, as a prerequisite to employment or use of Benecard’s services. In 2015, Benecard’s computer system was hacked and unknown third parties accessed Plaintiffs’ personal information. The hackers then used Plaintiffs’ personal information to file fraudulent tax returns and subsequently receive tax refunds from the Internal Revenue Service.

Plaintiffs filed a putative class action against Benecard on behalf of all former and current employees and customers of Benecard whose information was accessed through the data breach. Plaintiffs asserted claims against Benecard for negligence and breach of implied contract, but the district court dismissed both claims for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). In a unanimous opinion issued on August 25, 2016, the Third Circuit affirmed the district court’s dismissal of the putative class action in its entirety.

On the negligence claim, Plaintiffs argued that Pennsylvania economic-loss doctrine does not bar their claims because their claims did “not arise from a contractual duty, but rather a common law duty grounded in public policy . . .” Plaintiffs pointed to the Pennsylvania Supreme Court’s decision in Bilt-Rite Contractors, Inc. v. The Architectural Studios in asserting that Pennsylvania’s economic-loss doctrine is applicable “only in cases where the source of the duty plaintiff seeks to enforce arises from a contract and, even then, only in instances where the harm suffered is limited to economic loss arising from the interference with contractual expectation.”

The Third Circuit rejected Plaintiffs’ arguments in concluding that Pennsylvania’s economic-loss doctrine should not be cast aside “simply because Plaintiffs are not in contractual privity with Benecard and thus have no contractual remedy.” In doing so, the Third Circuit declined to “right the ship” as to interpretation of the doctrine, and left that “task, if necessary” for the Pennsylvania Supreme Court.

The Court also affirmed the dismissal of Plaintiffs’ claim for breach of implied contract, primarily based upon Plaintiffs’ failure to plead sufficient facts other than the allegation that Plaintiffs were required to provide Benecard with personal information as a prerequisite to employment. The Court explained that Plaintiffs failed to offer “any company-specific documents or policies from which one could infer an implied contractual duty to protect Plaintiffs’ information.”

On September 9, 2016, Plaintiffs requested the Court to rehear their case en banc, and we will continue to report on updates for this matter. Following the United States Supreme Court’s decision in Spokeo v. Robbins, standing has been a hot issue in the defense of class actions. While we expect standing to continue to generate a great deal of attention post-Spokeo, defense counsel will be well-served to consider other potential defenses, such as the economic-loss doctrine, in looking to ground class actions at an early stage.

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