Are data breach lawsuits just tilting at windmills?

Personal data stolen? Go ahead, sue -- see what it gets you

For all the concern expressed about companies' exposure to lawsuits in the wake of of data breaches, a decision earlier this week by a federal appeals court shows yet again what a challenge it can be for consumers to actually win redress when one occurs.

The United States Court of Appeals for the Seventh Circuit on Thursday rejected a proposed class-action lawsuit against Evansville, Ind.-based Old National Bancorp (ONB) over a 2005 data-breach incident.

In dismissing the proposed suit, the judges argued that damages were unavailable to the plaintiffs in this case because they had failed to show how they had been monetarily affected by the breach at the bank.

The lawsuit was filed on behalf of tens of thousands of customers of Old National Bancorp whose personal and financial data had been exposed by an intrusion that in the court's ruling was described as "sophisticated, intentional and malicious."

The complaint charged ONB with failing to properly secure personal data that it had solicited from customers through its Web site. The plaintiffs in the case sought compensation from ONB for past and future credit monitoring services that they said they needed to obtain in response to the compromise.

The three judges of the United States Court of Appeals for the Seventh Circuit who heard the case ruled that mere "allegations of increased risk of future identity theft" were insufficient grounds for claiming damages from ONB. "The plaintiffs have not suffered a harm that the law is prepared to remedy," the judges wrote in their decision.

The judges pointed to Indiana's existing data breach disclosure law and said that that statute only required companies to inform individuals of compromises involving personal data. The law does not require "the database owner to take any other affirmative act in the wake of a breach," the judges noted. Its only in situations where a breached entity fails to notify affected individuals that the law can be enforced, and that too only by Indiana's Attorney General, the judges noted.

The law does not provide for private right of action by consumers and neither does it allow them to ask for compensation in breach situations, they noted.

"Had the Indiana legislature intended that a cause of action should be available against a database owner for failing to protect adequately personal information, we believe that it would have made some more definite statement of that intent," the judges said.

Things are non-compensated all over

The appeals court's decision echoed similar decisions made by other courts in the past.

Just this June, a U.S. District judge in Ohio dismissed a class action claims against Litton Loan Servicing LP over a data breach involving personal data. In that case, the individuals filing the law suit sought compensation for credit monitoring costs from Litton. But the judge threw out the claims arguing that in the absence of actual identity theft resulting from the breach, the plaintiffs suffered only anticipated injury and therefore did not need to be compensated.

In February 2006, U.S. District Court in Minnesota dismissed a lawsuit brought by an individual whose personal data -- and that of more than 550,000 individuals -- had been compromised when a laptop containing the information was stolen from an employee at Brazos Higher Education Service Corp. in Austin.

The individual claimed that Brazos was negligent in securing the data because it had not been encrypted. The court dismissed the claim, saying that Brazos had not violated any of its security obligations under the Gramm-Leach-Bliley Act.

Similarly, in Sep. 2005 a federal court dismissed a class-action lawsuit against TriWest Healthcare Alliance in Phoenix. Plaintiffs in that case had argued that TriWest had been negligent when it allowed several hard disks containing personal data to be stolen from one of its facilities in 2002. Though personal information on more than 500,000 individuals was compromised in that incident, the court threw out the case, saying it was unclear whether any of he data had actually been accessed or used by those who stole the disks.

Wanted: Overhaul (inquire at statehouse)

Legal experts have said such cases highlight the need for an overhaul of state data breach laws. Indeed, some states have already done just that or are working towards that goal. Minnesota, for instance, recently passed a new Plastic Card Security Act that holds breached entities responsible for reimbursing banks and credit unions the costs associated with notifying and reissuing cards after a breach.

The law also allows private citizens to bring lawsuits against breached companies. California passed a similar law recently, though it does not provide for private right of action.

"The current case is in line with recent and past decisions regarding potential future economic harm" resulting from data breaches, said Christopher Pierson, partner at Lewis and Roca LLP a Phoenix-based law firm. "The courts have pretty much decided that if you don't have a cognizable case of current harm you are not going to be able to receive damages," Pierson noted.

"Lawsuits brought under traditional negligence norms will not be successful. Courts are just not going to award damages and let these cause of action go forward unless there is actual harm," from a data breach.

Even in those cases, actually proving that the harm resulted from a specific data breach can be incredibly hard especially given the high number of data breaches being disclosed these days, Pierson said. "It's going to be difficult for an individual to prove that it was actually company A's breach as opposed to company B's breach that caused them harm."

Copyright © 2007 IDG Communications, Inc.

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