Court dismisses lawsuit in merchant data-breach case

The legal battle involved a 2004 data breach by BJ's Wholesale Club

Security analysts have for some time now been warning that companies could find themselves becoming targets of costly lawsuits for information security failures. But so far, at least, it has been mostly the plaintiffs who have lost the few cases taken to court.

The latest example is a U.S. District Court's decision late last week to throw out a lawsuit filed by the Pennsylvania State Employees Credit Union (PSECU) against Fifth Third Bancorp. of Cincinnati.

The Harrisburg-based PSECU hoped to recover $100,000 it spent on canceling and reissuing 235,000 Visa credit cards compromised in a security breach at BJ's Wholesale Club Inc., based in Natick, Mass., in 2004.

PSECU had argued that Fifth Third was liable for the costs because it was the bank responsible for processing card transactions for BJ's and should have ensured that the merchant was complying with Visa's security requirements.

PSECU's original lawsuit for breach of contract and negligence also included BJ's. But all of PSECU's claims against BJ's and three of its claims against Fifth Third bank were dismissed last October by the court in Harrisburg.

The same court threw out the one remaining claim against Fifth Third last Friday, saying that PSECU wasn't a third-party beneficiary to the contract between Fifth Third and Visa and was therefore not entitled to seek any card reissuance costs.

"PSECU is at most an incidental beneficiary of the member agreement between Visa and Fifth Third, but an incidental beneficiary has no right to enforce a contract," District Judge William Caldwell wrote in his opinion. "Needless to say, I'm disappointed with the court's ruling," PSECU President Greg Smith said in an e-mailed comment. "It's a little frustrating to know that PSECU was the one party in this situation that kept its word [and] honored its contracts, but when someone else didn't, we're still the one to pay."

As a result of the BJ's breach, Fifth Third has paid almost $900,000 in fraud-related charges to several credit card issuers, according to court documents.

"The court seems to be saying that the Visa system provides relief for issuers who suffered fraud losses, but Visa won't cover the costs of reissuing cards, which is the best defense against fraudulent charges," Smith said.

Stephanie Hagen, a spokeswoman for Fifth Third, said the bank does not comment on litigation issues.

The PSECU is one of several institutions that have filed claims over the BJ's breach. Others include CUNA Mutual Group, Sovereign Bank and Banknorth NA.

The case highlights how "there really is a high barrier for plaintiffs to bring these kind of lawsuits," said Ethan Preston, an attorney atKamber & Associates LLC in New York.

"It's unfortunate, because there is a lot of harm that can be caused because of negligent security," he said. "But if you look at the legal basis behind the decision, it is not entirely unexpected."

In fact, there are at least two other cases in which similar claims have been rejected by courts, he said.

In February, a 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 Gramm-Leach-Bliley Act.

Similarly, last September, a federal court dismissed a class-action lawsuit against TriWest Healthcare Alliance in Phoenix. The class-action members claimed that they were harmed because TriWest was negligent in allowing several hard disks containing personal information to be stolen from one of its facilities in 2002. The incident exposed personal information about more than 500,000 military personnel.

The court threw out the case, saying that it was unclear whether any of the personal data had actually been accessed by the criminals who stole the disks.

The cases show the need for an updating of existing liability laws, Preston said. "We don't quite have the laws yet that make people liable for security as a matter of statutory law," he said.

Copyright © 2006 IDG Communications, Inc.

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