Starbucks Data Breach Plaintiffs Try Their Luck in the 9th Circuit — Krottner v. Starbucks

[Post by Venkat]

A lost laptop computer containing the personal information of Starbucks employees prompted a class action lawsuit against Starbucks (in Washington). The lawsuit received some coverage (see, for example Bob McMillan here, and Starbucks Gossip here), but the trial court’s dismissal of the lawsuit received almost no coverage. (I mentioned the lawsuit, but failed to note the court’s dismissal of it. Here is the one mention I came across of the dismissal.) Plaintiffs appealed the dismissal to the Ninth Circuit, and their just-filed appeal brief is worth a look. Access a copy of the brief at scribd here.

Background: As described in the complaint, in 2008, someone stole a laptop containing the personal information of approximately 97,000 employees. Starbucks notified the police and affected employees (plaintiffs claim Starbucks was slow in effecting this notice). Starbucks also offered one year of free credit monitoring to affected employees. The plaintiffs fall into a couple of categories, but significantly, one of the plaintiffs was notified that someone tried to open a bank account without his authorization. It was never determined whether this attempt to open a bank account with the information of one of the plaintiffs was connected to the underlying breach.

Ruling by Judge Jones: Judge Jones granted the motion to dismiss filed by Starbucks, finding that Washington courts would not recognize a cause of action as asserted by plaintiffs. (Access a copy of the order by Judge Jones dismissing the claims here: [scribd].) After concluding that plaintiffs had standing (given the broad scope of Article III standing this wasn’t a surprise), Judge Jones focused on the issue of whether plaintiffs stated cognizable claims in negligence under Washington law. Judge Jones noted that Washington courts don’t typically recognize claims where the sole injury is “risk of future harm,” and if Washington courts were to recognize a common law cause of action arising from a data breach, they would be alone in doing so. Judge Jones also noted that the overwhelming majority of courts that have looked at the issue have declined to find that plaintiffs could recover merely because their data was stolen, and those that have recognized a possible cause of action have typically ruled against plaintiffs due to insufficient proof of misuse of the data. In Judge Jones’s view, the Washington Supreme Court would likely conclude that the issue is best left to the legislature. In a footnote, he notes the enactment of data breach laws in other states, but points out that none of those laws provide for private causes of action, “much less a private right to damages.”

With respect to the plaintiffs who did not have any proof that their personal information was misused, the court found that they could “claim only monitoring costs” as a potential injury, and these wouldn’t fly under Washington law. With respect to the plaintiff who presented proof that someone tried to open a bank account in his name, the court acknowledged that “the timing of the [events permitted] the inference that someone acquired [plaintiff's] personal information from the laptop and misused it.” Nevertheless, the court concluded that he did not assert a cognizable claim because he didn’t suffer any out of pocket loss. The plaintiffs also asserted a claim based on implied contract, but the court didn’t need to address whether Starbucks breached any implied obligations since it found that plaintiffs did not suffer any type of injury for which Washington law affords a remedy.

What to Make of the Appeal? Plaintiffs’ appeal brief (filed on Monday) sort of canvasses the various theories under which plaintiffs should be entitled to relief under Washington law. Plaintiffs spend a fair amount of space discussing how Starbucks breached its (implied) contractual obligations to plaintiffs – Starbucks obtained this information in the employment context, and had policies in place which required employees to safeguard employee information. Given that Starbucks failed to fulfill these obligations, plaintiffs argue that the law would fashion some sort of remedy for the injured plaintiffs. Plaintiffs also attack the trial court’s dismissal of the negligence claim from all angles, pointing out that stolen data is often misused long after it is compromised, and the fact that the underlying data breach is unsolved means that Starbucks can’t conclusively show that the data will not be misused at some point in the future.

The dispute raises the familiar issue of whether the harm in the data breach context lies in the breach, or the actual misuse of the data. Courts have pretty uniformly taken the view that the harm flows from the actual misuse of the data, rather than the loss of the data. That said, the outcome here depends on the vagaries of state law, and what the Ninth Circuit predicts the Washington Supreme Court would do. My anecdotal observation is that Washington courts are very privacy friendly, but somewhat middle of the road when it comes to crafting “new” causes of action. Plaintiffs also asked the Ninth Circuit to certify the issue to the Washington Supreme Court, something the Ninth Circuit did recently in a spam case (Kleffman v. Vonage).

The Ninth Circuit has dealt with this issue once in an unpublished decision (Stollenwerk v. Tri-West Healthcare Alliance, 254 Fed. Appx. 664 (9th Cir. 2007).) In that case the Ninth Circuit affirmed the dismissal of data breach claims brought by plaintiffs who did not allege misuse of their data, but reversed as to the plaintiff who made a basic showing that the data could have been misused. Stollenwerk was inconclusive in that the Ninth Circuit (again, in an unpublished decision) merely stated that if the plaintiff was able to show actual damages, he would be entitled to relief. Interestingly, Stollenwerk was settled shortly after remand, on the heels of the district court’s denial of a motion for class certification. One possibility to consider is that a monitoring claim seems much easier to fit into a class. An “actual damage” claim may be less amenable to class resolution.

On a related note, there’s talk of federal data breach legislation winding its way through Senate. (Two proposals are mentioned here.) To my knowledge, neither of the proposals contain a private right of action, and both merely speak to notification upon a breach. There’s also the familiar call for a federal standard which would displace disparate state standards. This debate sounds somewhat similar to the one that surrounded the passage of the CAN-SPAM Act.

Related: Tom O’Toole has a post from a while back about Ruiz v Gap Inc., a case from the Northern District of California also involving the loss of employee/applicant data (coincidentally, from an unencrypted laptop): “Court Finds No Cognizable Damages in Gap Laptop Theft Case.”