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Privacy Tracker | Court Decision Brings Implications for Breach Liability Related reading: Navigating privacy amid the holiday shopping frenzy

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On September 3, the Fifth Circuit reversed and remanded a District Court ruling that dismissed a negligence claim based solely on economic losses in Lone Star National Bank v. Heartland Payment Systems, Inc. Though the Fifth Circuit stopped short of deciding any dispositive issues, the decision has important implications concerning the scope of liability for data breaches. The Fifth Circuit’s decision suggests that the Economic Loss Doctrine and contract terms may no longer be an effective shield against tort liability, at least in jurisdictions that follow New Jersey’s approach to the economic loss doctrine.   

The crux of the case was whether the Economic Loss Doctrine, which typically precludes plaintiffs from seeking recovery for purely economic losses arising from commercial transactions, barred the plaintiff’s negligence claim under New Jersey law. The Court held that under New Jersey law the economic loss doctrine does not always bar tort claims based solely economic loss and advanced three arguments in support of its reversal:

“Identifiable Class”
First, the Fifth Circuit pointed to the New Jersey case, People Express Airlines, Inc. v. Consolidated Rail Corp., to find that the economic loss doctrine does not preclude tort recovery where a defendant’s conduct results in financial injury to an identifiable class of plaintiffs to whom the defendant owes a duty of care and whose liability is not boundless.

The Court then explained that plaintiff banks constituted an identifiable class because it was foreseeable that the banks would suffer economic loss if Heartland were negligent. Consequently, Heartland may have owed the banks a duty of care and may be liable for economic losses the banks sustained. The Court further explained that Heartland’s liability was not boundless, but rather limited to a reasonable amount of loss from a finite number of entities.

Availability of Non-Tort Remedies
Second, the Court found that barring the plaintiff banks’ tort claim would offend “notions of fairness, common sense, and morality” because the plaintiff would have no basis of recovery for Heartland’s alleged negligence.  The Court also explained that there was insufficient evidence to determine if the Visa and MasterCard rules and regulations, to which Heartland agreed to comply, provided a remedy for plaintiff banks for their losses. 

Allocation of Risk through Contract Negotiation
Third, the Court found that it was unclear if Heartland’s participation in the Visa and MasterCard networks provided the plaintiff banks with an opportunity to negotiate the allocation of risk.  Because the case was only at the motion to dismiss stage, the record before the Court lacked sufficient evidence to prove the existence of a contract between Heartland and either Visa or MasterCard.  As a result, it was not clear to the Court if any contractual remedies were available to the plaintiff banks.

While New Jersey’s approach to the doctrine is the minority approach, as many as 15 states apply the doctrine in manner, which, under similar circumstances, might lead to a result similar to that reached by the Fifth Circuit. For example, on March 7, 2013, the Supreme Court of Florida limited the application of the Economic Loss Doctrine to products liability cases.  Additionally, California employs a “special relationship” exception to the doctrine that bears a notable resemblance to New Jersey’s “identifiable class” standard.  Further, the pending decision from the District Court has the potential to leave entities actively involved in transactions with nested parties, such as payment processing, vulnerable to tort liability.

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