United States: U.S. City Suits: The Next Frontier Of Data Breach Actions

This article by privacy & cybersecurity partner Michelle Visser, counsel David Cohen, and associates Rebecca Harlow and Tom Wakefield was published by The New York Law Journal on February 21, 2018.

For over a decade, companies that have suffered data-security breaches have faced claims asserted by a dizzying array of adversaries, from the Federal Trade Commission and other federal agencies to state attorneys general to private plaintiffs such as consumers, employees, shareholders, and financial institutions. As if that were not enough, in late 2017 a new type of claimant has come to the fore: municipalities. Who are these new city plaintiffs, how do they fit into the existing landscape of data-breach litigation, and what can companies do to protect against the claims they bring? This article will de-mystify the new wave of city suits over data breaches and highlight some ways that organizations may be able to reduce their exposure to such suits.

Pre-Existing Litigation and Enforcement Activity

While the underlying statutes and common-law bases may vary, claims by government actors and private plaintiffs following a data breach are, for the most part, based on the same core set of factual allegations—the breached entity had inadequate security, deceived consumers about the quality of its security, and/or failed to respond appropriately or quickly enough upon discovering the breach. Pursuant to §5 of the Federal Trade Commission Act, for example, the Federal Trade Commission has convinced numerous companies to enter consent decrees and has brought enforcement actions based on allegations that the company's data security was inadequate and/or that its statements to the public about security were deceptive. Depending on the kind of entity and the type of data involved, other federal government agency investigations and actions may also ensue. On a parallel track, state attorneys general—acting individually or in a coordinated multistate effort—often investigate breaches and the responses to them and may ultimately exact settlements or initiate litigation under data-security, breach-notification, or unfair and deceptive trade practices laws. For instance, in May 2017, Target reached a settlement with a group of 48 state attorneys general in connection with a 2013 data breach without resort to litigation.

Class actions by private plaintiffs often follow on the heels of a data breach. Breached entities may also end up in contract-based litigation with their insurers over the allocation of the costs of the breach or with other third parties.

Litigation with cities represents a new line of attack that a breached entity now might face.

Overview of City Suits

San Francisco became the first city to sue Equifax in the wake of a data breach that affected an estimated 143 million U.S. consumers. Dennis Herrera, the city attorney, brought suit in San Francisco Superior Court on behalf of the People of California. Complaint, People v. Equifax, CGC-17-561529 (S.F. Super. Ct. Sept. 26, 2017). According to the city, hackers exploited a vulnerability in Equifax's open-source software to access a vast trove of consumer data, including names, addresses, birth dates, driver's license numbers, social security numbers, and financial information. Though several sources allegedly issued notices and alerts about the specific vulnerability as early as March 2017, the city contended that Equifax failed to implement patches or to detect suspicious traffic until late July.

The city claimed that Equifax violated California's Unfair Competition Law (UCL), which broadly proscribes unlawfulness. The UCL expressly authorizes city attorneys to bring actions for damages and injunctions on behalf of the People of California, Cal. Bus. & Prof. Code §§17204, 17206(a), and it allows litigants to predicate unlawfulness claims on violations of other statutes, see, e.g., Cal-Tech Commc'ns v. L.A. Cellular Tel. Co., 973 P.2d 527, 539-40 (Cal. 1999). Here, San Francisco predicated its unlawfulness claim on Equifax's alleged violation of California's Customer Records Act (CRA). In particular, the complaint alleges that Equifax violated three CRA requirements by failing to maintain reasonable security measures, failing to provide timely notice of the breach to affected customers, and failing to provide full and proper notice. See Cal. Civ. Code §§1798.81.5(b), 1798.82(a)-(b), (d). San Francisco also cast Equifax's allegedly unlawful conduct as "unfair business practices" under the UCL. On Dec. 21, 2017, the Superior Court overruled Equifax's demurrer in an order that found the claims adequately pleaded but contained little analysis. People v. Equifax, CGC-17-561529 (S.F. Super. Ct. Dec. 21, 2017) (order).

Los Angeles filed a similar lawsuit against Uber about two months later, alleging that the company paid hackers to delete stolen data—including the names and drivers' licenses of 600,000 Uber drivers—and waited a year to disclose the breach to affected drivers. Complaint, People v. Uber Techs., BC685552 (L.A. Super. Ct. Dec. 4, 2017). According to the city, Uber concealed the breach by treating the ransom payment as if it were a "bug bounty"—a tech industry practice where firms pay hackers to probe company software for vulnerabilities. Like San Francisco, Los Angeles pleaded a UCL claim that borrowed its unlawfulness from a purported CRA violation. But, because Los Angeles only pleaded that Uber violated the CRA by failing to provide timely notice, its suit is substantively narrower than San Francisco's. Both Los Angeles and San Francisco sought the UCL's penalty of $2,500 per violation, and San Francisco also sought restitution as well as an injunction against unlawful conduct.

Outside California, Chicago has sued both Equifax and Uber. Whereas California law expressly authorizes cities to bring suit under the state UCL, Illinois law contains no such provision. So Chicago purported to create its own means of enforcement: according to the city's Consumer Fraud, Unfair Competition or Deceptive Practices Ordinance (the Ordinance), a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA)—which prohibits unfair and deceptive conduct—also violates Chicago's municipal code. Chi. Code §2-25-090(a). In September 2017, Chicago filed suit against Equifax under the Ordinance, claiming that the company engaged in unfair acts—based on allegations that Equifax failed to protect against known, foreseeable data-security threats—and deceptive acts—based on allegations that Equifax misrepresented the company's data-security safeguards. Complaint, Chicago v. Equifax, 2017-CH-13047 (Ill. Cir. Ct. Sept. 28, 2017). It also alleged that Equifax failed to give the notice required by Illinois's Personal Information Protection Act, which itself constitutes an ICFA violation. Another count alleged that Equifax's offer of "free" credit monitoring was deceptive because it required a class-action waiver and individual-arbitration agreement and because it would automatically renew for a fee. After removal to federal court, the Northern District of Illinois stayed the case pending the likely formation of a multidistrict litigation (MDL) about the Equifax breach. Chicago v. Equifax, Case No. 17-cv-07798, slip op. at 3, (N.D. Ill. Nov. 26, 2017) (order), ECF No. 26.

After acting alone in Equifax, Chicago joined forces with the state in its suit against Uber. Complaint, Chicago v. Uber Techs., 2017-CH-15594 (Ill. Cir. Ct. Nov. 27, 2017). In a 10-count action filed by the city attorney and the state's attorney for Cook County, the first half of the complaint pleads Ordinance violations premised on alleged ICFA violations on behalf of Chicagoans and the second half pleads direct ICFA violations on behalf of the People of Illinois. The core alleged facts and theories remain the same: principally, that Uber mishandled personal information such that it was susceptible to attack, made deceptive representations regarding its inadequate data-security safeguards, engaged in unfair practices by concealing the breach, and violated the ICFA by failing to give prompt notice.

Implications for Breached Companies

The suits by San Francisco, Los Angeles, and Chicago signal a new trend that all companies should watch closely. The emergence of yet another category of data-breach plaintiffs will add to the complexity and expense of responding to a breach. Notably, cities may take the untested position that their remedies are cumulative to those recovered in state actions, as Chicago's suit against Uber exemplifies. In that joint city-state action, the plaintiffs seek a fine of $10,000 per offense per day under the Ordinance as well as—for the same violation of the same substantive law—$50,000 per violation under the ICFA directly. While breached companies may have powerful arguments that no such cumulative fines are permitted and that such city suits are inappropriately duplicative of state actions, Chicago's theory currently remains untested.

Chicago's attempt to seek duplicative penalties in the data-breach context is new, but the core allegations in these city suits mirror those commonly seen in other data breach actions. Accordingly, the steps that companies can take in an effort to reduce their exposure to this new wave of city suits largely mirror the steps that companies can take to reduce their exposure to the pre-existing panoply of potential plaintiffs. Key examples of such steps include:

  • Implementing and maintaining reasonable and appropriate security measures. Most of the city suits accused the companies of failing to create and maintain a sufficient information-security program and allowing an otherwise preventable data breach to occur.
  • Scrutinizing statements about the company's data-security practices and how the company has responded to the breach to ensure that they are accurate. Nearly all city suits in the data-breach context so far have included claims of deception.
  • Developing and regularly testing an incident-response plan. All of the city suits challenged, at some level, the adequacy of the companies' responses to the breaches.
  • Being aware of notification obligations, especially in regard to the timing, content, and form of notification, as unlawfulness claims might be predicated on alleged failures to abide by these statutes' often highly technical strictures. This point is apparent in San Francisco's suit against Equifax, where the parties quibbled over particulars of the company's notification, such as whether the notification had in fact been titled "Notice of Data Breach" and whether it included the date of the notice on the correct form. Companies might consider creating an internal notification procedure. In the event of a breach, compliance with an internal policy might provide a safe harbor to certain statutory requirements. See, e.g., Civ. Code §1798.82(l).

Reprinted with permission from the February 21 edition of The New York Law Journal © 2018 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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