Merchant Liability for "Time and Effort" Following Security Breach?
The Hannaford saga continues, with possible civil liability implications for retailers.
Earlier this year, a federal judge in Maine dismissed almost all claims in the consolidated class action lawsuit against Hannaford Brothers Co. (In re Hannaford Bros. Co. Customer Data Security Breach Litigation, MDL No. 2:08-MD-1954, USDC Maine). Hannaford had millions of payment card records hacked in 2007 and 2008. Judge Hornby ruled that the common law in Maine allows consumers to seek restitution only for unreimbursed fraudulent charges on their credit or debit cards. Since the card issuers reversed the fraudulent charges under their “zero-liability” policies, the cardholders suffered only “collateral consequences” such as the time and effort involved in changing cards and accounts, monitoring for fraud, and dealing with banks, merchants, and others following notice of the breach. Judge Hornby did not believe such collateral harms were cognizable injuries under state law.
This week the judge reversed that decision and certified to the Maine Law Court (the highest court in the state) the following question:
“Do time and effort alone, spent in a reasonable effort to avert reasonably foreseeable harm, constitute a cognizable injury under Maine common law?”
That question might well be raised in many states that, like Maine, require some form of “economic loss” to sustain an action for negligence. The answer from the Maine Law Court could be an important precedent. So far, plaintiffs in the United States have generally been unsuccessful in pursuing claims against merchants based on fear of identity theft and incidental expenses to protect against it, following a security breach incident. “Lost time and effort” may not be worth a great deal in damages to any single cardholder, but if Maine allows such claims to proceed, a class action with millions of class members could make “time and effort” claims daunting, as well as allowing plaintiffs to sustain an action in which emotional distress can also be asserted as grounds for damages.
This development should serve as an additional spur for retailers to take precautions against the kinds of attacks that resulted in Hannaford’s data losses. Adherence to applicable security guidelines, prominently the Payment Card Industry Digital Security Standard (PCI DSS), will go far to avoid such incidents and protect a company from fines and civil liability as well. The Hannaford hackers, one of whom is now in jail, used SQL injection to plant malware in the merchant’s servers. This is hardly a new technique, and it is one that retailers may be held accountable for neglecting.
In 2008 Hannaford, which operates more than 150 grocery stores in New York and New England, announced that its payment card processing servers had been hacked for several months, exposing millions of payment card records and resulting in thousands of fraud investigations in the Northeast. In August this year, a federal grand jury in Newark, New Jersey indicted a 28-year-old Florida hacker named Albert Gonzalez (formerly an informant for the US Secret Service) and two unnamed persons living “in or near Russia” as conspirators who allegedly carried out the Hannaford hack and several others, including massive attacks on Heartland Payment Systems and the 7-11 retail chain. Gonzalez is already awaiting trial on charges in connection with the TJX hack in 2007. Altogether, the ring is accused of stealing data on more than 130 million credit cards and debit cards. According to the TJX and Hannaford/Heartland indictments, the hackers used several methods, but primarily SQL injection, to gain access to the target networks and install sniffer malware that intercepted card details and transmitted them to computers controlled by the hackers.
The Federal Trade Commission has publicly taken the position that SQL attacks are “commonly known or reasonably foreseeable” (see, for example, the FTC Complaint against Guess?, Inc., and the FTC’s press release concerning Life is good, Inc.). Thus, the FTC has fined retailers following such attacks and in some cases entered consent orders imposing additional sanctions and requirements. This makes it relatively easy to assert negligence in a civil action on behalf of a class of cardholders following a successful SQL attack.