The Curious Case of EMI v. Comerica: A Bellwether on the Issue of "Reasonable Security"?

Security breaches in the online banking world continue to yield interesting lawsuits (you can read about three others in this post). The latest online banking lawsuit filed by Experi-Metal Inc. (“EMI”) against Comerica (the “EMI Lawsuit”) provides some new wrinkles that could further illuminate the boundaries of “reasonable security” under the law. Brian Krebs has a good article summarizing the case. In addition, has a recent article on this matter (in which yours truly was quoted). In this post we take a look at the EMI Lawsuit, consider some legal questions that the case raises, and analyze how it might impact the question of what constitutes “reasonable security” under the law.

The Allegations

On a general level the EMI Lawsuit involves a basic fact pattern that is similar to several online banking security breach cases: criminals were able to obtain the login credentials of a bank’s business customer and wire transfer large sums of money from the customer’s account (in the EMI lawsuit approximately $560,000 was allegedly wired). Like other online banking cases, the bank in this case (Comerica) did not reimburse EMI for the unauthorized wire transfers, and this lawsuit was eventually filed.

However, the EMI Lawsuit differs in two substantial ways from the online banking cases InfoLawGroup previously reported on. First, unlike the other online banking breach suits, in the EMI Lawsuit, Comerica had implemented (and EMI was using) 2-factor authentication.  In particular, Comerica had implemented a token-based 2-factor system. It appears that Comerica online banking customers where provided with a physical token that generated random numbers at various regular time intervals (e.g. the token number was always changing at regular interval). To utilize online banking, Comerica customers would have to input their username and password as well as the random number showing on their token. Without all three pieces of information, logging into Comerica's online banking would not be possible.

Second, in other the lawsuits, it was not known (or at least unclear from the compliant) how the criminals obtained the banking customer’s online banking credentials. In the EMI Lawsuit, however, the bad guys allegedly obtained EMI’s login credentials through a “phishing attack.”  EMI alleges that one of its employees was tricked into giving those login credentials to the criminals via a spoofed email that purported to be from Comerica. This fake email was allegedly similar to those sent by Comerica to EMI in the past.  Apparently the EMI employee would have provided not only user name and password, but also the random number from the token. The complaint alleges that the thieves were able to conduct about 97 money transfers over a period of approximately 6 ½ hours.


This case raises several interesting legal issues. In fact, this case could ultimately illuminate how courts view the scope of a “reasonable security” duty.

Existence and Scope of a “Reasonable Security” Duty.

One of the issues that will be key in this case is whether the bank has a legal duty to prevent these types of phishing attacks. The Shames-Yaekel case has recognized a general duty to protect a customer's online banking accounts. In that case, however, it is unclear how the bad guys obtained the banking customer's online credentials. This case is a little different because phishers were able to trick the customer into volunteering its online banking credentials. Assuming a general duty exists, the question is whether that duty extends to preventing (or reducing the risk of) its customers from being duped by social engineering attacks like phishing.

On that issue, In the EMI Lawsuit (like many of the other online banking lawsuits) the plaintiffs allege that Comerica failed to comply with the “commercially reasonable” security procedure requirement under Michigan’s version of UCC 4A202 (MCLA 440.4702(2)), which provides in relevant part:

(2) If a bank and its customer have agreed that the authenticity of payment orders issued to the bank in the name of the customer as sender will be verified pursuant to a security procedure, a payment order received by the receiving bank is effective as the order of the customer, whether or not authorized, if (i) the security procedure is a commercially reasonable method of providing security against unauthorized payment orders, and (ii) the bank proves that it accepted the payment order in good faith and in compliance with the security procedure and any written agreement or instruction of the customer restricting acceptance of payment orders issued in the name of the customer. The bank is not required to follow an instruction that violates a written agreement with the customer or notice of which is not received at a time and in a manner affording the bank a reasonable opportunity to act on it before the payment order is accepted.

Subsection (3) explains how “commercial reasonableness” is to be determined under MCLA 440.4702(2):

(3) Commercial reasonableness of a security procedure is a question of law to be determined by considering the wishes of the customer expressed to the bank, the circumstances of the customer known to the bank, including the size, type, and frequency of payment orders normally issued by the customer to the bank, alternative security procedures offered to the customer, and security procedures in general use by customers and receiving banks similarly situated.

Significantly, the existence of a duty and whether Comerica's security procedures were commercially reasonable under MCLA 440.4702(2)) are questions of law, and will be decided by the Court, not a jury. Also of note, some of the plaintiffs’ allegations track to the factors laid out in MCLA 440.4702(3), including allegations that EMI had only performed two wire transfers in the two years prior to the attack.  From a legal standpoint, assuming this case does not settle, since this is a question of law, we could see some actual briefings and a court decision on the issue of reasonable security.

One of the factors that courts look to in order to determine whether a duty exists and its scope is forseeability -- was this attack and/or the resulting harm foreseeable by the bank? In fact, EMI alleges that the secure token technology was one that was already known to fail. On this issue, in general, we know that phishing attacks have been around for awhile. We also know that banks and other organizations have developed approaches to try to prevent these types of attacks. Finally, security professionals tell me that use of phishing to foil two-factor authentication is also a risk that has been discussed in the past. In fact, a similar phishing attempt spoofing a Citibank online banking portal was reported back in 2006.  As such, we will likely see significant arguments from both sides on this issue.

“Reasonableness,” Industry Standards and Tug Boats

This case is interesting because Comerica was actually using 2-factor authentication. In the Shames-Yeakel matter, the court ruled that the failure of the bank to use two-factor authentication as suggested by FFIEC guidance created a question of fact appropriate for a jury. Thus, unlike Shames-Yeakel and other online banking cases, at least with respect to authentication, it appears that Comerica was meeting what some would call the "industry standard.”

However, at this point in time it is possible that a court could rule that 2-factor authentication only serves as a floor, and industry standards for online banking security may have evolved further. In other words, to the extent this “man in the middle” type of attack was known and there are methods for addressing it (especially in the phishing context), the “industry standard” for online banking may be 2-factor authentication PLUS other security measures. Again, plaintiffs allege several other measures they believe should have been in place, including verifying the computer sending the wire transfer instructions, security testing and fraud monitoring programs.  The key issue here will be determining what other similar banks are doing to address this risk.

Moreover, even if 2-factor authentication is considered the “industry standard,” under the law an entire industry may not be implementing reasonable security. The rationale for this was explained by Judge Learned Hand in the famous (for first year law students at least) T.J. Hooper case. In T.J. Hooper, the plaintiffs were shipping two barges full of cargo when the ships encountered a storm. The barges were accompanied by two tugboats owned by the defendants. Unfortunately the tugs were unable to safely pull the barges from the storm and the cargo they carried was lost. The plaintiffs asserted that the defendants were negligent because their tugboats were not equipped with effective radio sets capable of receiving warning of the storm. The defendants argued that they did not owe the plaintiffs a duty to carry such a radio because they were a new technology and it was not a common practice in the tugboat industry to carry such radios. Judge Learned Hand disagreed:

Indeed in most cases reasonable prudence is in fact common prudence, but strictly it is never its measure. A whole calling may have unduly lagged in the adoption of new and available devices. . . . Courts must in the end say what is required. There are precautions so imperative that even their universal disregard will not excuse their omission.

What is the import of this? Under the law for purposes of negligence, a defendant can avoid liability even if a plaintiff suffered harm as long as the defendant did not breach its duty of care. In this context if the bank's security measures where "reasonable" under the law it would not be liable. I think the fact that the bank used 2-factor authentication and can point to the FFIEC guidance will help its cause in this respect. Nonetheless, it is possible the court will rule either that industry standards have evolved further or that the entire online banking industry was “lagging” behind in its reliance on 2-factor authentication. From a legal perspective it will be very interesting to watch the court’s analysis on the issue of reasonableness as it relates to industry standards (and hopefully it will provide more guidance for lawyers and banks going forward).

What about EMI’s fault?

There is a concept in the law called contributory negligence (or comparative negligence). You can read more about it here. Essentially this concept recognizes that a plaintiff (the bank customer in this case) may have also been negligent and may have contributed to the harm it allegedly suffered. In some States if the plaintiff was more than 50% responsible, it would be barred from any recovery. Other states, including Michigan (where the EMI Lawsuit was filed) employ a “modified comparative negligence” approach. Using this approach, if the plaintiff was 60% negligent and the bank 40%, the bank would be responsible for only 40% of the plaintiff's loss. I think there is likely a good argument to be made that EMI should bear some of the responsibility for the unauthorized use of their online banking accounts. In fact, if you read Comerica’s answer to EMI’s complaint you will see that Comerica appears to be taking that position:

16. Denied that the alleged website “appeared to be a Comerica website” to any reasonably alert person who was responsible for safeguarding EMI’s financial records and digital credentials.

26. Denied that any perpetrators infiltrated EMI’s bank accounts. Valid credentials assigned to an EMI employee were used to authenticate a logon for purposes of online banking transactions. If some unknown criminals used those credentials, rather than the EMI employee to whom they had been entrusted, this was caused solely by the actions of that EMI employees.

Whether EMI bears some responsibility will be a very fact-intensive inquiry that will include an analysis of the spoofed email, Comercia's previous practices concerning requests for login-credentials and the actions and decision-making process of the employee that provided the credentials to the criminals.


In general, I believe that these online banking cases have more legs than other types of security breach lawsuits because the plaintiffs have suffered actual damages/harm. Evidence of this is the Shames-Yeakel case, which proceeded past a motion for summary judgment. Contrast this with the numerous security breach cases brought by consumers that have been dismissed relatively early in litigation. In those cases, the plaintiffs whose information was stolen have argued that they suffered harm because they had to pay for credit monitoring. Courts have more or less consistently rejected this argument. For online banking cases, plaintiffs don’t have that problem. In this case the plaintiff is out hundreds of thousands of dollars, so damages are clear.

So if a plaintiff can get past the motion to dismiss phase on the issue of damages, do the defendants have an opportunity to get a summary judgment (rather than risk having to present their case to a judge and jury – something every company likes to avoid, if possible). The problem for banks is that the issue of whether a bank’s security measures were “reasonable” is likely a “question of fact.” Courts are typically not willing to grant summary judgment where questions of fact exist for a jury to decide.

That said, this case is a little different than those in my other blog post because of the phishing issue and because the issue of commercial reasonableness is a question of law under MCLA 440.4702(2). Whether a duty exists under the law is typically a question of law that Courts (as opposed to juries) typically decide. I think there will be a battle at both the pleading and summary judgment phase with the banks trying to argue that they have no duty under the law to prevent their customers from being duped and that their practices were commercially reasonable 440.4702(2).  If Comerica does not win these argumenst then this case could go to a jury, which poses legal risk.