As we begin the New Year, constitutional standing has become a major issue in the class action field as courts examine whether the injury claimed by the named plaintiff is an “injury-in-fact” that satisfies the demands of Article III.

On June 20, the U.S. Supreme Court granted certiorari in First American Financial Corp. v. Edwards to review a Ninth Circuit decision holding that a statutory right to bring a private cause of action for damages satisfies the constitutional standing requirement, even in the absence of any actual injury distinct from the alleged statutory violation. (Click here to read our June 21, 2011, legal alert on Edwards.) The argument was held November 28 and the Supreme Court is expected to decide soon whether Congress may confer standing by statute, circumventing the actual injury requirement of Article III.

 

Against this backdrop, the U.S. Court of Appeals for the Third Circuit recently jumped into the fray by holding that, in a putative class action brought on behalf of individuals whose personal and financial information was allegedly stolen in a data security breach, claims of “an increased risk of identity theft” were insufficient to confer standing under Article III of the U.S. Constitution. In so holding, the Third Circuit departed from rulings issued by the Seventh and Ninth Circuit Courts of Appeals in similar identity theft class actions.

In Reilly v. Ceridian Corporation (Dec. 12, 2011), the Third Circuit upheld the District of New Jersey’s decision granting defendant Ceridian’s motion to dismiss the class complaint for lack of standing. Ceridian is a payroll processing firm that, in the course of its business, collected personal and financial information about its customers’ employees. The plaintiffs were employees of a Ceridian client. The case arose out of a December 2009 security breach in which an unknown hacker infiltrated Ceridian’s “Powerpay” system, potentially gaining access to personal and financial information of Ceridian’s customers’ employees. It was not known whether the hacker had read, copied, or understood the data, but the plaintiffs filed a putative class action complaint alleging that they had been exposed to “an increased risk of identity theft.” In upholding the district court’s dismissal, the Third Circuit reasoned: “Appellants’ allegations of hypothetical, future injury do not establish standing under Article III” of the U.S. Constitution.

In its ruling, the Third Circuit focused on established Supreme Court precedent holding that constitutional standing requires an “injury-in-fact,” meaning the invasion of a legally protected interest that is both “concrete and particularized,” and “actual or imminent, not conjectural or hypothetical.” Because the plaintiffs were unable to show that the hacker had read, copied, or understood the stolen data or that they intended to commit criminal acts by misusing the information, the Third Circuit concluded that “appellants have not suffered any injury; there has been no misuse of the information, and thus, no harm.”

Perhaps this would not seem so remarkable except that the Third Circuit departed from contrary decisions of the Seventh Circuit in Pisciotta v. Old National Bancorp and the Ninth Circuit in Krottner v. Starbucks Corp., which held in similar identity theft class actions that the plaintiffs’ standing had been established. Although it distinguished both cases on the ground that the injuries caused by the data theft in Pisciotta and Krottner were more “imminent” and “impending” than the threat of hypothetical harm alleged by the Ceridian plaintiffs, it also dismissed both Pisciotta and Krottner as relying on “skimpy” analyses of the requirements of Article III standing.

Ceridian provides a forceful reminder that an alleged breach of a common law duty does not itself create Article III standing. And, as noted above, we will soon learn whether the mere alleged violation of a statutory right, as opposed to an actual injury, is sufficient to create standing. If the Supreme Court takes the more stringent approach and reverses the Ninth Circuit, there will be a heightened level of attention to standing, and the Third Circuit’s approach to hypothetical injuries may end up carrying the day over the conflicting rulings of its sister circuits.

Ballard Spahr regularly defends companies against class actions arising out of consumer transactions, including the sale and servicing of products, consumer financial services, and service-based advertising claims. For additional information, contact Courtney L. Yeakel at 215.864.8206 or yeakelc@ballardspahr.com.


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