Privacy Advisor

New theory of harm in data breach cases

July 1, 2011

By Andrew Clearwater, CIPP

In the United States, 515 million records have been lost in data breaches since 2005. Customers seeking recovery after the loss of their personal information in data breaches have not been successful in recovering damages if they are not victims of identity theft. This lack of success can be attributed to an inability to articulate a concrete or particularized harm. Despite past setbacks, customers continue to search for legal theories to hold companies accountable.

The claims that proceed the furthest through the legal process are negligence, breach of contract and breach of implied contract. Under these legal theories, arguments have often emphasized three forms of harm: (1) lost time and effort for actions taken to mitigate the risk of identity theft or to restore accounts, (2) the expense of credit and identity-monitoring services that were obtained as a reaction to the data breach and (3) the emotional distress that accompanies loss of personal information. Given the lack of success under current theories, a new theory that claims a property right in personal information has recently been tried. Under this theory, a data breach causes a loss of personal information property and therefore a concrete or particularized harm has been realized. The use of this theory is currently being tested in Alan Claridge v. RockYou Inc (2011 WL 1361588 (N.D. Cal.; Apr. 11, 2011)).

RockYou is a developer of social games used with social networking sites. In late 2009, due to a SQL injection flaw and a failure to use other common methods for protecting stored passwords, the e-mail and social networking login credentials of approximately 32 million customers were exposed in a data breach. Claridge was a RockYou customer who lost personal information in the breach. Claridge brought nine causes of action, including breach of contract, breach of implied contract, negligence and negligence per se. He claimed damages under these causes of action by stating that customers of the RockYou programs and services bought use and access by providing their personal information, which constituted valuable property in that exchange. The damages theory here is novel. It also has a certain logical appeal. Nothing is free, so services must be paid for with something of value. The value exchanged was personal information. RockYou filed a motion to dismiss the case before evidence was gathered, but the judge allowed the contract and negligence claims to continue given the initial showing of damages under this new theory. If this legal theory allows Claridge to proceed to later stages of trial, it increases his chances of receiving a settlement. Additionally, the recognition of personal information as a form of property could increase the chances of successful consumer data breach litigation in future cases.

The early success of this new personal-information-as-property theory is not likely to result in widespread recognition of damages in data breach cases. First, the court is skeptical of this theory even at this early stage in the litigation proceedings. Claridge made a claim under California’s Unfair Competition Law, and it failed. The court held that personal information is not property that could be lost under California’s Unfair Competition Law because the information did not cease to belong to him or pass beyond his control. While this failure is specific to California’s Unfair Competition Law, the court could later apply this reasoning to his contract and negligence claims. Second, contract claims relying on a loss of value in personal information will fare much better when there is a direct exchange of personal information for services. This scenario may be common between online service providers and their customers, but many other businesses will not fit this model. Often, the exchange for services involves many parties, and defining the exchange as a simple trade of property for services becomes more difficult. For example, when a purchase is made with an online merchant, a credit card number is given as a proxy for cash in exchange for goods. If the online merchant were to lose credit card numbers in a data breach, would the credit card numbers be considered property? The value of credit card numbers depends on exposing them to other parties. Credit card numbers can also easily be changed because they are only loosely associated with a person’s identity. In that scenario, the credit card numbers do not appear to be the property for which goods are exchanged. The plaintiff would have a hard time showing a loss in value in her personal information attributable to the loss of the credit card numbers.

So what are the likely implications of the RockYou case and its novel personal-information-as-property theory? Companies that lose personal information in data breaches may see more cases by customers who can establish standing and survive motions to dismiss. This will allow discovery where potential plaintiffs will still struggle to establish injury-in-fact. Ultimately, the RockYou case may allow some data breach claims to establish injury-in-fact, but the theory will likely be limited to direct exchanges where personal information is a form of payment.

Andrew Clearwater is a Fellow at the Center for Law and Innovation at the University of Maine School of Law, where he works to strategically enhance the center's teaching mission, reinforces the Maine Patent Program’s ability to serve clients and provides the university with privacy scholarship. Andrew has an LLM in global law and technology with a concentration in information technology and intellectual property. Prior to joining the center, Andrew was a researcher at Harvard’s Berkman Center for Internet and Society.