In Re Verisource Services Inc Data Breach Litigation

Key Facts

Transaction Type

Issues

• The court addressed the negligent hiring claim against Southwest Water Company and Planned Administrators. Plaintiffs alleged that both Defendants shared confidential information without vetting VeriSource Services, Inc. and inquiring about its data security qualifications. Plaintiffs further alleged that if Defendants had done so, they would have discovered VeriSource did not have data security measures in place compliant with recognized industry standards. The court concluded that the plausible allegations by Plaintiffs in that regard survive dismissal.
• The court determined that Plaintiffs have standing against Southwest Water Company and Planned Administrators. The Memorandum and Recommendation concluded that all Plaintiffs alleged cognizable injuries in fact. Plaintiffs plausibly alleged that they were required to entrust their sensitive, non-public Private Information to one or more Defendants and by extension to VeriSource Services, Inc., who ultimately suffered the subject breach. Plaintiffs also pleaded that their injuries are traceable to Southwest Water Company and Planned Administrators, despite the intervening actions of VeriSource Services, Inc. and cybercriminals.
• The court addressed whether Plaintiffs sufficiently alleged damages to support their negligence claims against VeriSource Services, Inc. The court determined that Plaintiffs have sufficiently alleged damages to support their negligence claims, including risk of harm, loss of benefit of the bargain, mitigation costs, and emotional distress, which is sufficient to survive dismissal at this juncture. Arguments regarding emotional distress damages may be renewed at summary judgment after discovery and upon an undisputed factual record.

Holdings

• Defendants Southwest Water Company, LLC and Planned Administrators, Inc.'s motion to dismiss is granted in part and denied in part. Claims for negligence and negligence per se, unjust enrichment, breach of implied contract, declaratory judgment, and injunctive relief are dismissed with prejudice. The standing claim and negligent hiring claim against SWC and PAI proceed.
• Defendant VeriSource Services, Inc.'s motion to dismiss is granted in part and denied in part. Claims for negligence per se, breach of implied contract, breach of third-party beneficiary contract, unjust enrichment, declaratory judgment, and injunctive relief are dismissed with prejudice. The negligence claim against VSI proceeds.

Remedies

• The court denied in part motions to dismiss, allowing the negligence claim against VeriSource Services, Inc. and the negligent hiring claim against Southwest Water Company, LLC and Planned Administrators, Inc. to proceed to summary judgment.
• The court granted in part motions to dismiss with prejudice against Defendant VeriSource Services, Inc. and Defendants Southwest Water Company, LLC and Planned Administrators, Inc. for various claims including negligence per se, breach of implied contract, breach of third-party beneficiary contract, unjust enrichment, declaratory judgment, and injunctive relief, while denying negligence and negligent hiring claims which will proceed.

Legal Principles

• Plaintiffs must plausibly allege that their injuries are traceable to Defendants. Plaintiffs alleged they were required to entrust sensitive Private Information to Defendants and VSI, who ultimately suffered the data breach. Plaintiffs also pleaded that, but for SWC and PAI's failures, the VSI data breach would not have occurred and was a foreseeable consequence of their failure to properly vet and monitor VSI.
• The court addressed negligence claims where Plaintiffs alleged Defendants failed to properly protect confidential information. Plaintiffs alleged that both Defendants shared confidential information without vetting VSI and inquiring about its data security qualifications, and that if Defendants had done so, they would have discovered VSI did not have data security measures compliant with industry standards.
• The district court reviews de novo those conclusions of a magistrate judge to which a party has specifically objected, pursuant to FRCP 72(b)(3) and 28 USC § 636(b)(1)(C). The court may accept other portions to which there's no objection if satisfied that no clear error appears on the face of the record.

Precedent Name

• United States v Wilson
• Guillory v PPG Industries Inc
• Douglass v United Services Automobile Association

Cited Statute

• Federal Rules of Civil Procedure Rule 72(b)(3)
• 28 U.S.C. § 636(b)(1)(C)

Judge Name

Passage Text

• The objections by Defendants to the Memorandum and Recommendation of the Magistrate Judge are OVERRULED. No clear error otherwise appears upon review and consideration of the Memorandum and Recommendation, the record, and the applicable law.
• Upon de novo review and determination, Defendants' objections lack merit. As to VSI's objections, they fail because Plaintiffs have sufficiently alleged damages to support their negligence claims. All Plaintiffs allege a risk of harm, loss of benefit of the bargain, mitigation costs, and emotional distress, which is sufficient to survive dismissal at this juncture.
• The Memorandum and Recommendation of the Magistrate Judge is ADOPTED as the Memorandum and Order of this Court. The motion by Defendant VeriSource Services, Inc, to dismiss is GRANTED IN PART and DENIED IN PART. The motion to dismiss by Defendants Southwest Water Company, LLC, and Planned Administrators, Inc, is GRANTED IN PART and DENIED IN PART.

Damages / Relief Type

• Injunctive relief claim dismissed with prejudice
• Emotional distress damages claimed but may be renewed at summary judgment; no specific amount specified
• Declaratory judgment claim dismissed with prejudice