U.S. Fifth Circuit - The FindLaw 5th Circuit Court of Appeals Opinion Summaries Blog

Economic Loss Doctrine Falls Flat in Credit Card Case

In a case filed Tuesday, the Fifth Circuit reviewed a tort claim by banks which had suffered economic damages at the hands of a ring of hackers who had stolen millions of credit card numbers.

Not the short-haired, mid-1990s Angelina Jolie type hackers, but the sophisticated real-world kind who caused several banks (called "Issuer Banks") to replace compromised credit cards and reimburse their customers for any fraudulent charges.

These banks wanted some legal compensation from Heartland, a credit card processing company that held the crucial credit card information in their allegedly vulnerable systems targeted by the hackers.

The Fifth Circuit stepped in to wrangle Lone Star National Bank, et al. v. Heartland Payment Systems, Inc. by determining whether the lower court correctly affirmed Heartland's motion to dismiss.

12(b)(6) Motions Don't Ask Much

For those civil procedure buffs out there, you may remember that under the Ashcroft v. Iqbal, claims need only be facially plausible that a defendant is liable for some misconduct to survive a motion to dismiss under 12(b)(6).

Plausibility is a pretty low standard, and generally it involves presenting any amount of facts that can allow a court to draw reasonable inferences that a defendant is liable.

The question before the Lone Star court is whether the Issuer Banks claim for recovery under a theory of negligence is enough to overcome Heartland's motion to dismiss for failure to state a claim.

Normally, the answer would be yes, since the facts seem to suggest that Heartland had a duty to keep its security in compliance with certain standards and it didn't, leaving the foreseeable plaintiff, Issuer Banks, with a bunch of irate customers.

There is, however, the economic loss rule.

Economic Loss Rule

Under this common law theory, contract parties are typically barred from making tort claims against parties for purely economic losses when they had reasonable opportunity to negotiate and include contract remedies in an agreement between the parties.

The problem is that both Texas and New Jersey (the two home states of the parties) have different views of the doctrine, and while Texas flatly bars these types of claims, the New Jersey courts have allowed them when there are no other remedies available to the claimant in contract.

This question of law is a bit unclear, and even the Third Circuit has held the economic loss rule to bar tort claims for only economic damage.

Undeterred, the Fifth Circuit thinks this is an exception, since the weird privity relationship between Heartland and the Issuers Banks makes it unclear that a contract remedy could even exist, and fairness would dictate allowing some legal avenue for recovery.

Bottom Line

Plausibility allows for a lot of stretching with a lenient court, and Heartland may succeed in a later summary judgment motion but not with a 12(b)(6).

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