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First Circuit Rejects Claim of Inadequate Privacy Protection as Too Speculative

Wednesday, March 14, 2012
Katz v. Pershing, LLC, No. 11–CV–01983, 2012 BL 46758 (1st Cir. Feb. 28, 2012) In a putative class action, the U.S. Court of Appeals for the First Circuit dismissed breach of contract, misrepresentation and privacy law claims against a financial services company alleging a failure to protect sensitive personal information, holding that the plaintiff did not allege any actual harm but only speculated that her data might be stolen and misused in the future.

Customer Claimed Third Party Protection Was Inadequate

Defendant Pershing, LLC sells brokerage execution, clearance, and investment products and services to other financial organizations. Its customers are broker-dealers and investment advisors that trade securities for their clients. One of its services is NetExchangePro, an electronic platform through which subscribing financial organizations ("introducing firms") can manage brokerage accounts on the Internet. When an introducing firm uses NetExchangePro, its employees can access information about its customers' accounts. The introducing firm can make its customers' non-public personal information ("NPPI"), including Social Security Numbers, accessible to authorized employees on NetExchangePro, such as investment consultants. Plaintiff Brenda Katz had a brokerage account at National Planning Corporation ("NPC"), an introducing firm that used the NetExchangePro service. NPC and Pershing were parties to an agreement governing their use of customers' information. Because NPC made its customers' account information accessible in NetExchangePro, Katz and other NPC customers received a disclosure statement from Pershing about the relevant provisions of the agreement. Katz alleged that Pershing did not adequately protect her NPPI, because authorized end-users could access and store her unencrypted data "at home and elsewhere, twenty-four hours a day and seven days a week," which could then be accessed by hackers. She also claimed that Pershing failed to monitor unauthorized access, and used inadequate methods for inadequate end-user authentication. Katz at 4. Katz filed a putative class action in federal court, based on diversity and claiming more than $5,000,000 in damages. She claimed breach of contract, breach of implied contract, negligent breach of contractual duties, and violation of Massachusetts consumer protection laws. Pershing moved to dismiss for lack of standing and failure to state a claim. The district court granted the motion, and Katz appealed.

Standing to Sue

As the court explained, there are two types of standing: constitutional and statutory. Under Article III of the Constitution, a plaintiff must establish injury, causation, and redressability. Injury must be "an invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical." Katz at 7 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)). Causation must show a direct connection between the challenged action and the injury. Redressability requires a showing that a favorable outcome would likely redress the alleged harm. The prudential aspect of standing requires a claim not to be "merely a generalized grievance." Id. at 8 (quoting Pag

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