Court approves settlement, limits recovery of class counsel fees

15 Sep

On August 29th, Justice Perell of the Ontario Superior Court of Justice approved settlement of an action brought against Home Depot following a significant 2014 payment card system intrusion. The Court approved a settlement that featured a $250,000 non-reversionary settlement fund for documented claims of “compromise” and an agreement to pay up to $250,000 in credit monitoring. It also denied payment of approximately $407,000 in (docketed) legal fees to class counsel as unjustified, approving instead, payment of $120,000 in fees.

This is a good outcome for organizations exposed to potential class action claims for data security incidents. It was driven by two factors: (1) the Court found the incident was associated with a limited risk of damage; and (2) the Court was impressed by Home Depot’s incident response.

Regarding damage, the Court assessed the risk of damage flowing from a compromise to payment card information and e-mail address information as minimal:

[46] Professor Archer outlined three heads of damage to consumers from a payment card breach:  (1) the risk of a fraudulent charge on one’s credit card; (2) the risk of identity theft; and (3) the inconvenience of checking one’s credit card statements. The so-called non-reversionary Settlement Fund of $250,000 is designed to provide compensation for these heads of damages.

[47] Of the three heads of damage, practically speaking, there is little risk of fraudulent charges because of sophisticated safeguards developed by credit card companies. Moreover, when there are frauds, the losses are almost always absorbed by the credit card company or the retailer. The credit card companies are not Class Members.

[48] In the immediate case, there is no evidence that a Class Member absorbed a fraudulent charge. Neither Merchant Law Group nor McPhadden Samac Tuovi LLP have been contacted by a putative Class Member who said that he or she suffered a financial loss attributable to the data breach.

[49] There is also little risk that the data breach, including the disclosure of email addresses, increased the risk of identity theft, because the stolen data would have been inadequate to allow a criminal to fake another’s identity.

[50] Mr. Hamel’s evidence was that for identity theft, the most important information to have is a government-issued identification number such as a driver’s licence number, social insurance number or passport number and preferably all three. In the immediate case, the data stolen from Home Depot did not include this information.

[51] As for inconvenience damages, in the immediate case, there are none, because credit card holders are already obliged to check their statements for fraudulent purchases.

(Note that the Office of the Information and Privacy Commissioner of Alberta has recognized that the loss of e-mail address is associated with a risk of spear phishing – a risk that is arguably remote.)

Regarding incident response, Home Depot had offered to pay for a number of fraud protection services following the incident – including credit monitoring, identity theft insurance and credit repair services. The Court commented that this reduced the need for behavior modification:

[100] The case for Home Depot being culpable was speculative at the outset and ultimately the case was proven to be very weak. The real villains in the piece were the computer hackers, who stole the data. After the data breach was discovered, there was no cover up, and Home Depot responded as a good corporate citizen to remedy the data breach. There is no reason to think that it needed or was deserving of behaviour modification. Home Depot’s voluntarily-offered package of benefits to its customers is superior to the package of benefits achieved in the class actions.

These two factors led the Court to place little value on the action or the settlement. Justice Perell (who is outspoken), commented, “I would have approved a discontinuance of Mr. Lozanski’s proposed class action with or without costs and without any benefits achieved by the putative Class Members.”

Lozanski v The Home Depot, Inc., 2016 ONSC 5447 (CanLII).

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