Injury In Hack?

In 2016, the number of American consumers impacted by identity theft rose to 15.4 million from 13.1 million in 2015. Eighty-five percent of identity theft victims do not realize their identity has been stolen for a year or longer; and, according to a study completed in 2006, only 0.14% of identity thieves are ever caught.

Unfortunately for these millions of Americans, circuit courts are split over whether threat of future identity theft satisfies the “imminent injury-in-fact” requirement for Article III standing. Article III standing requires: (1) concrete, imminent injury-in-fact; (2) proximate causation; and (3) redressability. The split concerns the meaning of “imminent” within the injury-in-fact requirement.

Clapper v. Amnesty International

The primary case cited by courts on both sides of the issue is Clapper v. Amnesty International. In Clapper, the Supreme Court ruled that an “objectively reasonable likelihood” a future injury will be suffered by the plaintiff is insufficient for Article III standing, and that costs incurred to mitigate speculative harm do not satisfy the injury-in-fact requirement for standing. However, the court stopped short of ruling plaintiffs must prove that the harm will certainly occur. In some cases, “substantial risk” the injury will occur is sufficient.

The Splits

Does increased risk of identity theft qualify as a “substantial risk,” satisfying the imminent injury-in-fact requirement for Article III standing?

To Stand….

The Sixth, Seventh, and Ninth Circuits have held increased threat of identity theft qualifies as an imminent injury-in-fact. Moreover, these courts have held that costs incurred in response to this imminent injury qualify as a present injury-in-fact.

The Sixth and Seventh Circuits rest their decisions on a broad reading of Clapper. The Ninth Circuit decision was made prior to the Supreme Court’s ruling. These courts consider the increased threat to identity theft to satisfy the “substantial risk” standard for injury-in-fact.

In addition to a broad interpretation of Clapper, these courts distinguish the increased threat of identity fraud from the plaintiffs’ claims in Clapper. Primarily, the plaintiffs know their information has been stolen. In contrast, the plaintiffs in Clapper only suspected their conversations were being record. Costs are incurred from a breach of personal information in both cases, but, these courts distinguish the costs incurred to prevent identity theft from the costs incurred by the Clapper plaintiffs. Because the harm in Clapper was purely speculative, the costs incurred therefrom were merely to mitigate tenuous harm. However, if the increased threat of identity theft is not a speculative harm, costs incurred to mitigate should qualify as present injury.

From a public policy perspective, these courts feel it’s unfair to force plaintiffs to wait until their identities are stolen to sue.

Or Not to Stand….

The Third and Fourth Circuits have held increased threat of identity theft does not qualify as an imminent injury-in-fact. Additionally, these courts hold that costs incurred in response to a breach of data information is mitigation of a speculative harm and, under Clapper, not considered sufficient present injury-in-fact.

Both courts consider the increased threat of identity theft to be merely speculative until actual misuse of the personal information can be shown. The Fourth Circuit rests its decision on a narrow reading of Clapper. The Fourth Circuit considers the costs incurred by the identity-theft plaintiffs to be analogous to the costs incurred by the plaintiffs in Clapper, and therefore, determines that the costs are insufficient to satisfy the injury-in-fact requirement. Both courts feel that the plaintiffs’ claims require too many steps in the causal chain to qualify as “imminent.”

From a public policy perspective, these courts consider the slippery-slope of allowing some plaintiffs to sue on hypothetical future injuries, regardless of the likelihood that injury will occur.

Conclusion

Considering the alarming number of Americans affected by identity theft, this split should be resolved to inform citizens as to their legal rights following a data breach. Since few identity thieves are ever caught, litigating against those who are responsible for data breaches may be the only remedy available to those who identities are stolen. Therefore, clarity as to Article III standing must be resolved. On a broader scale, the underlying conflict in interpretation of the “substantial risk” standard following Clapper should also be resolved as this conflicting interpretations will only lead to more splits of this nature.

Third Party Liability in Unsolicited Fax Advertisements: Somehow, a Thing that Exists.

The Issue

Your beeper business has seen better days. Sure, it was doing great for a few years, but ever since Clinton left office, things haven’t quite been the same. You know it’s time for a big play to turn things around. I know it’s a bit flashy, but it’s time to start thinking about advertising. And not just any advertising. You need to bring out the big guns. Yeah, you know what I’m talking about.

Unsolicited mass faxes.

You’ve decided to send out fliers to every single fax machine within a 10-mile radius. But you don’t have the know-how for such techno-wizardry, so it’s time to bring in the reformed Phone Phreaks over at Sir FaxALot. You tell them the plan. You give them the money. They get to work.

Two weeks later, you get a knock on your door. It’s a process server. Turns out that sending out unsolicited advertising faxes is a violation of the Telephone Consumer Protection Act (TCPA) of 1991. It also turns out that the console jockeys down at Sir FaxALot misplaced a decimal point, and your ad went out to every single fax machine within a 100-mile radius.

So here’s the question: with whom does the liability lie? Is it all on you? Or is Sir FaxALot on the hook?

Surprisingly, the circuits are still split on this (somehow) pressing issue.

Background

The American consumer is protected by several different laws. Insofar as Americans are protected against abuses related to telecommunications, the TCPA has been a bedrock of consumer protection law for over three decades. Protections such as the Federal Do Not Call Registry, regulations against spammers, and the all-important ban on unsolicited advertising faxes can be traced to this act. Parties who violate the TCPA are subject to stiff penalties, which are keyed to the medium of the violation (e.g., telephone, SMS, fax, etc.) and each individual consumer affected by the infraction. In 2005, the TCPA was expanded and amended by the Junk Fax Prevention Act, the penalty for unsolicited advertising faxes is $500 per page per person.

Naturally, nobody wants to pay such a penalty should they get caught, so it becomes necessary to see which type of third party liability applies. Determining the extent to which each party is liable is where we find our split.

The Split

Here, we have the Sixth Circuit and the Seventh Circuit disagreeing over the extent to which third party liability for faxing violations applies.

Seventh Circuit

In Bridgeview Health Care Ctr. Ltd. v. Clark (2016), a small medical supply business instructed a third-party marketing firm to send roughly 100 faxed advertisements to local businesses within a 20-mile radius of Terre Haute, Indiana. Instead, the marketing firm sent 4,849 faxed advertisements across three states. In determining whether the medical supply business was liable for faxes sent out beyond the 20-mile radius, the Seventh Circuit applied three types of common law agency analysis: express actual authority, implied actual authority, or apparent authority.

First, express actual authority:

Because B2B expressly contradicted Clark’s actual instructions, this is clearly not express actual agency.

Second, implied actual authority:

While express actual authority is proven through words, implied actual authority is established through circumstantial evidence. Id. Nothing about fax marketing inherently calls for sending thousands of advertisements. And nothing about fax marketing inherently demands sending these ads to states where the advertiser does not do business. We thus find it impossible to conclude that implied actual authority exists here.

Third: apparent authority:

To create apparent authority, the principal must speak, write, or otherwise act toward a third party. His conduct must make the third party reasonably believe that he has consented to an action done on his behalf by someone purporting to act for him…In short, B2B made an independent decision to blast faxes across multiple state lines.

In short, the medical supply company could not be held liable for the violations of the TCPA committed by a third party.

The Sixth Circuit

In deciding Siding and Insulation Co. v. Alco Vending Inc., the Sixth Circuit split itself. First, the court held that a hybrid test to determine “on whose behalf” such faxes were sent would be more appropriate for faxes sent before 2006. Such a test involved balancing between common law agency principles (as outlined above) and certain policy considerations, such as “whether and to what extent each entity investigated the lawfulness of the fax broadcasts at issue.”

However, in dicta the court indicated that the standard post-2006 as established by the Federal Communications Commission’s (FCC’s) governing regulations applied a standard of strict liability. In other words, the small business that contracted out for the infringing advertising services would be on the hook for the full extent of the damages.

Looking Forward

This is going to be a brave new world for fax-based mass marketing. The split indicates that we may be headed for a showdown between common law agency analysis and strict liability. Depending on the jurisdiction one poor, outdated marketing decision could be a small business’s last.

The Inferiority Complex: Hiring v. Appointing at the SEC

 

They hold hearings. They issue subpoenas. They adjudicate. In the 2016 fiscal year, they ordered $12.4 million in disgorgement and $14.5 million in civil penalties. They are the U.S. Securities and Exchange Commission’s (SEC) administrative law judges.

Administrative proceedings are commonly used by agencies to adjudicate claims or enforcement actions quicker than if the agency filed in federal court. Cases are heard before administrative law judges, or ALJs, instead of Article III judges on the federal bench. While the SEC faces numerous challenges to the partiality of its ALJs and its rules of practice, there is a preliminary challenge—are the SEC’s ALJs constitutional at all?

Hiring v. Appointing

Currently, the SEC’s ALJs are selected by the current Chief ALJ of the SEC, subject to the ALJ hiring process set forth by the Office of Personnel Management. Under the view that ALJs are employees of the SEC, this approach is perfectly fine. However, if ALJs are deemed “inferior officers,” then this selection process is unconstitutional.

The issue derives from the Appointment Clause of the Constitution. The Appointment Clause gives the President the power to appoint “primary officers,” subject to confirmation by the Senate. The clause gives Congress the power to vest appointment power for inferior officers in the President, judicial courts, or heads of departments. Thus far, there is no definitive test to determine what positions are inferior officers as opposed to mere employees.

The Split

In Bandimere v. SEC, the Tenth Circuit determined that SEC ALJS are inferior officers under the Appointment Clause. The court relied upon three facts from Freytag v. Commissioner of Internal Revenue, where the Supreme Court determined that the Tax Court’s special trial judges were inferior officers. The court wrote in Bandimere:

Those three characteristics exist here: (1) the position of the SEC ALJ was “established by Law”; (2) “the duties, salary, and means of appointment . . . are specified by statute”; and (3) SEC ALJs “exercise significant discretion” in “carrying out important functions.”

However, the D.C. Circuit reached the opposite result in Raymond J. Lucia Companies v. SEC. Here, the court determined that ALJs were employees of the SEC by primarily focusing on the fact that the ALJs’ decisions were subject to final review by the SEC Commissioners (who are primary officers).

Put otherwise, the Commission’s ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for public benefit.

Looking Forward

So where does this leave the law? Clearly, one circuit on its own cannot change the structure of a federal agency. If the Supreme Court concludes that the SEC’s ALJs are inferior employees, Congress would need to take swift action to create an appropriate avenue to appoint ALJs to avoid overwhelming the federal docket with cases that would have been resolved in administrative proceedings.

Honest Belief, Reasonable Belief: Can Your Employer Fire You Based on a Mistake?

The Issue

When an employer fires an employee, and the employee sues for discrimination, the employer typically justifies the firing by showing a “legitimate, nondiscriminatory reason” (LNR) for it. But what if that reason turns out to be a mistake?

An Honest Belief

Many federal courts hold that an employer does not violate Title VII, or other anti-employment-discrimination statutes, if the employer fires the employee based on an “honest belief” in facts that suggest there is a legitimate, nondiscriminatory reason to fire the employee. This principle seeks to draw a firm line between intentional discrimination against someone for their age, sex, etc. and firing them for a valid (if incorrect) reason.

What does “honest belief” mean in practice? The Sixth and Seventh Circuits have split on how litigants can dispute an employer’s LNR if that LNR is based on an honest mistake. The split is so fundamental that one circuit puts the burden on the plaintiff, and the other on the defendant, to show that the employer’s honest belief was or was not honestly held.

Background

Several federal statutes protect against discrimination in the workplace. Title VII of the Civil Rights Act of 1964, allows a person to sue an employer if the employer discriminates against them on the grounds of race, sex, color, religion, or national origin. The Age Discrimination in Employment Act does the same thing for age; and the Americans with Disabilities Act for disability.

A suit under these statutes generally works like a ping-pong game between the plaintiff and defendant. First, the plaintiff “serves” by showing what in law-speak is called the “prima facie” case (Latin for “first appearance”). This, basically, is the upfront reason to believe that something discriminatory happened, and plaintiffs are supposed to be able to meet this initial burden easily. They have to show that

  1. The plaintiff is a member of a protected class
  2. They suffered an adverse employment action (such as being fired),
  3. They were qualified for their position, and
  4. Circumstances were present that give rise to an inference of unlawful discrimination.

See Clay v. United Parcel Service, Inc., 501 F.3d 695, 703 (6th Cir. 2007); cf. McDonnell Douglas Corp. v. Green, 411 U.S. 792, 802 (1973).

Next, the “return”: the burden shifts to the employer, who must articulate a “legitimate, nondiscriminatory reason” (LNR) for the rejection. McDonnell Douglas, 411 U.S. at 802.

Finally, the volley: if the defendant articulates its LNR, the plaintiff then has an opportunity to show that the LNR is merely a pretext for the discrimination. See Texas Department of Community Affairs v. Burdine, 450 U.S. 248, 253 (1981).

The Honest Belief Rule

One good way for plaintiffs to show that the employer’s LNR is pretextual is to show that employees similarly situated to the plaintiff were treated better. For example, if the employer refuses to hire a female employee because she was not a college graduate, the female could point to males hired for the same position who also lack college degrees. That suggests the employer’s LNR is bunk—and sex discrimination is much more likely.

Honest belief comes in at the next stage of the ping-pong point. Suppose a plaintiff is successful in showing that the employer’s LNR is false—in the earlier example, she was, in fact, a college graduate! One might think the plaintiff, at this point, had hit a screaming winner down the line—but the “honest belief” rule actually allows the defendant to hit the ball back again.

As stated by the Seventh Circuit, the “honest belief” rule says that an employer’s LNR is not pretext for discrimination if the employer honestly believed in the LNR—even if the plaintiff shows the LNR to be “mistaken, trivial, or baseless.” Kariotis v. Navistar International Transportation Corp., 131 F.3d 672, 676 (7th Cir. 1997).

Defendants who satisfy the “honest belief” rule may be entitled to summary judgment, which defeats the plaintiff’s claim before the plaintiff has a chance to make the case to a jury.

A Split of Burdens

The Seventh Circuit

In the Seventh Circuit, the plaintiff bears the burden to come up with facts that undermine the honesty of the employer’s belief in its LNR:

To successfully challenge the honesty of the company’s reasons [plaintiff] must specifically rebut those reasons. But an opportunity for rebuttal is not an invitation to criticize the employer’s evaluation process or simply to question its conclusion about the quality of an employee’s performance. Rather, rebuttal must include facts tending to show that the employer’s reasons for some negative job action are false, thereby implying (if not actually showing) that the real reason is illegal discrimination. . . . [T]he question is not whether the employer’s reasons for a decision are ‘right but whether the employer’s description of its reasons is honest.’

Kariotis, 131 F.3d at 677 (quoting Gustovich v. AT&T Communications, Inc., 972 F.2d 845, 848 (7th Cir.1992).

In Kariotis, a 57-year-old employee sued her employer, Navistar, for age and disability discrimination. Navistar fired her and replaced her with a younger woman after it suspected her of exaggerating the effects of knee surgeries to take unwarranted time off. Kariotis responded that she was indeed debilitated by her injuries and offered medical evidence from her doctor. In response, Navistar pointed to the fact that it had hired a private investigator firm to watch Kariotis moving about – and Navistar said that it honestly believed the P.I.’s findings that Kariotis was not as disabled as she claimed. The Seventh Circuit held that Kariotis at most had shown that Navistar was “careless in not checking the facts before firing her,” but that was not enough to carry her burden of showing illegal discrimination.

The Sixth Circuit

The Sixth Circuit puts the burden on the defendant, requiring it to produce facts that justify its honest belief:

‘[t]o the extent the Seventh Circuit’s application of the ‘honest belief’ rule credits an employer’s belief without requiring that it be reasonably based on particularized facts rather than on ignorance and mythology, we reject its approach’). Under this approach, for an employer to avoid a finding that its claimed nondiscriminatory reason was pretextual, ‘the employer must be able to establish its reasonable reliance on the particularized facts that were before it at the time the decision was made.’

Wright v. Murray  Guard, Inc., 455 F.3d 702, 708 (6th Cir. 2006) (quoting Smith v. Chrysler Corp., 155 F.3d 799, 806 (6th Cir. 1998).

In Clay v. United Parcel Service, Inc. (6th Cir. 2007), for example, a UPS worker was fired allegedly for missing three straight days of work. He countered that, based on the timing of his availability and the termination letter, he was given only two days before being fired. UPS claimed that it honestly believed Clay violated the three-day rule, but that wasn’t enough for the court. UPS had a burden to show “reasonable reliance on the particularized facts that were before it at the time the decision was made.” Clay, 501 F.3d at 714. UPS was “silent” in the face of this burden, see id., so it was error for the trial court to grant summary judgment to UPS based on the honest belief rule—the case should go forward to trial for a jury to decide the honesty of UPS’s belief.

Looking Forward

Honest-belief cases will be driven by their facts, which will differ significantly from case to case. But, in all cases, the split starkly switches the burden of proof from plaintiff to defendant, or vice versa, depending on which circuit’s law applies.

For further reading, Noam Glick’s student comment for the Loyola of Los Angeles Law Review  supports the Sixth Circuit, but Professor Ernest F. Lidge III in the Oklahoma City University Law Review favors the Seventh Circuit’s approach.