It is no longer a matter of if, but when companies that suffer a data breach will be sued in a class action lawsuit following a data breach. Many of those data breach cases get dismissed, as it is difficult for consumers to show they have suffered a compensable harm from a particular data breach.
What is less common is a public company getting hit with a class action lawsuit by investors for securities fraud following a data breach. Several companies have been sued under the theory that since the company failed to protect customer data and made false and misleading statements about the company’s business, operational and financial results, proposed class members of all persons and entities that purchased or acquired shares in the time frame leading up to and following the data breach are entitled to damages, interest, fees and costs.
The common allegations in these cases are that the company issued SEC disclosures and letters to shareholders that the company was doing well, and that it had effective data security measures in place or had improved efforts around data security, when, in fact, the data breach was caused by inadequate data security measures, that the company faced a higher risk of cybersecurity failure because of automation and efficiency initiatives, and therefore, the public statements were materially false and misleading.
When issuing public statements about data security on websites or through letters to investors or in public filings, consideration of how those statements can be used in the wake of a data breach is important. Otherwise, the increase in securities fraud litigation will continue, just as we have experienced with data breach class action litigation.