Chief Litigation Officer Summit – September 8-10 2013

The National Law Review is pleased to bring you information about the upcoming Chief Litigation Officer Summit.

 

Chief Lit Officer Sept 2013

 

When: 8-10 September 2013
Where: The Ritz-Carlton, Amelia Island, FL, USA

The primary objective of the Chief Litigation Officer Summit is to explore the key aspects and issues related to litigation best practices and the protection and defense of corporations. The Summit’s program topics have been pinpointed and validated by leading litigation counsel as the top critical issues they face.

 

Third-Party Litigation Funding Comes of Age

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Law firm Chief Marketing Officers (CMOs) are on the front line of client development, and thus have an unobstructed view of how the legal market for complex litigation is developing. As budget pressures continue to weigh on corporate general counsel, the need for law firms to adjust their pricing to secure new clients is clearly being felt – some firms are now hiring specialty personnel to focus solely on the question of proper pricing. CMOs are thus actively speaking the lingua franca of today’s latest fee structures – from RFPs to AFAs and discounted fees.

Given this, it is surprising to discover that many otherwise business savvy CMOs know little about the emergence of commercial litigation finance. While some are keenly aware of the new industry’s progress – and eager to share their involvement in the funding of multiple cases – others are seemingly unfamiliar with the advent of specialist funding companies and the business development opportunities that they could present for them.

In fairness, due to the often confidential nature of commercial litigation finance, the commercial litigation finance industry has been somewhat constrained in publicizing itself. One example of this is at a recent conference I sat next to the sharp CMO of a top firm who asked me what litigation finance did and what company I worked for. I explained to him that we financed legal fees in multi-million dollar cases, and that we had recently funded a case involving his own firm!

At its most basic level, litigation finance is very straightforward. A third-party funds legal fees and expenses associated with a litigation or arbitration, in return for a portion of the ultimate proceeds (settlement or judgment), if any. Importantly, the funding is typically “non-recourse”, meaning that if there is no recovery for the plaintiff, the litigation financier receives no fee.

Claimants have historically found ways to fund their cases – with available capital, through a bank loan, or by agreeing to a contingency fee with their attorney. What has changed recently is the emergence of specialty finance companies that limit their work to the financing of litigation. These firms – which first appeared in Australia a decade ago, and are now active in the United Kingdom and the United States.  They typically invest in large-scale and complex commercial litigation, with investments (and thus legal fees) on the order of several million dollars.

Not all cases are appropriate for litigation financing, and certain criteria must be met as part of a careful due diligence process. Four considerations include:

  1. the merits of the claim – the case must stand a very strong chance of success on the law and facts;
  2. the ratio of costs/proceeds – the ratio of legal fees (and other costs) must be in proper proportion to the expected proceeds (to allow for reasonable costs associated with financing – typically a ratio of at least 1:4 is required);
  3. the duration of the proceedings – as the cost of financing will usually be related to the time the case takes to resolve (given the time value of money), notice must be paid to the expected length of the case; and
  4. the enforceability of judgment – it must be clear at the outset that, if the claim is successful, the plaintiff will be able to collect its judgment from the defendant.

Once an investment is made, litigation financiers are careful as to their involvement in a given case. Important rules of legal ethics are respected so that the funder does not interfere with case strategy, settlement decisions, or the attorney-client relationship. And, as mentioned above, the financing is typically kept confidential between the parties.

Given the challenge of drawing in new clients, law firm CMOs must leverage every available advantage. In several business development scenarios, the prospect of litigation finance can help:

  • Fee negotiations – in situations where a client would prefer to work with a given firm – but the client will not (or cannot) pay the firm’s standard hourly fees – financing can be used to pay such fees and allow the case to proceed;
  • Alternative to contingency fee – in situations where a firm is asked to act on a contingency fee basis, a litigation financier can step in to provide a similar result: the firm receives its standard hourly fees, paid for by the funder, which in turn only receives compensation in the event of a “win” (sometimes referred to as a “synthetic contingency”);
  • RFP (request for proposal) – in situations where an RFP has been issued by a potential client, a firm’s response may be better received if it makes proper mention of litigation finance as an innovative variation to AFA (alternative fee arrangements); and
  • Fee “fatigue” – in situations where an existing client involved in extended litigation has begun to express concern regarding mounting fees (perhaps on the eve of trial), litigation finance can offer immediate cash-flow relief and allow the firm to receive its full fees.

In short, litigation finance can offer law firm CMOs (and anyone involved in legal business development) a new tool with which to hammer out difficult pricing issues and fee structures for big-ticket litigation.

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The Consumer Financial Protection Bureau, Week in Review: June 10 – June 14, 2013

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CFPB Launches Regulatory Implementation Page

In an effort to streamline resources and better assist financial institutions implementing the many new rules and policies promulgated by the CFPB, the CFPB announced the launch of its “Regulatory Implementation” webpage, available here. The page is a one-stop shop for financial institutions looking for assistance in understanding some of the more salient differences and requirements of the rules. In addition to a number of quick-reference guides, the page also contains compliance guides for the following rules: (i) Ability to Repay/Qualified Mortgage; (ii) 2013 HOEPA Rule; (iii) Loan Originator Compensation; (iv) ECOA Valuations; (v) TILA HPML Appraisals; (vi) Escrows; and (vii) TILA and RESPA Servicing.

CFPB Examines Impact of Overdraft Practices on Consumers

On June 11, 2013, the CFPB released its “CFPB Study of Overdraft Programs” (the Report), which is available here. The Report was based upon (i) responses the CFPB received to a request for information published in the Federal Register in February 2012, and (ii) aggregate, institution-level information data and random samples of consumer checking accounts. Through the inquiry, the CFPB determined that overdraft programs are costly to consumers, provide substantial sources of checking account revenue for financial institutions, and vary widely across financial institutions.

The Report noted that overdraft practices employed by financial institutions are frequently very complex. Not only do the fees charged for overdraft protection vary, but many other differences exist throughout the industry, including: the number of times a consumer can be charged; whether there are caps on such charges; the amount of such caps; the scope of overdraft protection; and even the order in which transactions are posted. Each of these factors can play a significant role in determining the fees consumers will face. Accordingly, the CFPB’s report raises concerns about consumers’ ability to understand, navigate and anticipate fees.

In light of the Report’s findings, the CFPB has announced its intention to engage in further review of account-level data to better understand how differences in practices affect consumers.

CFPB Proposes New Redress System for Victims of Unlawful Activities

Under Section 1055(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB may obtain various types of monetary relief, such as restitution, refunds and damages, in both judicial and administrative proceedings. The CFPB collectively refers to such relief as “redress”, and can be required to receive such redress from a defendant and then distribute it to victims of unlawful activities. In order to better assist this process, which is known as “Bureau-Administered Redress,” the CFPB is proposing a new system of records that will enable the CFPB to manage distributions to consumers.

Specifically, the new system will enable the CFPB to: (i) track the collection, allocation and distribution of funds in the Civil Penalty Fund and redress monies; (ii) identify and locate victims who may receive such payments; (iii) determine the amounts that the CFPB will distribute to such victims; (iv) maintain associated account and financial information; and (v) develop reports to applicable tax officials regarding such payments.

The proposal, which is available here, states that any comments on the proposed system must be received no later than July 11, 2013. The new system will become effective on July 22, 2013, unless comments are received that result in a contrary determination.

CFPB Releases New Training Module to Combat Financial Exploitation of Older Americans

On June 12, 2013, the CFPB along with the Federal Deposit Insurance Corporation (FDIC), released a tool called “Money Smart for Older Adults.” The purpose of the module is to assist older adults (age 62 and older), as well as their caregivers, in avoiding and preventing financial exploitation. In addition, it provides information to educate consumers about planning for a secure financial future and making informed financial decisions.

The module, which consists of a scripted instructor guide, a participant/resource guide and Power Point slides, has been designed to be presented and administered by financial institution representatives, adult protective services agencies, senior advocacy organizations, law enforcement, and similar organizations and agencies.  The module is available, free of charge, on the FDIC website. Click here to view.

CFPB Assistant Director Tells Nonbanks to Quickly Implement Compliance Management Systems

During the American Bankers Association’s Regulatory Compliance Conference on June 12, 2013, Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, urged nonbank entities to implement compliance management systems without delay. She specifically pointed to many payday lenders, consumer reporting agencies, mortgage lenders and servicers, student lenders and debt collectors that have yet to implement these compliance management systems.

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Supreme Court Holds That Reverse Payment Patent Settlements Are Subject to Antitrust Scrutiny

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For over a decade, the antitrust enforcers at the Federal Trade Commission have challenged the type of patent settlement where a brand-name drug manufacturer pays a prospective generic manufacturer to settle patent challenges, and the generic manufacturer agrees not to bring its generic to market for a specified number of years. The lower federal courts have over the years rejected the challenges. However, on June 17, 2013, the Supreme Court addressed the issue in Federal Trade Commission v. Actavis, and in a 5-3 decision held that such settlements are subject to rule of reason antitrust scrutiny. However, beyond that conclusion, the Court left the questions of how to structure and resolve the rule of reason issue to the lower courts and future cases.

As Justice Breyer’s majority opinion summarized the issue and its holding:

Company A sues Company B for patent infringement. The two companies settle under terms that require (1) Company B, the claimed infringer, not to produce the patented product until the patent’s term expires, and (2) Company A, the patentee, to pay B many millions of dollars. Because the settlement requires the patentee to pay the alleged infringer, rather than the other way around, this kind of settlement agreement is often called a ‘reverse payment’ settlement agreement. And the basic question here is whether such an agreement can sometimes unreasonably diminish competition in violation of the antitrust laws.

In this case, the Eleventh Circuit dismissed a Federal Trade Commission (FTC) complaint claiming that a particular reverse payment settlement agreement violated the antitrust laws. In doing so, the Circuit stated that a reverse payment settlement agreement generally is ‘immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.’ And since the alleged infringer’s promise not to enter the patentee’s market expired before the patent’s term ended, the Circuit found the agreement legal and dismissed the FTC complaint. In our view, however, reverse payment settlement such as the agreement alleged in the complaint before us can sometimes violate the antitrust laws. We consequently hold that the Eleventh Circuit should have allowed the FTC’s lawsuit to proceed. (Citations omitted.)

The Court reasoned that even if the settlement agreement’s anticompetitive effects fall within the scope of the exclusionary potential of the patent, that fact or characterization cannot immunize the agreement from antitrust attack. Justice Breyer found that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well” and that “patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’ — and consequently antitrust law immunity — that is conferred by a patent.”

Justice Breyer acknowledged that a conclusion of antitrust immunity would find some degree of support in a general legal policy favoring the settlement of dispute. However, he concludes that this factor should not “determine the result here” but is offset by five sets of considerations:

First, the specific restraint at issue has the potential for genuine adverse effects on competition. To the Court, even though the settlement permitted the challenger to enter the market before the patent expired, the settlement also entrenched the patent holder for the period the challenger agrees to stay out of the market in exchange for a payment, delaying the potential for lower prices. As the Court put it, “The patentee and the challenger gain; the consumer loses.”

Second, these anticompetitive consequences will at least sometimes prove unjustified. To be sure, in some circumstances, the reverse payment may amount to no more than a rough approximation of the litigation expenses saved through the settlement, or compensation for other services the generic has promised to perform. In such circumstances, a patentee is not using its monopoly profits to avoid the risk of patent invalidation or a finding of no infringement. In the antitrust proceeding, the Court concludes, the patentee should have to show that such legitimate justifications are present.

Third, where a reverse payment threatens to inflict unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about.

Fourth, the majority believes that an antitrust action would be administratively feasible. The majority did not believe that it would be necessary to litigate patent validity to normally answer the antitrust question — an unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. “In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.”

Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling in some other way, without the potential to maintain and share patent-generated monopoly profits.

The FTC advocated that the Court adopt a rule that reverse payments are “presumptively unlawful” and that they be analyzed under a “quick look” approach, requiring the patentee to show empirical evidence of procompetitive effects. The Court rejected this position, instead instructing the issue undergo a full rule of reason analysis. In doing so, it left to the lower court the structuring of this and other rule of reason antitrust litigation on the issue.

In practical terms, the decision leaves many difficult issues to be grappled with, and the majority’s apparent confidence that the antitrust question is answerable without getting into the patent issues themselves may prove more aspirational than practical. Chief Justice Roberts’s dissent exposes one flaw:

The majority seems to think that even if the patent is valid, a patent holder violates the antitrust laws merely because the settlement took away some chance that his patent would be declared invalid by a court. …This is flawed for several reasons.

First, a patent is either valid or invalid. The parties of course don’t know the answer with certainty at the outset of litigation; hence the litigation. But the same is true of any hard legal question that is yet to be adjudicated. Just because people don’t know the answer doesn’t mean that there is no answer until a court declares one. Yet the majority would impose antitrust liability based on the parties’ subjective uncertainty about that legal conclusion.

The Court does so on the assumption that offering a ‘large’ sum is reliable evidence that the patent holder has serious doubts about the patent. Not true. A patent holder may be 95% sure about the validity of its patent, but particularly risk averse or litigation averse, and willing to pay a good deal of money to rid itself of the 5% chance of a finding of invalidity. What is actually motivating a patent holder is apparently a question district courts will have to resolve on a case-by-case basis. The task of trying to discern whether a patent holder is motivated by uncertainty about its patent, or other legitimate factors like risk aversion, will be made all the more difficult by the fact that much of the evidence about the party’s motivation may be embedded in legal advice from its attorney, which would presumably be shielded from discovery.

The FTC has hailed the decision:

The Supreme Court’s decision is a significant victory for American consumers, American taxpayers, and free markets. The Court has made it clear that [reverse payment] agreements between brand and generic drug companies are subject to antitrust scrutiny, and it has rejected the attempt by branded and generic companies to effectively immunize these agreements from the antitrust laws. With this finding, the Court has taken a big step toward addressing a problem that has cost Americans $3.5 billion a year in higher drug prices.

The FTC’s “victory lap” is probably premature. To be sure, we now know that blanket antitrust immunity for reverse payment settlements does not exist. However, everything else remains up for grabs. Until there are additional decisions grappling with the actual issue of liability issued, and reviewed, the extent and circumstances of antitrust liability is unclear. The risk-averse patent holder to whom Justice Roberts alluded might well be motivated to avoid utilizing reverse payments in structuring settlements in the future. In addition, the Competition Office of the European Union actively continues to examine reverse payments settlements, and there have been renewed calls for federal legislation banning such settlements.

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Basic Guidelines for Protecting Company Trade Secrets

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Under the Uniform Trade Secrets Act (UTSA), “trade secrets” are generally defined as confidential proprietary information that provides a competitive advantage or economic benefit. Trade secrets are protected under the Economic Espionage Act of 1994 (EEA) at the federal level, and the vast majority of states have enacted statutes modeled after the UTSA (note that some jurisdictions, such as California, Texas and Illinois, have adopted trade secret laws that differ substantially from the UTSA; thus, businesses should research laws in the relevant jurisdiction(s).). Under the UTSA, to be protectable as a trade secret, information must meet three requirements:

i. the information must fall within the statutory definition of “information” eligible for protection;

ii. the information must derive independent economic value from not being generally known or readily ascertainable by others using appropriate means; and

iii. the information must be the subject of reasonable efforts to maintain its secrecy.

Trade secret theft continues to accelerate among U.S. companies, and can have drastic consequences. To combat this threat, Congress and certain state legislatures have recently enacted legislation to broaden trade secret protection. As a result, it is paramount that companies safeguard all proprietary information that may qualify as protectable trade secrets. This blog post explains some key trade secrets concepts, and offers pointers on how to identify and protect trade secrets.

(1) Determine Which Data Constitutes “Information”

The UTSA-type statutes generally define “information” to include:

Financial, business, scientific, technical, economic, and engineering information;

Computer code, plans, compilations, formulas, designs, prototypes, techniques, processes, or procedures; and

Information that has commercial value, such as customer lists or the results of expensive research.

Courts have similarly interpreted “information” to cover virtually any commercially valuable information. Examples of information that has been found to constitute trade secrets includes pricing and marketing techniques, customer and financial information, sources of supplies, manufacturing processes, and product designs.

(2) “Valuable” and “Not Readily Ascertainable” Information

To be protectable, information must also have “economic value” and not be “readily ascertainable” by others. Courts generally determine whether information satisfies this standard by considering the following factors:

Reasonable measures have been put in place to protect the information from disclosure;

The information has actual or potential commercial value to a company;

The information is known by a limited number of people on a need-to-know basis;

The information would be useful to competitors and would require a significant investment to duplicate or acquire the information; and

The information is not generally known to the public.

(3) Take Reasonable Measures to Maintain Secrecy

Businesses should implement technical, administrative, contractual and physical safeguards to keep secret the information sought to be protected. Companies should identify foreseeable threats to the security of confidential information; assess the likelihood of potential harm flowing from such threats; and implement security protocols to address potential threats. Examples of security measures might include restricting access to confidential information on a need-to-know basis, employing computer access restrictions, circulating an employee handbook that outlines company policies governing confidential information, conducting entrance interviews for new hires to determine whether they are subject to restrictive covenants with former employers, conducting exit interviews with departing personnel to ensure that the employee has returned all company materials and agrees to abide by post-employment obligations, encrypting confidential information, limiting access to confidential information through passwords and network firewalls, track all access to network resources and confidential information, restrict the ability to email, print or otherwise transfer confidential information, employ security personnel, limit visitor access, establish surveillance procedures, and limit physical access to areas that may have confidential information.

Conclusion

This blog post is intended to provide some broad guidelines to identifying and protecting company trade secrets. Most if not all companies have confidential information that may be protectable as a trade secret. But certain precautions need to be in place to ensure that the information is protectable. Because each company and situation is different, you should seek advice about your specific circumstances.

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Tri-Agencies Release Final Rules on Wellness Programs

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On May 29, 2013, the U. S. Departments of Labor, Health and Human Services and the Treasury (the Tri-Agencies) issued final regulations (the final rules) implementing the changes that the Patient Protection and Affordable Care Act (PPACA) made to wellness programs. The final rules apply to both grandfathered and non-grandfathered group health plans and are effective for plan years beginning on or after January 1, 2014.

The final rules do not change the basic distinction between “participatory” wellness programs and “health-contingent” wellness programs. The final rules, consistent with the proposed rules, focus largely on revisions to health-contingent wellness programs. The key PPACA changes to the 2006 wellness regulations include:

  • Increases in the maximum allowable rewards under a health-contingent wellness program from 20% of the cost of coverage to 30% for non-smoking related programs and a 50% maximum for smoking related programs;
  • Clarifications of what constitutes a “reasonably designed” health-contingent wellness program; and
  • Additional guidance on reasonable alternatives that must be offered under any health-contingent wellness program so that the program remains non-discriminatory.

Participatory wellness programs are programs that either do not provide a reward or do not require an individual to meet a standard related to a health factor in order to obtain a reward. Participatory wellness programs are presumed to be nondiscriminatory if participation is made available to all similarly situated individuals, regardless of their health status. Examples include programs that reimburse employees for the cost of membership in a fitness center, or reward employees who complete a health risk assessment. These programs are easier to administer and not subject to the more exacting criteria that apply to health-contingent wellness programs.

Health-Contingent wellness programs require an individual to satisfy a health-related standard to obtain a reward. Examples include programs that provide a reward for smoking cessation, or programs that reward achievements for specified health-related goals, such as lowering cholesterol levels or losing weight. The final rules subdivide health-contingent wellness programs into two types: activity-only and outcome-based. An activity-only wellness program requires an individual to perform or complete an activity related to a health factor (e.g., a diet or exercise program), but it does not require the individual to reach or maintain a specific health result. In contrast, an outcome-based wellness program requires an individual to reach or maintain a specific health outcome (such as not smoking or attaining certain results on biometric screenings).

Modification to Maximum Rewards

All health-contingent wellness programs must satisfy five requirements to ensure compliance with the HIPAA non-discrimination rules. The final rules, as noted above, increase the maximum rewards allowed under a health-contingent wellness program. The five requirements are listed below and reflect the PPACA increases in the maximum rewards:

  1. The reward must be available to all similarly situated individuals;
  2. The program must give eligible individuals the opportunity to qualify for the reward at least once a year;
  3. The program must be reasonably designed to promote health and prevent disease;
  4. The reward must not exceed 30% of the cost of coverage (or 50% for programs designed to prevent or reduce tobacco use); and
  5. The program must provide a reasonable alternative standard to an individual who informs the plan that it is unreasonably difficult or medically inadvisable for him or her to achieve the standard for health reasons and therefore will not get the reward.

Clarifications to Reasonable Designs

Consistent with the 2006 regulations, the final rules continue to require that health-contingent wellness programs be reasonably designed to promote health or prevent disease. A program will meet this standard if it has a reasonable chance of improving health or preventing disease; is not overly burdensome; is not a subterfuge for discrimination based on a health factor; and is not highly suspect in the method chosen to promote health or prevent disease. The rules provide plan sponsors with a great deal of flexibility to design a wellness program.

Guidance on Reasonable Alternatives

The final rules modify the structure of the 2006 requirements with respect to providing reasonable alternatives for those individuals who are unable to attain the health-related goals of a health-contingent wellness program.

First, to satisfy the reasonable alternative requirement, the same full reward must be available to individuals who satisfy the reasonable alternative as is provided to individuals who are able to satisfy the standard program. As noted in the Preamble to the final rules, this means that the reasonable alternative must allow the individual a longer period to complete the program, and the reward earned must be the same as that given under the standard program.

The final rules do not require that the reasonable alternative be determined in advance and, consistent with past practice, allows the alternative to be set on an individual-by-individual basis. The final rules reiterate that, in lieu of providing a reasonable alternative, a plan or issuer may waive the otherwise applicable standard and simply provide the reward. Although in general a doctor’s verification is not needed for an individual to qualify for the reasonable alternative, the final rules do permit a doctor’s verification to be required under the activity-based reasonable alternative.

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New Data Breach Class Action has Two Million Plaintiffs

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Cyber breaches resulting in the release of personal identifiable information (PII) are increasingly common and now we are starting to see class action lawsuits filed as a result. In what will likely be the beginning of a wave of lawsuits filed as a result of cyber breaches, Schnucks Markets, operator of 100 supermarkets across the Midwest, recently removed a class action lawsuit filed against it to federal court stemming from a data breach that occurred in March in which 2.4 million credit card numbers were stolen.

The Class action complaint alleges Schnucks failed to properly and adequately safeguard its customer’s personal and financial data. In addition to common law negligence and disclosure, the plaintiffs allege a violation of the Illinois Personal Information Protection Act which requires a data collector of personal information to notify individuals in the most expedient manner possible and without unreasonable delay. The complaint alleges Schnucks waited over two weeks to notify its customers and then did so only through a press release as opposed to providing actual notice to individual consumers. Apparently Schnucks struggled to find the source of the breach and this delay may have continued to expose the PII of people who shopped at its stores.

cybercrime graphicSchnuck’s notice of removal to federal court states the grounds for removal include a class size of more than 100 people and damages at issue are greater than $5 million. Schnucks also explains that the data breach was the result of criminals hacking into its electronic payment systems at 23 stores. Further, during the relevant period, 1.6 million credit or debit card transactions took place at these stores. Schnucks calculates that 500,000 unique credit or debit cards were involved thus the putative class has at least 500,000 members.

Damages alleged by the plaintiffs include having their credit card data compromised, incurring numerous hours cancelling their compromised cards, activating replacement cards and re-establishing automatic withdrawal payment authorizations as well as other economic and non-economic harm. Given that data breaches are becoming increasingly common it is likely that there will be more lawsuits filed similar to Schnucks in the near future. Legal counsel experienced in cyber risk and insurance can assist retailers and insurance companies with handling such problems as they arise.