Community Bank of Trenton v. Schnuck Markets, Inc.
210 F. Supp. 3d 1022
S.D. Ill.2016Background
- Between Dec. 2012 and Mar. 2013 Schnucks experienced a data breach potentially affecting ~2.4 million payment cards; Plaintiffs are issuing banks/financial institutions that reimbursed customers and incurred costs.
- Plaintiffs sued Schnucks in federal court asserting federal jurisdiction under RICO (18 U.S.C. § 1961 et seq.) and CAFA, and pleaded 13 theories of relief (RICO, fiduciary duty, negligence variants, contract claims, consumer fraud, unjust enrichment, subrogation, declaratory/injunctive relief).
- Plaintiffs’ core factual theory: Schnucks failed to follow industry PCI-DSS standards, stored unencrypted card data in its internal processing environment, delayed isolating the breach, and thereby caused financial institutions to incur costs such as card reissuance and fraud remediation.
- The complaint and briefing were highly generalized: Plaintiffs did not identify specific misrepresentations, exact communications to plaintiffs, amounts lost, or particular predicate acts for RICO with the particularity required by Rule 9(b).
- The Court reviewed the pleading standards (Twombly/Iqbal and Rule 9(b)), found many claims implausibly or insufficiently pled, and granted Schnucks’ motion to dismiss: most claims dismissed without prejudice, some dismissed with prejudice (Illinois negligence/gross negligence). Plaintiffs were permitted to file an amended complaint.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RICO §1962(c)/(d) liability (wire/bank fraud predicates) was plausibly pleaded with required particularity | Schnucks made false/misleading representations or omissions about data security and used interstate wires/transactions to defraud banks; conspiracy and ‘‘cheat’’ theories support predicates | Allegations are conclusory, do not identify specific misrepresentations, wire transmissions, or resulting losses; Rule 9(b) not met; ‘‘cheat’’ theory overbroad | Dismissed without prejudice: RICO predicates inadequately pleaded under Rule 9(b); conspiracy claims also dismissed because no adequately pleaded underlying RICO violation |
| Whether a fiduciary duty existed between banks and Schnucks (IL and MO) | Banks relied on Schnucks’ data-security practices and thus were in a special/dominant–subservient relationship creating fiduciary duties | Relationship was a routine commercial arrangement among sophisticated parties; no facts show dominance/subservience or special trust | Dismissed without prejudice: no plausible factual basis for fiduciary duty under Illinois or Missouri law |
| Whether negligent misrepresentation/negligence (and negligence per se) were pleaded | Schnucks allegedly misrepresented data-security compliance; banks relied and suffered costs | Plaintiffs fail to identify specific false statements, duty, reliance, or statutory violation; economic loss issues; in IL no common-law duty recognized | Negligent misrepresentation dismissed without prejudice (IL & MO). Negligence/gross negligence: dismissed with prejudice in Illinois, without prejudice in Missouri. Negligence per se dismissed (IL with prejudice; MO without prejudice) |
| Whether contract-based claims (implied contract; third-party beneficiary; unjust enrichment; equitable subrogation) state plausible claims | Plaintiffs contend payment-network relationships and implied expectations of data security create contractual or equitable rights | Alleged network governed by express contracts; plaintiffs are likely incidental beneficiaries; no specific contract terms or consideration identified; plaintiffs did not allege payment of a third-party debt for subrogation | All such claims dismissed without prejudice (unjust enrichment and subrogation dismissed; inequitable theories allowed to be repled if facts plausibly support them) |
Key Cases Cited
- Erickson v. Pardus, 551 U.S. 89 (statement of Rule 12(b)(6) pleading standard)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (plausibility standard for complaints)
- Ashcroft v. Iqbal, 556 U.S. 662 (application of plausibility standard and dismissal principles)
- Haroco, Inc. v. Am. Nat. Bank & Trust Co. of Chicago, 747 F.2d 384 (7th Cir.) (elements of §1962(c) and person/enterprise distinction)
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (wire-fraud predicate need not prove actual reliance for RICO wire-fraud theory)
- H.J., Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229 (pattern of racketeering activity: continuity and relationship analysis)
- Beck v. Prupis, 529 U.S. 494 (RICO conspiracy requires agreement to violate substantive RICO)
- U.S. v. Weimert, 819 F.3d 351 (7th Cir.) (caution against overbroad application of wire/mail fraud statutes)
- Gandhi v. Sitara Capital Mgmt., LLC, 721 F.3d 865 (7th Cir.) (limits on liberal pleading where defendant controls the alleged fraudulent information)
- Swanson v. Citibank, N.A., 614 F.3d 400 (7th Cir.) (description of pleading facts to present a plausible, coherent story)