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Lone Star National Bank, N.A. v. Heartland Payment Systems, Inc.

United States Court of Appeals, Fifth Circuit

September 3, 2013

LONE STAR NATIONAL BANK, N.A.; AMALGAMATED BANK; FIRST BANKERS TRUST COMPANY, NATIONAL ASSOCIATION; PENNSYLVANIA STATE EMPLOYEES CREDIT UNION; ELEVATIONS CREDIT UNION; O BEE CREDIT UNION; SEABOARD FEDERAL CREDIT UNION Plaintiffs - Appellants
v.
HEARTLAND PAYMENT SYSTEMS, INC., Defendant-Appellee

Appeal from the United States District Court for the Southern District of Texas

Before SMITH, GARZA, and SOUTHWICK, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

This case arises out of a group of hackers' breach of Heartland Payment Systems, Inc.'s ("Heartland's") data systems, compromising confidential information belonging to customers of the plaintiff banks (together, the "Issuer Banks"). The district court dismissed the Issuer Banks' claims. The Issuer Banks appeal only the dismissal of their negligence claim. We REVERSE and REMAND for proceedings consistent with this opinion.

I

The Issuer Banks have contracts with Visa and MasterCard that allow them to issue payment cards, including both credit and debit cards, to their customers. When a customer uses one of these cards at a merchant, the card information is first sent to a bank with whom the merchant contracts, known as the "acquirer bank." The acquirer bank then sends the information to a processor, such as Heartland, and the processor sends the information to the issuer bank that issued the card. The approval or disapproval of use of the card is then transmitted back to the merchant through this chain.

Two acquirer banks, KeyBank and Heartland Bank (together, the "Acquirer Banks"), are members of the Visa and MasterCard networks. Heartland contracted with the Acquirer Banks to process their transactions. These contracts required Heartland to comply with the Visa and MasterCard regulations, which contain mechanisms for Visa and MasterCard network members to recoup losses in the event of a data breach.

Such a data breach occurred when hackers infiltrated Heartland's data systems and stole payment card information. As a result, the Issuer Banks allege they incurred costs associated with replacing the compromised cards and reimbursing customers for fraudulent charges. Lacking a written contract with Heartland, the Issuer Banks asserted various claims, including negligence and contract claims as third party beneficiaries of Heartland's contracts with other entities.

As to the negligence claim, the parties disputed whether Texas or New Jersey law governs. They agreed the economic loss doctrine under Texas law would bar the Issuer Banks' negligence claim, but disputed the applicability of the economic loss doctrine under New Jersey law. The district court dismissed all the Issuer Banks' claims, holding that even under New Jersey law, the economic loss doctrine would bar the Issuer Banks' negligence claim. The district court reasoned that by entering into the web of contractual relationships established by Visa and MasterCard, the Issuer Banks contracted for the specific remedies afforded by the Visa and MasterCard regulations and thus could not bring common law tort claims against another participant in the same web.

The Issuer Banks timely appealed the district court's dismissal of their negligence claim against Heartland.

II

We review motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) de novo, "accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiff." Highland Capital Mgmt., L.P. v. Bank of Am., Nat'l Ass'n, 698 F.3d 202, 205 (5th Cir. 2012) (quoting Bustos v. Martini Club Inc., 599 F.3d 458, 461 (5th Cir. 2010)). The well-pleaded facts must state a claim that is plausible on its face, and "[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 205 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).

The Issuer Banks assert that under New Jersey law, the economic loss doctrine does not bar their negligence claim. We agree. The economic loss doctrine generally limits a plaintiff seeking to recover purely economic losses, such as lost profits, to contractual remedies. See generally Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 671–72 (N.J. 1985). The New Jersey Supreme Court explained:

Generally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential ...

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