In Re TJX Companies Retail SEC. Breach Litigation ( 2009 )

United States Court of Appeals
For the First Circuit
Nos. 07-2828, 08-1075, 08-1076
IN RE: TJX COMPANIES RETAIL SECURITY BREACH LITIGATION.
__________
AMERIFIRST BANK and SELCO COMMUNITY CREDIT UNION,
Plaintiffs, Appellees/Cross-Appellants,
v.
TJX COMPANIES, INC., FIFTH THIRD BANK and FIFTH THIRD BANCORP,
Defendants, Appellants/Cross-Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Boudin, Lipez and Howard,
Circuit Judges.
Douglas H. Meal with whom Richard D. Batchelder, Jr. and Ropes
& Gray LLP were on brief for TJX Companies, Inc.
W. Breck Weigel with whom Robert N. Webner, Vorys, Sater,
Seymour and Pease LLP, James R. Carroll, Nicholas I. Leitzes and
Skadden, Arps, Slate, Meagher & Flom LLP were on brief for Fifth
Third Bank and Fifth Third Bancorp.
Joe R. Whatley, Jr. with whom Patrick J. Sheehan, Whatley
Drake & Kallas, LLC, Archie C. Lamb, Jr., F. Inge Johnstone and The
Lamb Firm, LLC were on brief for AmeriFirst Bank and SELCO
Community Credit Union.
March 30, 2009
BOUDIN, Circuit Judge. Before us are cross-appeals
stemming from a well known incident: the theft from TJX computers
of customer credit and debit card information and the subsequent
fraudulent use of the information. See generally In re TJX Cos.
Retail Sec. Breach Litig., 493 F. Supp. 2d 1382 (D. Mass. 2007);
McMorris v. TJX, 493 F. Supp. 2d 158 (D. Mass. 2007). Law suits
ensued, this case--involving banks injured in the debacle--among
them.
In January 2007, TJX Companies, Inc. ("TJX"),
headquartered in Massachusetts and a major operator of discount
stores, revealed that its computer systems had been hacked. Credit
or debit card data for millions of its customers had been stolen.
Harm resulted not only to customers but, it appears, also to banks
that had issued the cards ("issuing banks"), which were forced to
reimburse customers for fraudulent use of the cards and incurred
other expenses.
In May 2007, AmeriFirst Bank, based in Alabama, filed
suit in the federal district court in Massachusetts against TJX
and, in addition, against an Ohio bank and its parent--Fifth Third
Bank and Fifth Third Bancorp (collectively "Fifth Third").1 Fifth
1
The suit against TJX included other named plaintiffs who have
since settled. A second AmeriFirst suit, with another named
plaintiff (SELCO--a credit union in Oregon), was filed against
Fifth Third in the district court. The two cases were consolidated
and, as allegations against Fifth Third in the second suit mirror
those in the first, we refer only to "the complaint."
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Third served as "processing bank" for TJX transactions, receiving
the data from the customer's initial charge for a purchase and,
after high-speed verification from the issuing bank, authorizing
the charge. Visa and Mastercard each had a network and regime for
such purposes.
AmeriFirst's complaint, seeking class action status for
issuing banks, charged that both TJX and Fifth Third were variously
at fault: that TJX and Fifth Third failed to follow security
protocols prescribed by Visa and MasterCard to safeguard personal
and financial information; that the breaches occurred from July
2005 onward but were discovered and disclosed only later; and that
the issuing banks suffered losses from reimbursing customers for
fraud losses, monitoring customers accounts, and cancelling and
reissuing cards.
The multi-count complaint charged (1) negligence, (2)
breach of contract, (3) negligent misrepresentation, and (4) unfair
or deceptive practices under chapter 93A, Mass. Gen. Laws ch. 93A
(2008). The defendants moved to dismiss for failure to state a
claim. Fed. R. Civ. P. 12(b)(6). On October 12, 2007, the
district court dismissed the negligence and breach of contract
claims but refused to dismiss claims based on negligent
misrepresentation and chapter 93A. (A fifth claim, for "negligence
per se," was dismissed and is not at issue.) In re TJX Cos. Retail
Sec. Breach Litig., 524 F. Supp. 2d 83.
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Plaintiffs then moved to amend their complaint, seeking
to add a claim for conversion and also new facts to the chapter 93A
claim. On November 29, 2007, the district court provisionally
denied class status; if made final, this denial would in turn
defeat subject matter jurisdiction based on the minimal diversity
provisions of the Class Action Fairness Act, 28 U.S.C. § 1332(2006). The court invited briefing as to whether, if class action
status were ultimately denied, it should transfer the case to state
court. In re TJX Cos. Retail Sec. Breach Litig., 246 F.R.D. 389.
On December 18, 2007, the court denied the motion to
amend the complaint, it made the denial of class status final, and
it ordered the transfer of the case to the Massachusetts Superior
Court. Although all but two of the claims had been dismissed, the
district court designated its pre-transfer rulings as "without
prejudice" to reconsideration by the state court. At defendants'
request, this court stayed the transfer pending review on appeal.
TJX and Fifth Third now appeal to this court, urging
principally that all claims against them should have been dismissed
with prejudice and that in any event transfer to the state court
was precluded by governing precedent. AmeriFirst and SELCO raise
standing and finality objections to defendants' appeal and ask for
affirmance of the transfer order; but by cross appeal, they say
that dismissal of their other claims was error and that both class
action status and the motion to amend should have been allowed.
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Jurisdiction, Standing and Finality. Although no party
has questioned it, we are compelled to consider first an oddity
that might seem to imperil subject matter jurisdiction.
Jurisdiction in the district court rested on the minimum diversity
provision available only for class actions, 28 U.S.C. § 1332, and
ultimately the district court ruled that class certification was
improper. So one might ask: how do the parties now get to litigate
on the merits whether specific counts did or did not state claims?
The answer is the district judge had provisional
jurisdiction to decide those merits issues--because whether class
action status was sustainable depended in part on what claims were
on the table. "In such cases it is both proper and necessary for
the trial court first to resolve the merits of the claim to the
extent necessary to allow the court to properly determine its own
jurisdiction." Augustine v. United States, 704 F.2d 1074, 1079
(9th Cir. 1983). See generally Bell v. Hood, 327 U.S. 678 (1946).
In the end, after disposing of standing and finality
objections, our analysis of the claims--both those sustained and
those dismissed--leads us to agree for the most part with the able
district judge's analysis (although not with the transfer order)
but to disagree in one respect that reopens the class action issue.
We therefore end by remanding for further proceedings as explained
below.
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The standing and finality objections are directed to bar
defendants' argument that two remaining counts of the complaint--
negligent misrepresentation and chapter 93A--should have been
dismissed. Plaintiffs say that because the district court
dismissed other counts and thereafter transferred the case, the
merits rulings against the defendants on the remaining counts
caused no harm to them, beyond speculative collateral estoppel
effects that might flow from the rulings in future litigation.
Because the district court ruled that the two counts
stated viable claims, the defendants were plainly and concretely
disadvantaged: instead of an end to the liability claims, they now
face further litigation of these claims (indeed, in this very case,
because the transfer turns out to be invalid and the claims may
still end up going forward in the district court). They are thus
entitled to appeal from the adverse ruling--assuming that the
ruling is embodied in a final judgment. 28 U.S.C. § 1291.
Ordinarily a defendant may not appeal from a denial of
a Rule 12(b)(6) motion because the litigation in the trial court
will not have concluded. But here the district court brought the
case before it to an end by the class action ruling and purported
transfer. Appeals from transfers between federal courts are
sometimes immediately appealable and sometimes not; but where the
transfer court lacks power to transfer, an order purporting to do
so can hardly defeat review of an otherwise final judgment.
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Plaintiffs also argue that the defendants' appeal is
barred because the district court said that its merits rulings were
without prejudice to reconsideration by the state courts.
Dismissals without prejudice are sometimes deemed to prevent an
immediate appeal where they represent an invitation to a plaintiff
to cure some technical deficiency by re-filing in the same court.
E.g., Umbenhauer v. Woog, 969 F.2d 25, 30 (3rd Cir. 1992). In this
case, no such invitation was extended by the district court.
Finally plaintiffs invoke Balcom v. Lynn Ladder &
Scaffolding Co., 806 F.2d 1127 (1st Cir. 1986), which refused to
allow a third-party defendant, vindicated by a jury, to appeal from
a judgment in its favor. This defendant wanted to challenge jury
findings, fearing that they would prejudice it in future
litigation. This court said that the findings were not essential
to the judgment and thus would have no collateral estoppel effect.
Id. at 1127. Balcom is clearly not on point.
Negligent misrepresentation. We therefore turn to the
merits of defendants' appeal, starting with the negligent
misrepresentation claim which the district court found adequately
alleged for purposes of Rule 12(b)(6). Review of Rule 12(b)(6)
rulings is de novo. First Medical Health Plan, Inc. v. Vega-Ramos,
479 F.3d 46, 51 (1st Cir. 2007). At the outset, one has to
understand the nature of the claim as stated in the complaint and
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as thereafter clarified by the plaintiffs in resisting the motion
to dismiss.
The complaint alleged that Fifth Third has contracts with
MasterCard and Visa that require compliance with operating
regulations adopted by each credit card organization and that TJX
and Fifth Third similarly have a contract that requires TJX to
comply with such regulations. It further alleged that TJX and
Fifth Third ignored security measures required by the operating
regulations--for examples, that signatories deploy a firewall
configuration, protect stored data, encrypt transmission of
cardholder data, and track access to cardholder data and network
resources.
But although TJX and Fifth Third are charged in the
complaint with misrepresentations, the plaintiffs' claim--as
elaborated their district court filings and brief on appeal--
appears to rest (with one doubtful exception as to Fifth Third2) on
a flimsier foundation than actual misrepresentation. Rather,
plaintiffs argue that by accepting credit cards and processing
payment authorizations, defendants impliedly represented that they
2
The possible exception is that the complaint alleges that
Fifth Third is a member of an organization that promotes security
measures and is so listed on its website and that, in context, this
amounts to an affirmative representation of compliance with various
standards; but it is not apparent that the website contains the
missing affirmative representations implied by the complaint, and
plaintiffs' brief to us does not rely on this allegation in
defending the claim but rather on the conduct theory just noted.
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would comply with MasterCard and Visa regulations and this was the
negligent misrepresentation.
Massachusetts law defines negligent misrepresentation
using the Restatement (Second) of Torts (1977), which in section
552 requires the following elements:
One who, in the course of his business,
profession or employment, or in any other
transaction in which he has a pecuniary
interest, supplies false information for the
guidance of others in their business
transactions, is subject to liability for
pecuniary loss caused to them by their
justifiable reliance upon the information, if
he fails to exercise reasonable care or
competence in obtaining or communicating the
information.
Nycal Corp. V. KPMG Peat Marwick LLP, 426 Mass. 491, 495-96
(1998)(quoting the Restatement).
It would almost surely stretch Massachusetts law too far
to say that merely doing credit card transactions with issuing
banks, whether directly (Fifth Third) or indirectly (TJX), is a
representation implied by conduct to third parties that the
defendants were complying with detailed security specifications of
Visa and MasterCard. The implication is implausible and converts
the cause of action into liability for negligence--without the
limitations otherwise applicable to negligence claims.
Conduct can be part of a representation, but the link
between the conduct and the implication is typically tight. Thus,
in Danca v. Taunton Sav. Bank, 385 Mass. 1, 9 (1982), the court
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upheld an implied representation claim where plaintiffs, in applying
for a mortgage, were told by the bank that it needed to assure
compliance with a zoning requirement; later by a combination of
words and action, the bank led the plaintiffs to believe that the
bank had found compliance. More recently the SJC said of Danca:
We emphasized the importance to our decision
of the defendant's "conduct and words" and
"response to the plaintiffs' inquiry," holding
it sufficient "that the representation was
reasonably understood as a statement that the
bank employees had looked at the plan and
found no problems."
Page v. Frazier, 388 Mass. 55, 66-67 (1983) (quoting Danca, 385
Mass. at 9).
Yet we stop short of holding that the district court had
to dismiss the misrepresentation claim in this case on the face of
a complaint that explicitly alleged misrepresentation. Recently
the Massachusetts trial court refused to dismiss virtually the same
claim brought by credit unions against Fifth Third and another
defendant for credit card losses resulting from a security breach.
CUMIS Ins. Soc., Inc. v. BJ's Wholesale Club, Inc., 23 Mass. L. Rep.
550 (Mass. Super. 2005). Plaintiffs naturally rely on this
decision, as did the district court.
Then, on summary judgment in CUMIS, it became crystal
clear that the charge of "misrepresentation" rested simply on the
doing of credit card business--the same implication from conduct
argument that plaintiffs offer in this case. The CUMIS court then
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granted summary judgment for defendants because inter alia such
conduct was not a misrepresentation under Massachusetts law. CUMIS
Ins. Soc., Inc. v. BJ's Wholesale Club, Inc., 24 Mass. L. Rep. 117,
*11-12 (Mass. Super. 2008). The ultimate disposition is therefore
far more helpful to defendants.
Ordinarily a district court does not have to look behind
the complaint and grant a motion to dismiss because later statements
by the plaintiff offer a narrower picture of what plaintiff expects
to prove at trial. Had the second CUMIS decision been available,
the district court might well have granted the motion, but summary
judgment is the more common method of disposing of claims that are
facially valid but prove (usually after discovery) to be unsupported
by evidence. The present claim thus survives, but on life support.
Chapter 93A. The provisions of chapter 93A invoked by
plaintiffs, M.G.L. ch. 93A §§ 2, 11, pertinently provide for a claim
for "unfair" or "deceptive" trade practices as between businesses--
the unfairness label in these provisions being a cross-reference to
more specific standards borrowed from an appropriate source of law.
Ciardi v. F. Hoffmann-La Roche, Ltd., 436 Mass. 53, 70-72 (2002).
Plaintiffs offered three different theories invoking specific
standards:
•negligent misrepresentation (already alleged
as a separate tort) under Massachusetts law,
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•violation of section 5 of the Federal Trade
Commission Act, 15 U.S.C. § 45(a)(1) (2006),
which chapter 93A cross-references,3 and
•violation of a federal statute that protects
information that customers confide to
financial institutions, Gramm-Leach-Bliley
Act, 15 U.S.C. § 6801 (2006).
The district court sustained only the first of these theories and
it rejected the other two.
The negligent misrepresentation claim is likely to have
no future in this case for reasons just explained and, if it falls,
so too does its use under chapter 93A. Townsends, Inc. v. Beaupre,
47 Mass. App. Ct. 747, 755 (1999). Further, the district court
found--and we below uphold its ruling--that the negligent
misrepresentation claim, whether standing alone or under chapter
93A, is not certifiable under the class action rubric. This brings
us to the second theory (plaintiffs have abandoned the third).
Plaintiffs contend that their second theory--that
defendants' lack of security measures was "unfair" under the Federal
Trade Commission Act--provides an alternative basis for its chapter
93A claim. The district court disagreed, saying that the unfairness
characterization rested on consent decrees of the Federal Trade
3
M.G.L. ch. 93A § 2 ("It is the intent of the legislature that
in construing paragraph (a) of this section . . . courts will be
guided by the interpretations given by the [FTC] and the Federal
Courts to section 5(a)(1) of the [FTCA]."), as well as case law,
see PMP Associates, Inc. v. Globe Newspaper Co., 366 Mass. 593, 595
(1975) (Chapter 93A "directs us to consider the interpretations of
unfair acts and practices under s.5 of the Federal Trade Commission
Act . . . .").
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Commission and (the court said) a consent decree is not under
Massachusetts law an authoritative determination for purposes of
chapter 93A. Whitinsville Plaza, Inc. v. Kotseas, 378 Mass. 85, 101
(1979). Plaintiffs read the case more narrowly.
However Whitinsville may be read, plaintiffs' claim here
rests on far more than consent decrees, which sometimes do go beyond
legal obligations. Specifically, they invoke (1) an FTC complaint
against TJX based on the very security lapse charged here and (2)
at least two other cases in which the FTC ruled that similar conduct
violated the Federal Trade Commission Act.4 The FTC complaint
against TJX states (in paragraph 12):
[R]espondent's failure to employ reasonable
and appropriate security measures to protect
personal information caused or is likely to
cause substantial injury to consumers that is
not offset by countervailing benefits to
consumers or competition and is not reasonably
avoidable by consumers. This practice was and
is an unfair act or practice.
Use of FTC precedent--certainly as to decided cases like
DSW and BJ's--is directly supported by chapter 93A itself. Further,
Massachusetts case law treats FTC complaints as an expression of the
4
FTC Complaint, In the Matter of The TJX Companies, File No.
072-3055; Press Release, Fed. Trade Comm'n, Agency Announces
Settlement of Separate Actions Against Retailer TJX, and Data
Brokers Reed Elsevier and Seisint for Failing to Provide Adequate
Security for Consumers' Data (Mar. 27, 2008) (the release says that
over twenty FTC complaints have been brought against similar
conduct by other companies); In re DSW Inc., Docket C-4157, 2006 WL
752215 (F.T.C. Mar. 7, 2006); In re BJ's Wholesale Club, Inc.,
Docket C-4148, 2005 WL 2395788 (F.T.C. Sept. 20, 2005).
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FTC's views, Schubach v. Household Fin. Corp., 375 Mass. 133, 135
(1978) (relying in part on “several complaints” issued by the FTC),
and adjudicated FTC complaints are even more potent. So the chapter
93A claim can go forward on this second theory unless derailed by
two TJX counter-arguments--to which we now turn.
The first--that chapter 93A requires a closer association
than its indirect connection with AmeriFirst--was answered by the
district court. Case law does require a business relationship,
e.g., Imprimis Investors, LLC v. KPMG Peat Marwick LLP, 69 Mass.
App. Ct. 218, 230-31 (2007), but here a jury might say that TJX was
regularly seeking payment from the issuing banks through an
intermediary (Fifth Third) and that this is a close enough
connection. At least at the complaint stage, this seems enough.
TJX next argues correctly that chapter 93A is intended
exclusively for egregious conduct, see Ahern v. Scholz, 85 F.3d 774,
797-98 (1st Cir. 1996), and--it contends--that either deliberate
wrongdoing or personal benefit is present in virtually all of the
sound case law. Perhaps policy might make this a desirable stopping
point, given the vagueness of the unfairness standard and
availability of a private damages remedy unchecked by agency
prudence.
But Massachusetts decisions do not say that deliberate
wrongdoing or self-benefit are required; seemingly systematic
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recklessness may suffice.5 Knowing so little about the extent of
TJX's or Fifth Third's fault at the complaint stage, we think that
at best TJX's argument is one that would have to await discovery and
perhaps a summary judgment motion. The procedural caution shown in
CUMIS is easily justified on this issue.
Finally, Fifth Third argues that the chapter 93A claim
must fail against it because none of its acts occurred “primarily”
or “substantially” within Massachusetts. See M.G.L. ch. 93A, § 11.
But again, the allegations are sufficient at this stage. Fifth
Third is alleged to have an office or offices in Massachusetts,
which under CUMIS is arguably sufficient, 23 Mass. L. Rep. 550, at
*16-17; and presumably Fifth Third's communicating to and from TJX's
servers in Massachusetts is part of the causal chain.
One final point as to the unfairness-based claim under
chapter 93A. The district court indicated, in its decision on
October 12, 2007, that federal subject matter jurisdiction might
independently attach to such a claim--regardless of class action
status--because a federal issue might be deemed embedded in the
5
See Briggs v. Carol Cars, Inc., 407 Mass. 391, 396-97 (1990)
("We also reject the argument that the judge erred in concluding
that the defendant's representation was recklessly made. It is
enough that the judge found on adequate evidence that the defects
in the vehicle were readily ascertainable by the defendant. If a
statement of fact which is susceptible of knowledge is made as of
one's knowledge and is false, it may be the basis of an action for
deceit); Pietrazak v. McDermott, 341 Mass. 107, 109-10 (1960). See
also Kozdras v. Land/Vest Properties, Inc., 382 Mass. 34, 43
(1980); Glickman v. Brown, 21 Mass. App. Ct. 229, 235 (1985).
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state law claim. It did not pursue the issue because it rejected
the theory; but we are now reinstating that theory and class action
status is at best uncertain.
The embedded issue theory, associated with Smith v.
Kansas City, 255 U.S. 180 (1921), raises a complicated and much
mooted problem as to the proper construction of the "federal
question" statute. 28 U.S.C. § 1331. The answer may not matter in
this case: the district court's class-action analysis suggested that
because individual bank recoveries may be small, the plaintiffs may
have no practical interest in pursuing this case unless
certification is granted.
But if the Smith theory becomes critical, jurisdiction
should not be assumed merely because the state claim resorts to
federal precedent; nor is it perfectly clear that Massachusetts
regards the section 5 standard as binding (as opposed to merely
informative precedent to be considered)--which would arguably not
suffice even under Smith. It is enough to warn that there is
precedent and commentary that would have to be consulted and briefed
if and when necessary.6
6
See Erwin Chemerinsky, Federal Jurisdiction § 5.2, at 289-95
(5th ed. 2007); Grable & Sons Metal Prod., Inc. v. Darue
Engineering & Mfg., 545 U.S. 308, 315 (2005); Cambridge Literary
Prop., Ltd. v. W. Goebel Porzellanfabrik G.m.b., 510 F.3d 77, 95-96
(1st Cir. 2007); PCS 2000 LP v. Romulus Telecomm., Inc., 148 F.3d
32, 35 (1st Cir. 1998).
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Negligence. Plaintiffs say that the district court erred
in dismissing their simple negligence claim, a ruling that it based
upon the so called economic loss doctrine. Massachusetts, which is
not alone, holds that “purely economic losses are unrecoverable in
tort and strict liability actions in the absence of personal injury
or property damage." Aldrich v. ADD Inc., 437 Mass. 213, 222
(2002). Like "duty" and "proximate cause," the doctrine cabins what
could otherwise be open-ended negligence liability to anyone
affected by a negligent act.
AmeriFirst says that it did suffer property damage
because it had a property interest in the payment card information,
which the security breach rendered worthless. Electronic data can
have value and the value can be lost, but the loss here is not a
result of physical destruction of property. Indeed, a reduction in
real property value, by dumping of contaminants in the neighborhood
but not on plaintiff's property was held to be economic loss. Lewis
v. General Electric, 37 F.Supp.2d 55 (D. Mass. 1999).
Plaintiffs offer policy arguments for limiting the
economic loss doctrine, but the physical injury requirement reflects
existing precedent, Lewis; Am. Tel. & Tel. Co. v. IMR Capital Corp.,
888 F. Supp. 221, 247 (D. Mass. 1995). CUMIS itself invoked the
economic loss doctrine to bar a negligence claim on the same facts.
23 Mass. L. Rptr. 550, at *8-9. Accord, Pa. State Employees Credit
Union v. Fifth Third Bank, 398 F. Supp. 2d. 317, 326 (M.D. Pa.
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2005). Nor will we certify an issue where state law is clear.
Cantwell v. Univ. of Mass., 551 F.2d 879, 880 (1st Cir. 1977).
Breach of contract. Plaintiffs also do not persuade us
that the district court erred in dismissing their contract claims.
Here, Visa and Mastercard bound participating banks like Fifth Third
to certain security procedures and approving banks like Fifth Third
bound sellers like TJX for whom they processed payments; but the
issuing banks were not parties to either of these contracts and can
therefore bring claims only if they were third-party beneficiaries.
Massachusetts law follows the third-party beneficiary
test of the Restatement (Second) of Contracts § 302 (1981), see Rae
v. Air-Speed, Inc., 386 Mass. 187, 195 (1982), which is relatively
hospitable to claims by those purporting to be third-party
beneficiaries--except where the direct parties to the contract have
"otherwise agreed." Section 302(1) states:
Unless otherwise agreed between promisor and
promisee, a beneficiary of a promise is an
intended beneficiary if recognition of a right
to performance in the beneficiary is
appropriate to effectuate the intention of the
parties and . . . the circumstances indicate
that the promisee intends to give the
beneficiary the benefit of the promised
performance.
The parties to the contracts in this case appear to have
"otherwise agreed." The agreement between Fifth Third and TJX
provides: "This Agreement is for the benefit of, and may be enforced
only by, Bank and Merchant . . . and is not for the benefit of, and
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may not be enforced by any third party." Plaintiffs argue that this
express language is superceded by provisions in the Mastercard and
Visa Operating Regulations. The regulations do say that they
prevail where they conflict with provisions in the merchant
agreements, but here the regulations do not conflict.
Instead, the MasterCard Operating Regulations state that
MasterCard "shall have the sole right to interpret and enforce" its
regulations, and the Visa Operating Regulations say that they "do
not constitute a third-party beneficiary contract as to any entity
or person . . . or confer any rights, privileges, or claims of any
kind as to any third parties." CUMIS is in accord. 23 Mass. L.
Rptr. 550, at *5-6. See also Pa. State Employees Credit Union, 398
F. Supp.2d at 323-26.
Conversion. Plaintiffs did not plead a claim for
conversion in their original or amended complaint but sought to add
it on October 25, 2007, a month after submitting the amended
complaint. The district court denied the motion on the ground that
the claim was not viable, saying that conversion related only to
interference with tangible property, and that plaintiffs claim
concerned intangible property. We review this denial for abuse of
discretion. Aponte-Torres v. Univ. of P.R., 445 F.3d 50, 58 (1st
Cir. 2006).
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Whether or not Massachusetts limits conversion claims to
tangible property is debatable,7 but even if it does not, such a
claim is less than a neat fit. Conversion implies appropriation,
which is hardly the first word that comes to mind--to describe the
store's behavior--when a customer gives a store a credit card and
the data is then filched from the store by a third party. Still,
the conversion concept is loosely defined, under Massachusetts law
as elsewhere, e.g., Kelley v. LaForce, 288 F.3d 1, 11-12 (1st Cir.
2002); so perhaps this too is a debatable issue.
In all events, the claim is not straightforward, could
have been presented in the original complaint, and does not depend
on newly discovered facts. The district court's decision not to
entertain a belated claim on top of numerous ones already pled and
under consideration, was not an abuse of discretion. Nor did the
court have to allow belated amendment of the chapter 93A claim to
add facts that could have been asserted earlier.
Class certification. After determining which claims
survived, the district court then applied the customary tests to
decide whether class action status could be sustained for the case,
see Fed. R. Civ. P. 23(a), (b), and provisionally concluded that
certification was not justified. This judgment was explicitly
limited to the two claims that survived. Ultimately, the district
7
Compare John G. Danielson, Inc. v. Winchester-Conant Props.,
Inc., 186 F. Supp. 2d 1, 28 (D. Mass. 2002), with Discover Realty
Corp. v. David, 2003 Mass. App. Div. 172, 175 (2003).
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court denied the request to amend and made final its denial of class
status.
Plaintiffs expressly decline to appeal from the denial of
class certification of the two claims in question--the negligent
representation claim and the chapter 93A claim resting on the same
theory. But arguing that some of the district court's discussion
is mistaken, or overcome by proffered amendments to the class
definition, they express concern that some of the discussion might
imperil certification on remand of any other claim that we might
reinstate on appeal--which is just what we are doing.
Conversely, TJX (although for intricate reasons not Fifth
Third) appears to agree that the district court's denial of
certification is mooted by plaintiffs' failure to appeal it; but
defendants themselves urge that--should we reinstate any of the
dismissed claims--we "affirm" the denial of certification and
"conclude that it precluded class certification of any revived
claims(s)." In other words, both sides suggest that we resolve,
although in opposite ways, a question not reached by the district
court.
The district court's resolution of the certification
issue before it--not to certify the negligent misrepresentation
claim--turned primarily on its conclusion that that claim required
proof of individual reliance on the misrepresentation--directly so
for the tort claim and at least indirectly so for the chapter 93A
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claim. On this basis, the district court found that class issues
would not predominate over individual-party issues, defeating the
only Rule 23(b) precondition that the court deemed viable.
It is not clear to us whether a chapter 93A claim based
on an unfairness theory would necessarily raise the same problem or
be barred on the same basis. The unfairness theory appears to look
to what the defendants did (or failed to do) rather than on the
banks' reliance on supposed misrepresentations; but the district
court's discussion of proof of causation of loss as a separate
individual-party issue may (or may not) apply to unfairness claims
as well. Neither side has briefed this issue and obviously the
district court has not decided it.
The district court also expressed concern about whether
the putative class was properly defined by plaintiffs and about
whether plaintiffs could provide fair and adequate representation,
also a precondition for class status. Fed R. Civ. P. 23(a)(4). But
the former concern might perhaps be cured by the proffered
amendments; and the latter directly related to the claims against
Fifth Third and the conflicting economic interests of banks that are
both issuers and acquirers; claims against TJX might be unaffected.
The district court showed an enviable mastery of class
action law and analysis, and the wisest course is to let it decide
in the first instance whether the chapter 93A unfairness theory
merits class status. To pick apart an integrated analysis and
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comment on specific reasons, as plaintiffs urge, would be unsound;
it would be even more unsound to decide, as defendants urge, the
class status of the revived claim unless and until the district
court considers the issue and it is properly briefed to us.
Transfer. Having denied certification, the district
court concluded that the case could not proceed in federal court,
partly because too little was at stake for the individual plaintiffs
but primarily because ordinary diversity is lacking once the minimal
diversity provided for a qualified class action fails. Defendants
attack, and plaintiffs defend, the transfer order--authority to
transfer being "a legal question we review de novo." Mills v.
Maine, 118 F.3d 37, 51 (1st Cir. 1997) (citation omitted).
Mills squarely decided "that, in the absence of any
specialized state statute, 'it is the duty of the trial court, if
it finds that jurisdiction does not exist, to proceed no further but
to dismiss the suit.'" Id. at 52 (emphasis in original) (quoting Joy
v. Hague, 175 F.2d 395, 396 (1st Cir. 1949)). Most of Mills'
reasoning would apply even if there were a Massachusetts statute
authorizing such a transfer, compare Weaver v. Marine Bank, 683 F.2d
744 (3rd Cir. 1982); anyway, no such statute is invoked.
Mills' ruling on transfers to state courts was not, as
has been suggested, merely dictum. In Mills, the district court had
refused to transfer to state court a suit that fell outside its own
subject matter jurisdiction and on appeal appellants insisted that
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the district court should have transferred the case to state court.
This court then considered the claim and decided that the district
court had no authority to make such a transfer. This holding binds
district courts and, indeed, this panel. Muskat v. United States,
554 F.3d 183, 189 (1st Cir. 2009).
In ordering transfer, the district court said that its
prior merits rulings were "'without prejudice' to reexamination in
the courts of the Commonwealth." TJX says that this too was error.
The "without prejudice" label has different meanings in different
contexts, e.g., In re Sonus Networks, Inc., 499 F.3d 47, 60 n.6 (1st
Cir. 2007); perhaps the district judge meant only that a transferee
court can revisit its prior rulings in the same case. Rio Mar
Assocs., LP v. UHS of P.R., Inc., 522 F.3d 159, 167 (1st Cir. 2008).
It would be quite another matter to decide a merits issue
but then purport to deprive the decision of res judicata effect in
future cases--a matter governed by established rules. E.g., Ramallo
Bros. Printing, Inc. v. El Dia, Inc., 490 F.3d 86 (1st Cir. 2007).
But the "without prejudice" gloss here was commentary incident to
the transfer order and, as we are vacating that order and remanding
the case, we treat the characterization as falling with the order.
Accordingly, we affirm (1) the district court's dismissal
of the negligence and breach of contract claims, (2) its denial of
the motion to amend the complaint, and (3) its sustaining of the
negligent misrepresentation claim (and use as a theory under chapter
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93A, but without prejudice to a motion by defendants for summary
judgment), but we vacate (4) its dismissal of the chapter 93A claim
based on the unfairness theory and (5) its transfer order and no-
prejudice ruling, and we remand for further proceedings consistent
with this decision. Each party will bear its own costs on the
appeal.
It is so ordered.
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