Silverpop Systems, Inc. v. Leading Market Technologies, Inc.

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 14-14258
Non-Argument Calendar
________________________
D.C. Docket No. 1:12-cv-02513-SCJ
SILVERPOP SYSTEMS, INC.,
Plaintiff – Counter Defendant – Appellee,
versus
LEADING MARKET TECHNOLOGIES, INC.,
Defendant – Counter Claimant – Appellant.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
________________________
(January 5, 2016)
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Before TJOFLAT and MARTIN, Circuit Judges, and ROSENTHAL, ∗ District
Judge.
PER CURIAM:
We AFFIRM the District Court’s well-reasoned and thorough decision for
the reasons stated in the Court’s order of February 14, 2014. A copy of that order
is attached below.
AFFIRMED.
∗
The Honorable Lee H. Rosenthal, U.S. District Judge for the Southern District of Texas, sitting
by designation.
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APPENDIXt
ORDER
This matter is before the Court on Plaintiff's motions to compel discovery
[Doc. Nos. 45 and 47},l motion for summary judgment [Doc. No. 53], and motions
in limine [Doe. No. 65 and 661,2 and Defendant's motion for partial summary
judgment [Doe. No. 52].
I. FACTUAL BACKGROUND
Plaintiff Silverpop Systems, Inc. ("Silverpop") provides digital marketing
services to businesses such as Defendant Leading Market Technologies, Inc.
("LMT"). On January 24, 2005, Silverpop and LMT entered into a service
agreement whereby LMT was authorized to access Silverpop's web-based e-mail
marketing tool (Engage). In accordance with the terms of the agreement, LMT
would upload digital advertising content and recipient e-mail addresses to the
Engage system. That advertising content would then be transmitted to the e-mail
addresses provided. The list of e-mail addresses provided by LMT was stored on
the Engage system. LMT's master e-mail address list was comprised of the e-mail
address of every person to have ever registered for its MarketBrowser software.
LMT would upload select e-mail addresses from its master list to the Engage
system. As a result, as of November 2010, Silverpop had in its possession a list
containing the e-mail addresses of 495,591 users of LMT's MarketBrower
software ("LMT List").
In November 2010, Silverpop's computer network experienced an
unauthorized intrusion by unidentified parties ("hackers") who gained access to the
information stored on the Engage system by 110 of Silverpop's 1,500
customers("data breach"). LMT was one of the customers affected by the data
breach. According to Silverpop, although it was apparent that the hackers had
created export files, it could not be confirmed that the export files were taken out
The District Court's Order of February 14, 2014, is reproduced here in relevant part. Only the formatting and
numbering have been changed.
Following the filing of the motions to compel, the parties represented lo the Court their intent to resolve the
underlying discovery dispute without the need for Court action. Relying on that representation and in the absence of
an indication that the parties' discovery dispute remains unresolved, the motions to compel are DISMISSED AS
MOOT.
2
Plaintiff's second motion in limine Doc, No. 66J is incorrectly identified as such. It is in fact the memorandum in
support of the contemporaneously filed motion in liminc [Doe. No. 651. Plaintiff is notified that it is unnecessary to
tile a motion and its supporting memorandum as separale docket entries. Here, there is only one motion in limine
pending before the Court [Doc. No. 65J, but, for the purposes of docket clarity and consistency, the Court lists both
docket entries as representing the motion in limine.
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The parties agree ment does not provide for a suspension of the contract.
'
On December 1,2010, an amended version of Rule 56 of the Federal Rules olCivil Procedure became effective,
The amendments to Rule 56 "are intended to improve the procedures for presenting and deciding summary-
judgment motions" and "arc not intended to change the summary-judgment standard or burdens." Farmers Ins.
Exchange t'. RNK. Inc., 632 F.3d 777, 782 n.4 (1st Cir. 2011) (internal quotation marks and emphasis omitied).
"IBlecause the summary judgment standard remains the same, the amendments will not affect continuing
development of the decisional law construing and applying the standard now articulated in Rule 56(a). Accordingly,
while the Court is bound to apply the new version of Rule 56, the undersigned will, where appropriate, continue to
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cite to decisional law construing and applying prior versions of the Rule." Murray i', Ingram, No. 3: 10-C V-348-
MEF, 201 1 WL 671604, *2 (M.D. Ala. Feb. 3, 2011) (internal quotation marks and citations omitted).
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2. LMT'S COUNTERCLAIM FOR NEGLIGENCE
To prevail on a claim for negligence under Georgia law, the plaintiff must
establish
(1) A legal duty to conform to a standard of conduct raised by the law
for the protection of others against unreasonable risks of harm; (2) a
breach of this standard; (3) a legally attributable causal connection
between the conduct and the resulting injury; and, (4) some loss or
damage flowing to the plaintiffs legally protected interest as a result
of the alleged breach of the legal duty.
Watson v. Gen. Mech. Servs., Inc., 276 Ga. App. 479, 481, 623 S.E.2d 679, 681
(2005) (quoting Bradley Ctr., Inc. v. Wessner, 250 Ga. 199, 200, 296 S.E.2d 693,
695 (1982)). Here, assuming, arguendo, that Silverpop had a duty to conform its
conduct to a particular standard to protect against incidents resulting in a data
breach, LMT has failed to present evidence to establish the applicable standard of
care. "Evidence of custom within a particular industry, group, or organization is
admissible as bearing on the standard of care in determining negligence." Muncie
Aviatio,z Corp. v. Party Doll Fleet, Inc., 519 F.2d 1178, 1180 (5th Cir. 1975).
Silverpop contends that LMT's expert has not proposed any standards that are
ordinarily employed in Silverpop's industry, and LMT fails to rebut this
contention. Overall, while LMT highlights several deficiencies in Silverpop's
intrusion detection system, it offers no evidence to establish how Silverpop's
practices, as they related to intrusion detection, failed to meet the applicable
standard of care. Accordingly, as LMT has failed to present evidence establishing
the standard of care that governed Silverpop's actions, it cannot establish a breach
of the standard of care.
Alternatively, LMT's negligence claim is barred by the economic loss rule.
The rule "generally provides that a contracting party who suffers purely economic
losses must seek his remedy in contract and not in tort." Gen. Elec. Co. v. Lowe's
Home 2enters, Inc., 279 Ga. 77, 78, 608 S.E.2d 636, 637 (2005). However, the
economic loss rule does not prevent the recover in tort of "those economic losses
resulting from injury to [a plaintiff's] person or damage to his property." Id."[B]oth the Georgia Supreme Court and [the Georgia Court of Appeals] have
applied the economic loss rule outside of product liability cases." City of Atlanta
v. Benator, 310 Ga. App. 597, 605, 714 S.E.2d 109, 116 (2011).
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Here, the parties disagree over whether the economic loss doctrine to this
case applies to bar LMT's recovery under its claim of negligence. Silverpop
argues that the issue here is whether it adequately performed the contract and thus
an action for recovery here may be brought only in contract and not in tort. LMT
contends that the economic loss rule does not prevent its recovery in tort because it
is seeking to recover for damages to its property (the LMT List) that was not the
subject of the service agreement between the parties. According to LMT, the LMT
List was property outside of the subject of the contract and the List lost all value as
a saleable asset because no reasonable business would buy a list which had been
the subject of a data breach.
Where a party to a contract suffers damage to property that is not the subject
of the contract, Georgia courts allow for recovery in tort on the premise that "the
duty breached in such situations generally arises independent of the contract."
Bates & Associates, inc. v. Romei, 207 Ga. App. 81, 83, 426 S.E2d 919, 921
(1993); see also Voting v. W.S. Badcock Corp., 222 Ga. App. 218,474 S.E2d 87,
89 (1996) (quoting Uizfied Svcs. v. Home ins. c's., 218 Ga. App. 85, 87(4), 460
S.E.2d 545 (1995)) ("[A] tort action cannot be based on the breach of a contractual
duty only, [but] it can be based on conduct which, in addition to breaching a duty
imposed by contract, also breaches a duty imposed by law."); Flintkote Co. v.
Dravo Corp., 678 F.2d 942, 948 (11th Cir. 1982) ("The [economic loss] rule acts
as a shorthand means of determining whether a plaintiff is suing for injuries arising
from the breach of a contractual duty. . . or whether the plaintiff seeks to recover
for injuries resulting from the breach of the duty arising independently of the
contract. . . .).
The bar presented by the economic loss rule cannot be circumvented here
because the duty at issue is one arising under the contract itself. LMT contends
that its list represented confidential information and Silverpop's duty to protect
against the disclosure of the LMT List arose from the fact that it "agreed to accept,
store, and safeguard" the LMT List [Doc. No. 68, 23]. However, assuming that the
LMT List contained confidential information, Silverpop's duty to protect the LMT
List arose under Section 4.1 of the parties' agreement, wherein it agreed to protect
against the disclosure of proprietary information (defined as "confidential
information" under the agreement [Doc. No. 1-1, p.7]).5 LMT identifies no other
Section 4.1 provides:
Each party hereunder may disclose to the other party certain Proprietary Information of such party
- . - . Recipient agrees to hold the Proprietary Information disclosed by Owner in strictest
confidence and not to, directly or indirectly.. . disclose, cause to be disclosed, or otherwise
transfer the Proprietary Information disclosed by Owner 10 any third party...
[Doc.No. 1-I, p.4].
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source for Silverpop's duty to safeguard the LMT List. Thus, to recover its
damages LMT must proceed under the contract.
LMT also argues that the accident and the misrepresentation exceptions to
the economic loss rule apply to its claim of negligence. The accident exception
"allows a plaintiff to recover in tort when there is a sudden and calamitous event
that not only causes damage to the product but poses an unreasonable risk of injury
to persons and other property." Advanced Drainage Sys., hzc. v. Lowinan, 210 Ga.
App. 731, 734, 437 S.E.2d 604, 607 (1993). According to LMT, the incident
resulting in the data breach was a sudden and calamitous event that caused damage
to its property. LMT cites no authority that supports the application of the accident
exception outside the realms of a product liability action, much less to this case.
Under the accident exception, a plaintiff may "recover for damages to the
defective product itself, where the injury resulted from an accident." Flinticote Co.,
678 F.2d at 948. Here, the parties' agreement encompassed a service and not a
product. But even if the Engage system was considered a "product" that LMT had
the rights to access under the agreement, the accident exception does not apply
because LMT does not seek to recover for any damage suffered by the "product
itself." Moreover, LMT offers no explanation as to why the data breach incident
constitutes "a calamity, sudden violence, collision with another object, or some
catastrophic event," justifying the application of the accident exception. Busbee v.
Chrysler Corp., 240 Ga. App. 664, 666, 524 S,E.2d 539, 542 (1999). Thus, there
is no basis to apply the accident exception here.
LMT's recourse to the misrepresentation exception is also unavailing. The
misrepresentation exception to the application of the economic loss rule recognizes
that
one who supplies information . . . in any transaction in which he has a
pecuniary interest has a duty of reasonable care and competence to
parties who rely upon the information in circumstances in which the
maker was manifestly aware of the use to which the information was
to be put and intended that it be so used.
Advanced Drainage Sys., Inc. v. Low,na,z, 210 Ga. App. 731, 734,437 S.E.2d 604,
607 (1993) (quoting Robert & Co. Assoc. v. Rhodes-Haveriy Partnership, 250 Ga.
680,681-682, 300 S.E.2d 503 (1983). Here, LMT has conceded its fraud claim and
its Counterclaim provides no allegations of misrepresentation with regard to its
cause of action for negligence. In the fashion of a shotgun pleading, the count of
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negligence in the Counterclaim indiscriminately incorporates by reference all of
the preceding allegations (including allegations of misrepresentation alleged in
support of the claim for fraud). But the sole stated basis for the negligence claim is
Silverpop's failure to protect against the data breach [Doc. No. 4, p.13, ¶17].
Accordingly, the misrepresentation exception does not apply to LMT's negligence
claim. See Home Depot U.S.A., Inc. v. Wabash Nat. Corp., 314 Ga. App. 360, 366,
724 S.E.2d 53, 59 (2012) (concluding that while "fraud and negligent
misrepresentation claims.. . fell within the misrepresentation exception" to the
economic loss rule a claim based on any other tort would have to be encompassed
by another exception to the rule to survive dismissal); City of Cairo v. Hightower
Consulting Engineers, Inc., 278 Ga. App. 721, 729, 629 S.E.2d 518, 525 (2006)
(concluding that the misrepresentation exception to the economic loss rule applied
because the plaintiff had asserted a clam for negligent misrepresentation).
Overall, Silverpop is entitled to summary judgement on LMT's claim of
negligence because LMT has failed to establish the applicable standard of care and
the breach of that standard and, alternatively, because the economic loss rule
applies to bar LMT's recovery in tort.
3. LMT'S COUNTERCLAIM FOR BREACH OF CONTRACT6
Each of the parties seeks summary judgment in its favor on LMT's breach of
contract claim. According to LMT, it is entitled to summary judgment because
Silverpop breached Section 4.1 of the parties' agreement by failing to protect the
LMT List from disclosure to third parties, the damages it incurred as a result of the
breach were direct rather than consequential and, thus, recoverable under the
contract, and even if those damages were consequential, its recovery is not barred
under the damages limitation provision of the contract. Silverpop, on the other
hand, argues that it is entitled to summary judgment on LMT's claim of breach of
contract because LMT cannot prove its damages, cannot establish that its damages
were caused by Silverpop's alleged breach of the contract, and cannot recover the
damages it seeks because they are consequential damages and the contract bars the
recovery of such damages.
In analyzing the cross motions for summary judgment on LMT's breach of
contract claim, the Court first addresses whether the damages LMT seeks are
consequential rather than direct. It is important here to categorize the damages
sought as either consequential or direct because while the parties' agreement does
In accordance with the choice of law provision, parties' agreement is governed by Georgia law [Doc. No. I, Ex.
A,111 1.3].
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not prohibit the recovery of direct damages, the damages limitation provision of
the agreement, to the extent it is applicable, prohibits the recovery of consequential
damages.
LMT seeks to recoup the lost sale value of its list. It argues that Silverpop
was bound under the contract to protect the LMT List from disclosure to third
parties. According to LMT, Silverpop did not have in place adequate security
measures to protect against the November 2010 data breach and, as a result, an
unauthorized third party was able to access the LMT List. LMT contends that its
list, as it existed before the data breach, had a certain value as an asset that could
be sold but that its sale value was reduced to zero after the data breach. According
to LMT, no reasonable business would purchase the LMT List for marketing
purposes once it had been accessed (and very likely exported) by a hacker.7
Assuming, arguendo, that the sale value of the LMT List, as it existed prior to the
data breach, was reduced to zero following that breach and that the LMT List was
a confidential document that Silverpop was required to protect from disclosure
under Section 4.1 of the parties' agreement, the question that must be answered is
which of the two categories of damages (direct or consequential) does the loss of
sale value fall under.
"The general rule applicable here is that damages recoverable for a breach of
contract are such as arise naturally and according to the usual course of things from
such breach [i.e., general damages] and such as the parties contemplated, when the
contract was made, as the probable result of its breach [i.e., consequential
damages]." Denny v. Nutt, 189 Ga. App. 387, 388, 375 S.E.2d 878, 879 (1988)
(internal quotation marks omitted) (alternations in original). So stated, however,
the rule does little to further one's understanding of the type of damages that may
"arise naturally from the contract" as opposed to the type that may be the
"probable result of the breach." The Court finds it helpful to consider general (i.e.,
direct) damages as those damages that compensate for "the value of the very
performance promised" and consequential damages as those damages that "seek to
compensate a plaintiff for additional losses (other than the value of the promised
performance) that are incurred as a result of the defendant's breach." Schonfeld v.
Hi/hard, 218 F.3d 164, 175-76 (2d Cir. 2000) (internal quotation marks omitted).
See also Imaging Sys. Int'l, Inc. v. Magnetic Resonance Plus, Inc., 227 Ga. App.
LMT theorizes that once in the hands of a hacker, the LMT List could he sold to any number of parties, which
would reduce its exclusivity, and the c-mail addresses on the LMT List would be at the risk of spam attacks, which
would make the address owners more wary about marketing c-mails even if sent by a business that had acquired the
address through legitimate means (e.g.. by purchasing the List from LMT).
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641, 646,490 S.E.2d 124, 129 (1997) (direct damages included loss of the benefit
of the bargain).
Here, LMT's damages are best characterized as consequential. LMT argues
that it seeks to recover the lost market value of the LMT List and that lost market
value is a direct injury rather than consequential damages. The two cases LMT
cites for the proposition that lost market value represents direct damages are
inapposite. In NUCO Invs., Inc. v. Hartford Fire Ins. Co., No. 1:02 CV 1622 CAP,
2005 WL 3307089 (N.D. Ga. Dec. 5, 2005), the plaintiff sought to recover under
an insurance policy the lost market value of a mold-damaged property. This Court
concluded that a loss in value represented direct damages recoverable under the
insurance contract based on the understanding that physical damage causes a loss
in both the utility and the value of property and that the insurer, having agreed to
pay for physical damage, was bound to pay for the loss in value. The NUCO
Court's analysis is unhelpful here.8 Here, the parties' agreement was not one for
the safeguarding of the LMT List. Rather, the parties contracted for the providing
of e-mail marketing services. While it was necessary for LMT to provide a list of
intended recipients (represented as e-mail addresses on the LMT List) to ensure
that the service Silverpop provided (targeted e-mail marketing) was carried out, the
safe storage of the list was not the purpose of the agreement between the parties.
Thus, in the face of a breach of the service agreement by Silverpop, LMT would
incur direct damages in the form of a loss of the value (e.g., the money it had paid
for the service) of the performance it had been promised. Here, considering the
nature of the breach, LMT also suffered a loss in the sate value of the LMT List.
That loss, however, is a loss that is separate from the loss of the value of the
performance itself. The loss LMT seeks to recover is not of the type that would
naturally flow from a breach of contract, irrespective of the actual provision
breached by Silverpop. Rather, the loss suffered by LMT is of a type resulting
from the breach of a specific term of the agreement. In the absence of a breach of
the confidentiality provision, LMT would not have incurred the loss to the sale
value of the LMT List. Thus, considering the purpose of the parties' agreement,
the damages LMT seeks are not the type that "arise naturally and from the usual
course of things." LMT's damages are consequential rather than direct.
Next, the Court addresses whether the damages limitation provision of the
parties' agreement bars LMT's recovery of its consequential damages.9 Silverpop
8 LMT's reliance
on Metro. Atlanta Rapid Transit Auth. r. Dend, 250 Ga. 538, 299 S.E.2d 876 (1983), is equally
unavailing. That case concerned the plaintiff's claim for compensation based on the market value ola condemnation
action.
Under Georgia law, "[tb the extent that consequential damages are recoverable in breach of contract actions, a
clause excluding such damages is valid and binding unless prohibited by statute or public policy." Mark Singleton
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structural (e.g., relating to remedies and the resolution of disputes) may survive
that termination. Goshawk Dedicated v. Portsmouth Settlement Go. 1, 466 F. Supp.
2d 1293, 1300 (N.D. Ga. 2006). See also TriState HVAC Equip., LLP v. Big Belly
Solar, Inc., 752 F. Supp. 2d 517, 534 (E.D. Pa. 2010) amended on other ground on
reconsideration, No. 10-1054, 2011 WL 204738 (ED. Pa. Jan. 21, 2011) (rejecting
the argument that the forum selection did not apply to parties' dispute because it
was not one of the enumerated provisions that survived the termination of the
contract).
LMT argues that a contract is nothing more than a recitation of statements of
mutual obligations and, in essence, argues that the term "obligations" in the
survival provision encompass all the terms and provisions included in the
agreement. Thus, according to LMT, the only provisions that survived the
termination of the parties' agreement were those specific provisions (Sections 4, 6,
7, 8, and 9) which were expressly exempted from termination. LMT further argues
that if "obligations" was intended to be restricted to performance obligations only
then there would have been no need to selectively exempt certain provisions not
dealing with performance obligations (i.e., Sections 8 and 9) from termination.
Adoption of LMT's arguments, however, would lead to an anomalous result.
For example, the choice of law provision in the agreement (which does not
represent a performance obligation) would be extinguished. While the agreement
was in force, the choice of law provision in the agreement would dictate the state
law to be applied to any suit filed under the agreement, but that choice of law
provision would no longer govern if the suit was filed over the same incident
following the agreement's termination. There is no cogent reason why the parties
would have elected to apply the law of a particular state to a dispute litigated while
the agreement was in force but have allowed for uncertainty as to the state law that
would govern any dispute litigated following the termination of the agreement.
On the other hand, construing the survival clause as limited to the
performance obligations of the agreement properly gives meaning to the relevant
provisions. Under that interpretation, structural provisions (such as the choice of
law provision) remain unaffected by the termination of the agreement and apply
uniformly regardless of whether the agreement is in force or has been terminated.
The damages limitation provision in the parties' agreement is not a performance
obligation that is extinguished upon an agreement's termination. Rather, that
provision, which limits the damages LMT may recoup, is more akin to a structural
provision governing remedies and the resolution of disputes under a contract. As
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'3