Sovereign Bank v. BJ Wholesale Club

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
7-16-2008
Sovereign Bank v. BJ Wholesale Club
Precedential or Non-Precedential: Precedential
Docket No. 06-3392
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 06-3392/3405
SOVEREIGN BANK,
Appellant No: 06-3392
v.
BJ'S WHOLESALE CLUB, INC.;
FIFTH THIRD BANCORP
PENNSYLVANIA STATE EMPLOYEES CREDIT UNION
Appellant No: 06-3405
v.
FIFTH THIRD BANK;
BJ'S WHOLESALE CLUB, INC.
BJ'S WHOLESALE CLUB, INC.
Defendant/Third-Party Plaintiff
1
v.
INTERNATIONAL BUSINESS MACHINES
CORPORATION, INC.
Third-Party Defendant
Appeals from the United States District Court
for the Middle District of Pennsylvania
(Civ. Nos. 05-cv-01150/04-cv-01554)
District Judge: Hon. William W. Caldwell
Argued: June 19, 2007
Before: McKEE, FISHER and CHAGARES,
Circuit Judges
(Opinion filed: July 16, 2008)
JOSEPH WOLFSON, ESQ. (Argued)
STACEY A. SCRIVANI, ESQ.
Stevens & Lee
620 Freedom Business Center
P.O. Box 62330
King of Prussia, PA 19406
Attorneys for appellant, Sovereign Bank
DONALD B. KAUFMAN, ESQ. (Argued)
DEVIN CHWASTYK, ESQ.
McNees Wallace & Nurick LLC
100 Pine Street
2
P.O. Box 1166
Harrisburg, PA 17108
Attorneys for appellant, Pennsylvania
State Employees Credit Union
JAMES W. PRENDERGAST, ESQ. (Argued)
JENNIFER L. CARPENTER, ESQ.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, MA 02109
GORDON PEARSON, ESQ.
MARIO J. WEBER, ESQ.
Wilmer Cutler Pickering Hall and Dorr LLP
1875 Pennsylvania Ave., NW
Washington, D.C. 2006
RICHARD L. KREMNICK, ESQ.
CHRISTOPHER A. LEWIS, ESQ.
LEWIS W. SCHLOSSBERG, ESQ.
Blank Rome LLP
One Logan Square
18th & Cherry Streets
Philadelphia, PA 19103
Attorneys for appellee, BJ’s Wholesale Club, Inc.
W. BRECK WEIGEL, ESQ. (Argued)
Vorys, Sater, Seymour & Pease LLP
221 East Fourth Street
Cincinnati, OH 45202
3
ANDREW L. SWOPE, ESQ.
ABRAM D. BURNETT III, ESQ.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
17 N. Second Street, 18th Floor
Harrisburg, PA 17101
Attorneys for appellee, Fifth Third Bank
OPINION
McKEE, Circuit Judge.
In these consolidated appeals, Sovereign Bank and the
Pennsylvania State Employees Credit Union appeal orders
dismissing claims that arose from the theft of certain credit card
information from a retailer’s computer files. For the reasons
that follow, we will reverse in part, and affirm those orders in
part.
I. BACKGROUND
These consolidated appeals involve two law suits that
arose from the theft of credit card information from the
computer files of a prominent retailer. Visa U.S.A., Inc., is a
4
corporation, comprised of an association of financial
institutions, which operates a credit card payment system known
as “Visa.” Sovereign Bank and the Pennsylvania State
Employees Credit Union (“PSECU”) are both members of the
Visa network. Sovereign and PSECU have a Membership
Agreement with Visa that allows them to issue Visa cards to
their respective customers and members. Within the Visa
network, Sovereign and PSECU are referred to as “Issuers,”
which means that they issue Visa cards to cardholders pursuant
to the contracts they enter into with them.
Fifth Third Bank is also a member of the Visa network,
and it also has a Membership Agreement with Visa. Within the
network, Fifth Third is referred to as an “Acquirer,” which
means that Fifth Third enters into contractual relationships with
businesses that agree to accept Visa cards as payment for their
goods and services (“Merchants”). Acquirers process those
5
transactions on behalf of the Merchants. BJ’s Wholesale Club,
Inc., is a Merchant. Accordingly, Fifth Third and BJ’s have
entered into a Merchant Agreement. Although Merchants
participate in the Visa network, they are not members. Only
financial institutions are eligible for membership. Therefore,
Merchants have no contractual relationship directly with Visa.
Every time a cardholder uses a Visa card to pay a
Merchant for goods or services, the Issuer, Acquirer and
Merchant must interact to process and complete the transaction.
The Merchant’s computer scanners first “read” the “Cardholder
Information” contained in the magnetic stripe on the back of
Visa cards as they are swiped through the familiar terminal at
the checkout. The Merchant then sends the pertinent account
information through the Visa network to the Issuer. The Issuer
reviews the Cardholder Information and, assuming the card is
valid with sufficient available credit, the Issuer authorizes the
6
transaction, and so notifies the Merchant. Upon receiving that
notification, the Merchant completes the transaction with the
cardholder, and then forwards the receipt to the Acquirer who
pays the Merchant pursuant to their agreement. The Acquirer
then notifies the Issuer that payment has been received, and the
Issuer pays the Acquirer and charges the cardholder.
Visa has created an extensive set of “Operating
Regulations” to both govern and facilitate transactions
involving Visa cards.1 Those Regulations address virtually
every aspect of the Visa payment system, and impose both
general and specific requirements on participants in the
network.
The disputes in these appeals center on certain
1
Visa offers both credit cards and debit cards. Since
the distinction is not relevant here, we will simply refer to
“credit cards.”
7
security regulations including the Cardholder Information
Security Program (“CISP”). The CISP provisions apply to
Issuers and Acquirers and include broad security requirements
intended to protect Cardholder Information. Those
requirements include a prohibition against retaining or storing
the data encoded in the familiar magnetic stripe on the back of
credit cards, i.e., Cardholder Information, after a consumer
transaction is completed.
One provision of the Operating Regulations, entitled
“Enforcement,” defines procedures by which Visa can enforce
compliance with the Operating Regulations. That provision
expressly allows Visa to take specified remedial actions against
Members who do not comply with the Operating Regulations,
including levying fines and penalties. Enforcement actions can
be appealed to Visa’s Board of Directors, but the Board’s
decision is final. The Operating Regulations give Visa, and
8
only Visa, the right to interpret and enforce the Operating
Regulations, and only Visa can determine whether a violation
of the Operating Regulations has occurred.
The Operating Regulations also impose extensive
security requirements on Issuers and Acquirers. Section 2.3 of
the Operating Regulations requires Issuers and Acquirers to
ensure that their agents, service providers and Merchants
comply with the Operating Regulations.
The Visa Operating Regulations also include
comprehensive provisions for resolving disputes between Visa
members. These provisions allow members to challenge
disputed charges through “chargeback” and representment
procedures,2 in accordance with risk allocation judgments made
2
A “chargeback” is the return of a transaction from the
Issuer to the Acquirer, sometimes because the Issuer’s
customer has a dispute with the Merchant or because the
customer does not recognize the transaction. A
9
by Visa. Disputes about the use of these procedures are
resolved by arbitration.
Finally, the Operating Regulations also include
“Compliance” provisions that apply when a Member’s
violation of a Regulation causes a financial loss to another
Member who cannot be made whole by resorting to chargeback
or representment. For example, a loss resulting from fraudulent
charges using stolen data is allocated to the Issuer. However,
the Issuer may use the Compliance proceedings to shift that loss
to the Acquirer if it resulted from the Acquirer’s violation of an
Operating Regulation. The Compliance provisions do not
eliminate any rights a Member may have to pursue any legal
remedies that may otherwise be available.
“representment” is the Issuer’s or its agent’s challenge to a
chargeback; it involves resubmission of its response to the
chargeback with additional information.
10
Pursuant to their Membership Agreements with Visa, all
Members of the Visa network including Insurers and Acquirers,
agree to be bound by the Operating Regulations. In addition,
before an Acquirer can enter into a Merchant Agreement with
a Merchant, the Acquirer must first determine that the Merchant
will abide by the Operating Regulations. Given the importance
attached to uniform compliance, an Acquirer’s initial
determination is deemed insufficient. Rather, an Acquirer must
agree to ensure continued compliance with the Operating
Regulations. Finally, the Acquirer must have a Merchant
Agreement with each of its Merchants. The Merchant
Agreements may generally contain whatever extraneous
provisions the Acquirer and Merchant agree upon, but, the
Agreement must, at a minimum, contain the provisions of
Section 5.2 of the Operating Regulations. These disputes
involve § 5.2.h.3.b. That subdivision prohibits a Merchant from
11
retaining or storing Cardholder Information after an Issuer
authorizes a transaction. Like all Visa Members, Fifth Third’s
predecessor agreed to be bound by the Visa Operating
Regulations and By-Laws, which are incorporated by reference
into the Membership Agreement.
The seeds that sprouted this litigation were sewn in
February 2004, when Visa identified a potential compromise of
electronically stored Cardholder Information pertaining to
certain Visa cards issued by Sovereign, PSECU and other
financial institutions. Electronic data on some credit cards had
been copied and used to fraudulently obtain goods and services
after cardholders had used the cards at various BJ’s stores. Visa
responded by issuing a “CAMS alert” to potentially affected
Issuers. Such CAMS alerts notify Visa members that
Cardholder Information may have been compromised. The
CAMS alert here notified the Issuers that Visa cards which had
12
been properly presented for payment at BJ’s stores from July
2003 through February 2004 had been compromised and could
be used to make fraudulent purchases.
Sovereign responded to the February 2004 alert by
cancelling some Visa cards and issuing new Visa cards to the
affected cardholders.3 Sovereign claims that the fraud was only
possible because BJ’s improperly retained and stored the
Cardholder Information from its customers’ cards instead of
deleting the data immediately after a sales transaction was
completed, as required by Visa Operating Regulation §
5.2.h.3.b. In Sovereign’s view, BJ’s failure to comply with the
3
The alert is purely informational and does not mean
that the accounts listed had been compromised. Fifth Third
claims that an Issuer has discretion in choosing how it will
respond to a CAMS alert. It can respond by monitoring the
affected accounts for fraudulent activity, cancelling the
accounts and reissuing new Visa cards, or taking other
measures based on the potential for fraud.
13
requirements of § 5.2.h.3.b. breached a duty owed to
Sovereign. Sovereign further contends that Fifth Third failed
to comply with the Operating Regulations by failing to ensure
that BJ’s complied with § 5.2.h.3.b.
According to Sovereign, BJ’s failure to delete the
Cardholder Information magnetically stored in Visa cards, and
Fifth Third’s failure to ensure that BJ’s complied with §
5.3.h.3.b, allowed the unauthorized and fraudulent use of
Cardholder Information. Sovereign maintains that it was legally
obligated to reimburse its cardholders for the resulting
fraudulent charges, and that it incurred expenses, and lost
income and fees from doing so. This purportedly included the
costs of issuing replacement cards to Cardholders (in an effort
to mitigate further losses), and loss of goodwill of its customer
base.
After it discovered the breach of security of Cardholder
14
Information that had been retained in BJ’s system, PSECU also
canceled approximately 20,000 Visa cards that it had issued to
its members who had used the cards at BJ’s. It then reissued
Visa cards with new account numbers and new Cardholder
Information at a cost of approximately $98,000.
II. Sovereign Bank v. BJ’s Wholesale Club and
Fifth Third Bank (No. 06-3392)
On January 10, 2005, Sovereign sued Fifth Third and
BJ’s in state court asserting a claim for negligence, breach of
contract, and equitable indemnification against each defendant.
The suit was brought to recover the losses that resulted from the
fraudulent use of Cardholders’ Information, lost fees and
commissions, the value of the unauthorized purchases and sales,
and the cost of replacing Visa cards.
BJ’s and Fifth Third removed the action to the United
15
States District Court for the Eastern District of Pennsylvania.4
Venue was subsequently transferred to the United States
District Court for the Middle District of Pennsylvania to allow
consolidation with Pennsylvania State Employees Credit Union
v. Fifth Third Bank and BJ’s Wholesale Club, Inc. That action
had been brought by the PSECU to recover the costs it incurred
in replacing its members’ Visa cards that had been
compromised by the fraud.
Following the transfer, BJ’s and Fifth Third separately
moved to dismiss the claims against them pursuant to
Fed.R.Civ.P. 12(b)(6). The district court denied BJ’s motion on
the negligence claim, but granted it on the breach of contract
and equitable indemnification claims. The court granted Fifth
Third’s motion on the negligence and equitable indemnification
4
The district court had jurisdiction pursuant to 28
U.S.C. § 1332.
16
claims, but denied it on the breach of contract claim. Sovereign
Bank v. BJ’s Wholesale Club, Inc., 395 F. Supp. 2d 183 (M.D.
Pa. 2005).
Fifth Third moved for reconsideration on the sole
remaining claim for breach of contract. Sovereign’s breach of
contract claim is based on a third-party or intended beneficiary
theory and depends, in part, upon whether Fifth Third and Visa
intended to give Sovereign enforceable rights under their
separate contract even though Sovereign is not a party to it.
Ultimately, the district court converted Fifth Third’s motion for
reconsideration into a motion for summary judgment and
ordered the parties to conduct discovery on the third-party
beneficiary issues, i.e., whether Fifth Third’s contractual
obligation to Visa to comply with the Visa Operating
Regulations was intended to benefit Issuers like Sovereign.
In the meantime, Sovereign filed an amended complaint
17
asserting claims against BJ’s for negligence, breach of
fiduiciary duty and promissory estoppel. The amended
complaint restated the breach of contract claim against Fifth
Third and added a claim for promissory estoppel. Fifth Third
and BJ’s again moved to dismiss the claims under Rule
12(b)(6), and the district court dismissed all claims against BJ’s
and dismissed all claims against Fifth Third except the breach
of contract claim. Sovereign Bank v. BJ’s Wholesale Club, Inc.,
427 F. Supp. 2d 526 (M.D. Pa. 2006).
In accordance with the district court’s order directing
limited discovery on the third-party beneficiary issues, the
parties exchanged paper discovery and took the deposition of
Visa’s designated representative, Alex Miller. After discovery
was completed, the district court granted summary judgment in
favor of Fifth Third on the third-party beneficiary claim,
holding that Sovereign was not an intended beneficiary of the
18
Visa-Fifth Third Member Agreement. Sovereign Bank v. BJ’s
Wholesale Club, Inc., 2006 WL 1722398 (M.D. Pa. June 16,
2006).
This appeal followed. With respect to Fifth Third,
Sovereign appeals only the district court’s Rule 12(b)(6)
dismissal of its equitable indemnification claim and the district
court’s grant of summary judgment in favor of Fifth Third on its
breach of contract claim. With respect to BJ’s, Sovereign
appeals only the district court’s Rule 12(b)(6)’s dismissal of its
negligence and equitable indemnification claims.
We discuss each of Sovereign’s arguments in turn.
A. Sovereign’s Breach of Contract Claim Against Fifth
Third.
As noted, Sovereign’s contract claim is based on the
theory that it is a third-party beneficiary of Fifth Third’s
Member Agreement with Visa. As also noted, that agreement
19
required Fifth Third to ensure that BJ’s complied with the Visa
Operating Regulations, and § 5.2.h.3.b. of that agreement
prohibits Merchants from retaining Cardholder Information.
Sovereign contends that Fifth Third breached that contract by
not ensuring BJ’s compliance.
Historically, under Pennsylvania law, “in order for a
third party beneficiary to have standing to recover on a contract,
both contracting parties must have expressed an intention that
the third-party be a beneficiary, and that intention must have
affirmatively appeared in the contract itself.” Scarpitti v.
Weborg, 609 A.2d 147, 149 (Pa. 1992) (citation omitted).
Sovereign appropriately concedes that it is not an express third-
party beneficiary of the Visa-Fifth Third Member Agreement.
However, in Scarpitti, the Pennsylvania Supreme Court adopted
§ 302 of the Restatement (Second) of Contracts. Id. That
provision allows an “intended beneficiary” to recover for breach
20
of contract even though the actual parties to the contract did not
express an intent to benefit the third party. Section 302
provides as follows:
Intended and Incidental Beneficiaries
(1) 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 intentions of the parties and either
(a) the performance of the promise will satisfy an
obligation of the promisee to pay money to the
beneficiary; or
(b) the circumstances indicate that the promisee
intends to give the beneficiary the benefit of the
promised performance.
(2) An incidental beneficiary is a beneficiary who
is not an intended beneficiary.
Under § 302, Sovereign’s contract claim depends on
whether the “recognition of a right to performance” in
Sovereign “is appropriate to effectuate the intentions of” both
Visa and Fifth Third in entering into their member agreement
and whether “the circumstances indicate that” Visa (the
21
promisee) “intend[ed]” to give Sovereign “the benefit of the
promised performance.”
As noted earlier, the district court converted Fifth Third’s
Rule 12(b)(6) motion to dismiss to a motion for summary
judgment and ordered limited discovery. The ensuing discovery
included production of numerous documents as well as the
deposition of Visa’s designated representative, Alex Miller.
Fifth Third relies in part on Miller’s testimony that he was not
aware that Visa intended to create a direct right of enforcement
under the Operating Regulations among Members and he has
never seen a document that would allow a Member “to step into
Visa’s shoes under its contract with other members” and
enforce the Operating Regulations. Miller testified in part as
follows:
[T]he core purpose of the Operating Regulations
is to set up the conditions for participation in the
system, to set up the rules and standards that
22
apply to that ultimately for the benefit of the Visa
payment system, the members that participate in
it and other stakeholders such as cardholders,
merchants, and others who may participate in the
system as well.
Fifth Third further contends that Miller also made it clear that
the Operating Regulations’ prohibition against retaining
Cardholder Information, which Fifth Third claims was enacted
long after it entered into its agreement with Visa, was not to
benefit any individual member or class of members. Rather,
according to Miller:
[t]he purpose of the CISP program . . . is to
maximize the value to the Visa system as a whole.
That can include the protection of any entity that
may be involved in the use or – or handling of
cardholder data, so it’s to protect a cardholder,
the privacy of their information, to protect their
confidence in using the Visa system, to protect
issuers, to protect acquirers, to protect merchants;
and by creating a system that protects cardholder
data, generally it’s to maximize the usage and
value of the Visa payment system for all of those
participants.
23
Miller was asked whether, even though there may have been
multiple purposes for requiring the Acquirer to ensure Merchant
compliance with the regulations, at least one such reason was to
protect Issuers. Miller responded as follows:
The part of your question I’m struggling with is
to say whether that was the purpose or not. I
think I summarized what the purpose was.
One of the entities that is impacted by the
Cardholder Information Program is issuers, as
well as acquirers, merchants and cardholders. So
my understanding was the purpose was not
directed at any one of those entities but to
maximize the value of the system in protecting
cardholder information for all of the participants.
Finally, Fifth Third notes that in responding to a question about
whether Visa intended to give Issuers the benefit of the
Acquirer’s compliance with the CISP, Miller testified:
Visa designed the CISP program to benefit the
Visa system as a whole, to drive confidence in the
integrity of the Visa system, to drive greater,
greater efficiency, to drive cardholder security,
24
and to do that from requirements that apply to all
Visa members that designed ultimately to yield a
more efficient system on behalf of all those
participants.
In sum, Fifth Third contends that Miller’s deposition
testimony clearly shows that the intent of the Operating
Regulations, and more particularly the prohibition on Merchant
retention of Cardholder Information, is to benefit the Visa
system as a whole and not Sovereign or any particular Issuer in
particular. Accordingly, Fifth Third argues that it is entitled to
summary judgment on Sovereign’s breach of contract claim.
Sovereign responds that there is a genuine issue of
material fact as to Visa’s intent which precludes summary
judgment. Sovereign notes that in August 1993, Visa wrote a
memorandum entitled “Retention of Magnetic-Stripe Data
25
Prohibited.”5 The memorandum described a new section of the
Operating Regulations prohibiting the storage of magnetic-
stripe data, i.e., Cardholder Information. It read in part as
follows:
To protect the Visa system and Issuers from
potential fraud exposure created by databases of
magnetic-stripe information, Section 6.21 has
been revised. Effective September 1, 1993, the
retention or storage of magnetic stripe data
subsequent to the authorization of a transaction is
prohibited. Acquirers are obligated to ensure that
their merchants do not store the magnetic-stripe
information from Visa Cards for any subsequent
use.
Sovereign contends that this August 1993 memorandum shows
that Visa understood and clearly intended that Issuers such as
Sovereign (and PSECU) would obtain direct benefits from the
requiring members to ensure that magnetic-stripe data was not
5
The memorandum was written by Vincent La Paglia,
Visa’s Vice President, Card Operations.
26
retained.
Sovereign further contends that other evidence obtained
from Visa shows that Visa expressly understood and intended
that the prohibition would provide direct benefits to Issuers and
that the type of harm suffered by Sovereign was specifically
intended to be avoided by compliance with the prohibition.
Visa published an on-line article entitled “Issuers and Acquirers
Are At Risk When Magnetic-Stripe Data Is Stored,” in May
2003. The article stated that the CISP “was established to
preclude a compromise that could lead to the duplication of
valid magnetic-stripe data on counterfeit or altered cards,”
because such a data compromise “impacts Issuers, Acquirers,
cardholder goodwill and the integrity of the payment system.”
Sovereign submits that this article is additional evidence that the
prohibition against retaining Cardholder Information contained
in the magnetic strip was intended to directly benefit Issuers.
27
Finally, Sovereign relies on the following exchange
during Miller’s deposition:
Q: [by Fifth Third’s counsel] Is it fair to say that
the operating regulations are not intended to
benefit a single group of participants, but the Visa
payment system as a whole?
Objection. Leading.
A: [by Miller] It’s fair to say that the core purpose
of the operating regulations is to set up the
conditions for participation in the system, to set
up rules and standards that apply to that
ultimately for the benefit of the Visa payment
system, the members that participate in it and
other stakeholders such as cardholders,
merchants and others who may participate in the
system as well. (emphasis added).
Q: They may have some incidental benefit; is that
correct?
Objection
Leading, and calls for a legal conclusion.
A: The bylaws and operating regulations, by their
terms, apply only to members. So to the extent
you mean they might have benefits beyond the
28
rules that apply to other stakeholders, that’s
correct. They’re not directly parties to these
rules. (emphasis added)
Sovereign argues that, despite the best efforts of Fifth Third’s
counsel, the italicized portions of Miller’s testimony
demonstrate that Visa understood that Issuers are more than
incidental beneficiaries of the Member Agreements. Rather, it
shows that Visa expressly understood that other classes of
participants, such as Issuers, were intended and foreseeable
beneficiaries of a Member Agreement, even though they are not
parties to a particular agreement.
Sovereign also argues that in granting summary
judgment to Fifth Third, the district court did not apply well-
settled summary judgment standards. Rather, according to
Sovereign, the district court acted like a fact-finder by weighing
conflicting or ambiguous evidence and making credibility
determinations. The district court explained:
29
In the face of this evidence of Visa’s intent [i.e.,
Miller’s deposition testimony], we do not believe
that the single August 1993 reference to
benefitting issuers nor the ambiguous “core
purpose” statement is sufficient evidence to lead
a reasonable jury to find for [Sovereign] on the
contract claim.
2006 WL 1722398 at *12 (emphasis added). It further
commented:
It cannot be disputed that Sovereign benefits from
the prohibition on the retention of magnetic-stripe
data. It is probably also true that as an issuer it
has the greatest need for such a prohibition, and
benefits the most from it, since its cardholders’
information is at risk if a merchant or other entity
retains such data so that it is subject to theft. But
one essential part of the test for third-party-
beneficiary status is that the promisee, here Visa,
must have intended to benefit the third party.
There is sufficient evidence on summary
judgment to state that Visa had no such intent. In
sum, as Fifth Third argues, Sovereign is at most
an incidental beneficiary of the member
agreement between Visa and Fifth Third, and an
incidental beneficiary has no right to enforce a
contract, no matter how great a stake it might
have in doing so.
30
Id. (emphasis added).
We disagree with Sovereign’s claim that the district court
did not apply well-settled summary judgment standards. In
Saldana v. Kmart Corp., 260 F.3d 228 (3d Cir. 2001), we
discussed the familiar principles governing summary judgment:
When reviewing an order granting summary
judgment, we exercise plenary review and apply
the same test a district court applies. Under
Federal Rule of Civil Procedure 56(c), that test is
whether there is a genuine issue of material fact
and, if not, whether the moving party is entitled to
judgment as a matter of law. In so deciding, a
court must view the facts in the light most
favorable to the nonmoving party and draw all
inferences in the party’s favor. A court should
find for the moving party if the pleadings,
depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any
material fact and that the moving party is entitled
to judgment as a matter of law. The party
opposing summary judgment may not rest upon
the mere allegations or denials of the pleading; its
response, by affidavits or as otherwise provided
in this title, must set forth specific facts showing
that there is a genuine issue for trial. There is no
31
issue for trial unless there is sufficient evidence
favoring the nonmoving party for a jury to return
a verdict for that party. Such affirmative
evidence – regardless of whether it is direct or
circumstantial – must amount to more than a
scintilla, but may amount to less (in the
evaluation of the court) than a preponderance.
Id. at 231-32 (citations omitted) (emphasis added). In a later
case, In re CITX Corp., 448 F.3d 672, 677 (3d Cir. 2006), we
commented that “to survive summary judgment on his claim .
. . [a nonmovant] must present sufficient evidence to allow a
reasonable jury to find in his favor.”
Moreover, in one of the leading, and oft-cited, summary
judgment standard cases, Anderson v. Liberty Lobby, Inc., 477
U.S. 242 (1986), the Supreme Court noted that “[b]y its very
terms,” Rule 56(c) “provides that the mere existence of some
alleged factual dispute between the parties will not defeat an
otherwise properly supported motion for summary judgment;
the requirement is that there be no genuine issue of material
32
fact.” Id. at 247-248 (emphasis in original). The Court went
on to explain:
As to materiality, the substantive law will identify
which facts are material. Only disputes over facts
that might affect the outcome of the suit under
governing law will properly preclude the entry of
summary judgment. Factual disputes that are
irrelevant or unnecessary will not be counted.
**********
More important for present purposes, summary
judgment will not lie if the dispute about a
material fact is “genuine,” that is, if the evidence
is such that a reasonable jury could return a
verdict for the nonmoving party.
Id. at 248.
Therefore, the district court did not err in referring to a
“reasonable jury” or “substantial evidence” in its summary
judgment analysis. However, even though we do not agree with
Sovereign’s contention that the district court misstated the rule
for granting summary judgment, we agree that the court
33
misapplied those principles and erroneously granted summary
judgment.
In order to be an intended beneficiary of the Visa-Fifth
Third Member Agreement, Sovereign has the burden of
producing, inter alia, sufficient evidence that Visa intended to
give it the benefit of the Fifth Third’s promise to Visa to ensure
that BJ’s complied with the provision of the Member
Agreement prohibiting Merchants from retaining Cardholder
Information. We believe that Sovereign met that burden.
We do not, however, regard the May 2003 on-line article
entitled “Issuers and Acquirers Are At Risk When Magnetic-
Stripe Is Stored” as indicative of an intent to benefit a particular
Issuer such as Sovereign or PSECU. That article simply states
the reason for the prohibition against retention of Cardholder
Information, viz., a data compromise that could result from
storage of magnetic-stripe data “impacts Issuers, Acquirers,
34
cardholder goodwill, and the integrity of the system.” However,
we do believe that Visa’s August 1993 memorandum, entitled
“Retention of Magnetic-Stripe Date Prohibited,” and Miller’s
“core purpose” deposition testimony raise a genuine issue of
material fact regarding the intent of the Visa and Fifth Third
Member Agreement. That was sufficient to preclude the grant
of summary judgment on Sovereign’s breach of contract claim.
In his deposition, Miller testified that the core purpose of
the Operating Regulations was to benefit the Visa system and
“the members that participate in it.” Admittedly, any indication
of an intent by Visa to specifically benefit Issuers is arguably
undermined by Miller’s references to “other shareholders such
as cardholders, merchants and others who may participate in the
system as well.” Nonetheless, his testimony clearly suggests an
intent by Visa to benefit Issuers. An argument to the contrary
is tantamount to claiming that since Visa intended to benefit
35
everyone who was part of the Visa system, it did not specifically
intend to benefit anyone. However, the fact that it intended to
benefit several Members or classes of Members does not negate
the possibility that it intended to benefit individual Issuers such
as Sovereign.
Moreover, as recited earlier, the August 1993
memorandum provides, in relevant part: “To protect the Visa
system and Issuers from potential fraud exposure created by
databases of magnetic-stripe information . . . . Acquirers are
obligated to ensure that their merchants do not store the
magnetic-stripe information from Visa Cards for any
subsequent use.” (emphasis added). Thus, the memorandum
clearly states that Acquirers must act to protect Issuers by
ensuring that their Merchants do not retain Cardholder
Information. Accordingly, the August 1993 memorandum is
sufficient evidence by itself to create a genuine issue about
36
whether Visa intended to give Sovereign the benefit of Fifth
Third’s promise to Visa to ensure BJ’s compliance with the
provisions of the Visa-Fifth Third Member Agreement.
Therefore, we will reverse the district court’s grant of summary
judgment to Fifth Third on the breach of contract claim and
remand for further proceedings on that claim.6
6
After oral argument, counsel for Fifth Third sent a
letter to the Clerk, pursuant to Fed.R.App.P. 28(j), informing
her of a decision of the United States District Court for the
District of Massachusetts in In re TJX Companies Retail
Security Breach Litigation, 524 F. Supp. 2d 83 (D. Mass.
2007), a case that is factually identical to the two appeals
before us. TJX is the Merchant in that case and Fifth Third is
the Acquirer. In TJX, a putative class of Issuers asserted
third-party beneficiary claims against Fifth Third arising from
a data security breach relating to unauthorized access to Visa
Cardholder Information retained by TJX. The district court
dismissed the third-party beneficiary claims pursuant to
Fed.R.Civ.P. 12(b)(6), holding that in a section of the
Operating Regulations, Visa expressly intended to preclude
third-party beneficiaries. 524 F. Supp. 2d at 89. However,
that section of the Operating Regulations is in a later version
of the Operating Regulations adopted after the events that
occurred here. Accordingly, In re TJX is not at all helpful to
37
B. Sovereign’s Equitable Indemnification Claims Against
Fifth Third and BJ’s.
As noted, BJ’s and Fifth Third separately moved to
dismiss these equitable indemnification claims pursuant to Rule
12(b)(6), and the district court granted both motions. 395 F.
Supp. 2d 183 (M.D. Pa. 2005). Sovereign contends that was
error.7
our analysis.
7
The standard of review for a dismissal under
Fed.R.Civ.P. 12(b)(6) is de novo. Phillips v. County of
Allegheny, 515 F.3d 224, 230 (3d Cir. 2008). We must
review the complaint in light of the Supreme Court’s decision
in Bell Atlantic Corp. v. Twombly, U.S. , 127 S. Ct. 1955
(2007) and our recent opinion in Phillips v. County of
Allegheny, supra, both of which were issued after the district
court’s decision. In Twombly, an antitrust case, the Supreme
Court rejected the language in Conley v. Gibson, 355 U.S. 41,
45-46 (1957), that a district court may not dismiss a
complaint “unless it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would
entitle him to relief.” In rejecting that language, the Supreme
Court explained that the allegations of the complaint should
“plausibly suggest[]” that the pleader is entitled to relief.
38
Indemnification is “a fault shifting mechanism.” Sirianni
In Phillips, a case brought under 42 U.S.C. § 1983, we
held that Twombly’s “plausibility” standard is not restricted to
antitrust cases. 515 F.3d at 234. Although we commented
that the exact boundaries of Twombly are not yet known, we
read it to mean that “[f]actual allegations must be enough to
raise a right to relief above the speculative level.” Id.
(quoting Twombly, 127 S.Ct. at 1965). Put another way,
“‘stating . . . a claim requires a complaint with enough factual
matter (taken as true) to suggest’ the required element.” Id.
(quoting Twombly, 127 S.Ct. at 1965). The complaint must
state “‘enough facts to raise a reasonable expectation that
discovery will reveal evidence of’ the necessary element.” Id.
(quoting Twombly, 127 S.Ct. at 1965). “That is to say, there
must be some showing sufficient to justify moving the case
beyond the pleading to the next stage of litigation.” Id. at
234-35.
In Wilkerson v. New Media Technology Charter
School, Inc., 522 F.3d 315, 322 (3d Cir. 2008), we extended
“our holding in Phillips to the employment discrimination
context. The plausibility paradigm announced in Twombly
applies with equal force to analyzing the adequacy of claims
of employment discrimination.” We see no reason why
Twombly’s plausibility standard does not apply to the
complaint before us now.
39
v. Nugent Bros., Inc., 506 A.2d 868, 871, (Pa. 1986).
The right of indemnity rests upon a difference
between the primary and the secondary liability of
two persons each of which is made responsible by
the law to an injured party. It is a right which
enures to a person who, without active fault on
his own part, has been compelled, by reason of
some legal obligation, to pay damages occasioned
by the negligence of another, and for which he
himself is only secondarily liable. The difference
between primary liability and secondary liability
. . . depends on a difference in the character or
kind of the wrongs which cause the injury and in
the nature of the legal obligation owed by each of
the wrongdoers to the injured person. . . .
[S]econdary as distinguished from primary
liability rests upon a fault that is imputed or
constructive only, being based on some legal
relation between the parties, or arising from some
positive rule of common or statutory law or
because of a failure to discover or correct a defect
or remedy a dangerous condition caused by the
act of the one primarily responsible.
Builders Supply Co. v. McCabe, 77 A.2d 368, 370, 371 (Pa.
1951) (emphasis omitted).
Sovereign claims a right to indemnification because BJ’s
40
and Fifth Third are primarily liable (presumably to Sovereign’s
cardholders) based on their negligently allowing the retention
of the Cardholder Information. Sovereign believes that it is
only secondarily liable because of the operation of the Truth in
Lending Act (“TILA”), 15 U.S.C. § 1643(a), (d), which creates
a ceiling of $50 for cardholder liability for unauthorized
charges.
Sovereign claims that its status of secondary liability
arises because, when a credit card purchase is made, the
cardholder’s account is charged, or debited, within days for that
purchase and it becomes the cardholder’s obligation to pay the
charges incurred; this is true even if the purchase is fraudulent.
However, once a cardholder becomes aware of fraudulent
activity on his/her account and notifies the card Issuer, that
Issuer is obligated to reverse the charges, or credit the
cardholder, for the amount of those fraudulent charges less $50,
41
under the TILA. Thus, although § 1643 on its face only limits
a cardholder’s liability, it creates a concomitant duty in the
Issuer to reimburse the cardholder’s account for all fraudulent
charges in excess of the $50 ceiling.
Sovereign submits that its cardholders had already been
charged the full amount of the fraudulent charges before the
fraud was discovered. Thus, in order to keep cardholders’
liability below the $50 limitation, Sovereign was obligated to
reimburse the cardholder accounts for the amount of the
fraudulent charges less $50. According to Sovereign, this is the
precise situation the doctrine of equitable indemnification was
designed to address. We disagree.
Sovereign can point to no authority to support its attempt
to forge an equitable indemnification claim from the provisions
of the TILA, and we have found none. The TILA is a consumer
protection statute. Fairley v. Turan-Foley Imports, Inc., 65
42
F.3d 475, 479 (5th Cir. 1995). TILA § 1643 does not impose
any obligation on issuers of credit cards to pay the costs
associated with unauthorized or fraudulent use of credit cards.
It simply limits the liability of cardholders, under certain
circumstances, to a maximum of $50 for unauthorized charges.
Indeed, §1643 does not address, nor is it even concerned with,
the liability of an Issuer or any party other than the cardholder
for unauthorized charges on a credit card. Section 1643
imposes liability only upon the cardholder. Since TILA § 1643
does not obligate Sovereign to reimburse its cardholders’
accounts, the district court correctly dismissed the equitable
indemnification claims against Fifth Third and BJ’s.
C. Sovereign’s Negligence Claim Against BJ’s.
The district court dismissed Sovereign’s negligence
claim pursuant to Fed. R. Civ. P. 12(b)(6) because the claim
was barred by the economic loss doctrine. 427 F. Supp. 2d at
43
533.
“The Economic Loss Doctrine provides that no cause of
action exists for negligence that results solely in economic
damages unaccompanied by physical or property damage.”
Adams v. Cooper Beach Townhome Communities, L.P., 816
A.2d 301, 305 (Pa. Super. 2003). “[T]he Economic Loss
Doctrine is concerned with two main factors: foreseeability and
limitation of liability.” Id. at 307
Pennsylvania appellate courts first discussed this doctrine
in Aikens v. Baltimore & Ohio R.R. Co., 501 A.2d 277 (Pa.
Super. 1985). There, employees of a manufacturing company
sued a railroad company to recover wages lost when their plant
had to close because of damage inflicted by a derailment
allegedly caused by the railroad company’s negligence. The
employees did not suffer any personal injuries or loss of
property. In appealing the trial court’s judgment on the
44
pleadings in favor of the railroad, the employees argued that the
Pennsylvania Superior Court should recognize “a cause of
action to compensate a party suffering purely economic loss,
absent any direct physical injury or property damage, as a result
of the negligence of another party.” 501 A.2d at 278. The
Superior Court declined the invitation; instead, the court
adopted the general rule set forth in the Restatement (Second)
of Torts § 766C. That rule provides as follows:
Negligent Interference with Contract or
Prospective Contractual Relation.
One is not liable to another for pecuniary harm
not deriving from physical harm to the other, if
that harm results from the actor’s negligently
(a) causing a third person not to perform a
contract with the other, or
(b) interfering with the other’s performance of his
contract or making the performance more
expensive or burdensome, or
(c) interfering with the others acquiring a contractual
relation with a third person.
The Superior Court noted that under § 766C, “recovery for
45
purely economic loss occasioned by tortuous interference with
contract or economic advantage is not available under a
negligence theory.” 501 A.2d at 278 (citation omitted).
As the Superior Court explained, the “roots of this well-
established rule” reach back to the U.S. Supreme Court’s
decision in Robins Dry Dock and Repair Co. v. Flint, 275 U.S.
303 (1927). The Superior Court quoted from the Supreme
Court’s decision in Flint, in concluding that:
negligent harm to economic advantage alone is
too remote for recovery under a negligence
theory. The reason that a plaintiff cannot recover
stems from the fact that the negligent actor has no
knowledge of the contract or prospective relation
and thus has no reason to foresee any harm to the
plaintiff’s interest.
501 A.2d at 279.
Moreover, as the Superior Court stressed, there are sound
public policy reasons to condition tort recovery on injury to
person or property.
46
[A]llowance of a cause of action for negligent
interference with economic advantage would
create an undue burden upon industrial freedom
of action, and would create a disproportion
between the large amount of damages that might
be recovered and the extent of defendant’s fault.
See Restatement (Second) of Torts Sec. 766c,
comment a (1979). To allow a cause of action for
negligent cause of purely economic loss would be
to open the door to every person or business to
bring a cause of action. Such an outstanding
burden is clearly inappropriate and a danger to
our economic system.
Id. Accordingly, the Superior Court held “that no cause of
action exists for negligence that causes only economic loss.” Id.
In its negligence claim against BJ’s, Sovereign is seeking
to recover the costs associated with replacement of some of its
customers’ Visa cards and the amounts it paid to reimburse
customers whose magnetic-stripe data was used for fraudulent
purchases. Sovereign tries to get around the fatal limitation of
the economic loss doctrine by relying on the Pennsylvania
Supreme Court’s decision in Bilt-Rite Contractors, Inc. v. The
47
Architectural Studio, 866 A.2d 270 (Pa. 2005). Sovereign
claims that Bilt-Rite severely weakened the economic loss
doctrine as first announced in Aikens v. Baltimore & Ohio R.R.
Co., supra.
Sovereign first claims that the district court erred in
assessing its losses in purely economic terms, because it also
incurred a loss of property, i.e. money, because of BJ’s alleged
negligence. The argument is meritless. Not surprisingly,
Sovereign cites no authority to support its contention that its
financial loss negates the economic loss doctrine. Indeed, the
argument would totally eviscerate the economic loss doctrine
because any economic loss would morph into the required loss
of property and thereby furnish the damages required for a
negligence claim.
Sovereign also attempts to pirouette around the economic
loss doctrine by arguing that it only applies when the plaintiff
48
has suffered an unforeseeable loss, and then claiming that its
loss was clearly a foreseeable result of BJ’s negligence. We do
not doubt that Sovereign’s loss was a foreseeable result of not
taking appropriate precautions to protect its cardholders’
information. However, that does not advance Sovereign’s claim
to the extent that Sovereign believes. We agree that the court
in Aikens did explain that the economic loss doctrine was partly
the result of a policy consideration to not impose loss for an
unforeseeable result. However, that is of no consequence here
because Sovereign did not incur any loss of property.
Moreover, Sovereign’s argument ignores the thrust of the public
policy rational explained in Aikens.
Finally, Sovereign claims that the decision in Bilt-Rite
Contractors, Inc. v. The Architectural Studio, supra, severely
weakened the economic loss doctrine by permitting negligence
claims to proceed without regard to economic loss. There, Bilt-
49
Rite, a general contractor, entered into a construction contract
to build a new school for a school district. In formulating its
winning bid for the contract, Bilt-Rite claimed that it had relied
on the drawings and specifications prepared by an architect who
had been hired by the school district for the very purpose of
preparing drawings and specifications that were to be used to
prepare bids. However, during the subsequent construction,
Bilt-Rite discovered that some of the representations in the
specifications were inaccurate. Bilt-Rite incurred significant
cost overruns in attempting to build the building, and it sued the
architect for negligent misrepresentation to recover its losses.
The trial court sustained the architect’s preliminary
objections based on the operation of the economic loss doctrine
and the Pennsylvania Superior Court affirmed. On appeal, the
Pennsylvania Supreme Court held that the economic loss
doctrine did not bar the contractor’s negligent misrepresentation
50
action. Sovereign relies on the following language from the
Pennsylvania Supreme Court’s majority opinion:
Here, [the contractor] had no contractual
relationship with [the architect]; thus, recovery
under a contract is not available to [the
contractor]. Having found that [the contractor]
states a viable claim for negligent
misrepresentation . . . , and that privity is not a
prerequisite for maintaining such an action, logic
dictates that [the contractor] not be barred from
recovering the damages it incurred, if proven.
Indeed, to apply the economic loss doctrine . . .
would be non-sensical: it would allow a party to
pursue an action only to hold that, once the
elements of the cause of action are shown, the
party is unable to recover for its losses.
866 A.2d at 288 (emphasis is Sovereign’s). Sovereign attempts
to leverage this excerpt from the majority opinion in Bilt-Rite
into a claim that applying the economic loss doctrine here
would be equally nonsensical. However, this argument is
completely without merit.
Sovereign concedes that “the bulk of the Supreme
51
Court’s opinion in Bilt-Rite focuses not on the economic loss
doctrine, but on whether or not in the context of a negligent
misrepresentation claim, plaintiff could establish the existence
of a duty on the part of the architect absent privity of contract.”
Sovereign’s Br. at 42. Moreover, the decision did not, as
Sovereign claims, severely weaken the economic loss doctrine.
Rather, the Court simply made an exception to the doctrine to
allow a commercial plaintiff recourse from an “expert supplier
of information” with whom the plaintiff has no contractual
relationship, when the plaintiff has relied on that person’s
“special expertise” and the “supplier negligently misrepresents
the information to another in privity.” 866 A.2d at 286. That
is simply not our case.8 The Pennsylvania Supreme Court never
8
Moreover, in reaching its decision in Bilt-Rite, the
Court adopted the Restatement (Second) of Torts § 552,
which is entitled: “Information Negligently Supplied for the
Guidance of Others,” and which provides:
52
suggested that it intended to severely weaken or undermine the
economic loss doctrine in a case such as this. It simply carved
(1) 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.
(2) Except as stated in Subsection (3), the liability stated in
Subsection (1) is limited to loss suffered
(a) by the person or one of a limited group of persons for
whose benefit and guidance he intends to supply the
information or knows that the recipient intends to supply it; and
(b) through reliance upon it in a transaction that he intends
the information to influence or knows that the recipient so
intends or in a substantially similar transaction.
(3) The liability of one who is under a public duty to give the
information extends to loss suffered by any of the class of
persons for whose benefit the duty is created, in any of the
transactions in which it is intended to protect them.
53
out a narrow exception when losses result from the reliance on
the advice of professionals.
Thus, the district court correctly held that Sovereign’s
negligence claim against BJ’s was barred by the economic loss
doctrine.
D. CONCLUSION
For the above reasons, we will reverse the district court’s
grant of summary judgment to Fifth Third on Sovereign’s
breach of contract claim and remand for further proceedings.
However, we will affirm the district court’s dismissal of
Sovereign’s equitable indemnification claims against Fifth
Third and BJ’s and its dismissal of Sovereign’s negligence
claim against BJ’s.
III. Pennsylvania State Employees Credit Union v.
Fifth Third Bank and BJ’s Wholesale Club, Inc.
(No. 06-3405)
The Pennsylvania State Employees Credit Union is the
54
Issuer of Visa cards to it members, Fifth Third is the Acquirer
and BJ’s is the Merchant. After discovering the breach of
Cardholder Information retained in BJ’s system, PSECU
canceled approximately 20,000 of its Visa cards that had been
used at BJ’s. It then reissued Visa cards with new account
numbers and new Cardholder Information at a cost of
approximately $98,000. PSECU brought this action to recover
related costs.9
PSECU filed an amended complaint against Fifth Third
and BJ’s alleging breach of contract, negligence, equitable
indemnification, and unjust enrichment.10 Fifth Third and BJ’s
9
It appears that PSECU went through the Visa
Compliance Process and was made whole by Fifth Third for
the money paid to PSECU’s cardholders as a result of BJ’s
retention of the Cardholder Information.
10
PSECU initiated the action in state court, but the
case was subsequently removed to the Middle District of
Pennsylvania. After removal, BJ’s filed a third-party
55
separately filed Rule 12(b)(6) motions to dismiss the amended
complaint. The district court dismissed all of PSECU’s claims
against BJ’s pursuant to BJ’s 12(b)(6) motion. The district court
also dismissed all of PSECU’s claims against Fifth Third except
for PSECU’s breach of contract claim. Pennsylvania State
Employees Credit Union v. Fifth Third Bank, 398 F. Supp. 2d
317 (M.D. Pa. 2005).
After limited discovery, the district court granted
summary judgment in favor of Fifth Third on PSECU’s breach
of contract claim, holding that PSECU, like Sovereign, was not
an intended beneficiary of the Visa-Fifth Third Member
complaint against International Business Machines
Corporation, (“IBM”) alleging that IBM’s software failed to
comply with BJ’s instructions not to retain Cardholder
Information. BJ’s sought to recover damages PSECU might
be awarded in its suit against BJ’s. However, the district court
granted IBM’s motion to dismiss BJ’s third-party complaint.
Consequently, that matter is not before us.
56
Agreement. Pennsylvania State Employees Credit Union v.
Fifth Third Bank, 2006 WL 1724574 (M.D. Pa. June 16, 2006).
This appeal followed.
PSECU challenges the grant of summary judgment to
Fifth Third on PSECU’s breach of contract claim and the
district court’s dismissal of its claims against Fifth Third and
BJ’s for negligence and unjust enrichment.
A. PSECU’s Breach of Contract Claim Against Fifth
Third.
PSECU’s breach of contract claim parallels Sovereign’s
breach of contract claim that we just discussed in No. 06-3392.
PSECU asserts that it is a third-party or intended beneficiary of
Fifth Third’s Member Agreement with VISA requiring Fifth
Third to ensure BJ’s compliance with the Visa Operating
Regulations. PSECU relies on the same documentary evidence
and deposition testimony that formed the basis of Sovereign’s
57
third-party beneficiary claim against Fifth Third. PSECU’s
arguments on appeal mirror Sovereign’s third party beneficiary
arguments, and our analysis of Sovereign’s third party
beneficiary claim therefore applies with equal force to PSECU’s
breach of contract claim. Accordingly, for the reasons set forth
in 06-3392, we will reverse the district court’s grant of
summary judgment to Fifth Third on PSECU’s breach of
contract claim and remand for further proceedings.
B. PSECU’s Negligence Claims Against BJ’s and Fifth
Third.
In asserting negligence claims against BJ’s and Fifth
Third, PSECU argues that BJ’s had a duty to comply with the
Visa Operating Regulations, and that Fifth Third had a duty to
ensure compliance. PSECU alleged that both parties negligently
breached their duties. The district court dismissed both
negligence claims based upon the economic loss doctrine that
58
we have already discussed in No. 06-3392.
PSECU makes two arguments in contesting the district
court’s application of the economic loss doctrine. First, PSECU
maintains that BJ’s and Fifth Third’s negligence resulted in
physical damage to PSECU’s property – the Visa cards - and
the doctrine was therefore not applicable. PSECU’s theory
proceeds as follows:
BJ’s and Fifth Third’s negligence allowed
unauthorized third parties to access the magnetic
stripe data from these Visa cards and convert that
data to their own purposes. Once this credit card
information was in the hands of third parties, the
associated Visa cards were rendered useless,
necessitating their replacement. [BJ’s and Fifth
Third’s] negligence, therefore, resulted in a
physical act (third party access) which damaged
physical property (the Visa cards) that belonged
to PSECU. PSECU therefore suffered property
damage as a result of [BJ’s and Fifth Third’s]
negligence and its claims should not be barred by
the economic loss doctrine.
PSECU’s Br. at 39-40. We cannot agree.
59
Even if we assume arguendo that destruction of the Visa
cards constitutes the kind of property damage that can be
compensated in a negligence action, PSECU’s argument still
fails because it ignores the fact that the Visa cards were not
damaged; they were cancelled. Therefore, if the magnetic-
stripe data constitutes physical property, PSECU’s negligence
claim is still not advanced. The data was copied, not destroyed.
Furthermore, the cards themselves remained intact and useable
until cancelled by PSECU. The fraudulent transactions had no
physical effect on either the cards, the data encoded on the
cards, or the magnetic-stripe which contained that data. The
fraudulent activity simply did not render the cards useless. The
cardholders could continue to use them to make purchases after
the information was compromised. Indeed, as BJ’s notes,
PSECU deemed the cards useless not because they were
damaged, but because PSECU was exposed to liability for
60
unauthorized charges. PSECU decided to limit that exposure by
canceling cards and reissuing new ones, but, that does not
establish that PSECU’s property was damaged.
Second, PSECU contends that the economic loss
doctrine does not apply because the parties are not in privity of
contract and the justifications for application of the doctrine are
not advanced by its application here. PSECU relies on Bilt-Rite
Contractors, Inc. v. The Architectural Studio, 866 A.2d 270
(Pa. 2005). PSECU also argues that that case constituted a
“sweeping departure from previous incantations of the
economic loss doctrine.” PSECU’s Br. at 43. According to
PSECU, in Bilt-Rite “the Pennsylvania Supreme Court held that
the economic loss doctrine may not apply where the plaintiff
has no available contract remedy.” PSECU’s Br. at 41 It bases
that argument on the following excerpt from Bilt-Rite:
Pennsylvania has long recognized that purely
61
economic losses are recoverable in a variety of
tort actions . . . . We agree with that court that a
plaintiff is not barred from recovering economic
losses simply because the action sounds in tort
rather than contract law. Here, Bilt-Rite had no
contractual relationship with TAS; thus, recovery
under a contract is not available to Bilt-Rite.
Having found that Bilt-Rite states a viable claim
for negligent representation . . . and that privity is
not a prerequisite for maintaining such an action,
logic dictates that Bilt-Rite not be barred from
recovering the damages it incurred.
866 A.2d at 288 (emphasis is PSECU’s).
However, we have already explained that Bilt-Rite did
not hold that the economic loss doctrine may not apply where
the plaintiff has no available contract remedy. As explained in
Sovereign’s appeal, the Bilt-Rite Court simply carved-out an
exception to allow a commercial plaintiff to seek recourse from
an “expert supplier of information” with whom the plaintiff has
no contractual relationship, in very narrow circumstances not
relevant here. 866 A.2d at 268. The Pennsylvania Supreme
62
Court emphasized that its holding was limited to those
“businesses” which provide services and/or information that
they know will be relied upon by third parties in their business
endeavors. . . .” Id. Acordingly, the district court did not err in
dismissing PSECU’s negligence claims against BJ’s and Fifth
Third.
C. PSECU’s Claims For Unjust Enrichment Against
Fifth Third and BJ’s.
The elements of unjust enrichment under Pennsylvania
law have been defined as follows:
(1) benefits conferred on defendant by plaintiff;
(2) appreciation of such benefits by defendant;
and (3) acceptance and retention of such
benefits under such circumstances that it would
be inequitable for defendant to retain the
benefit without payment of value.
Limbach Co. LLC v. City of Philadelphia, 905 A.2d 567, 575
(Pa. Commw. Ct. 2006) (citation omitted). The cause of action
is similar to a claim for equitable indemnification that we
63
discussed in No. 06-3392. “To sustain a claim of unjust
enrichment, a claimant must show that the party against whom
recovery is sought either wrongfully secured or passively
received a benefit that it would be unconscionable for her to
retain.” Torchia v. Torchia, 499 A.2d 581, 582 (Pa. Super.
1985) However, a claim for unjust enrichment requires more
than a showing that the defendant may have benefitted in some
way from the disputed conduct. Walter v. Magee-Womens
Hosp., 876 A.2d 400, 407 (Pa. Super. 2005).
PSECU argues that BJ’s and Fifth Third benefitted from
PSECU’s cancellation and replacement of its Visa cards
because the cancellation stopped the fraudulent use of those
cards and permitted PSECU’s members to resume using their
cards for retail purchases. PSECU’s actions also limited the
liability that BJ’s and Fifth Third would otherwise have
incurred to PSECU and its members. Thus, argues PSECU,
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BJ’s and Fifth Third’s acceptance and retention of the benefits
conferred without compensation to PSECU, would be
inequitable. Accordingly, BJ’s and Fifth Third were unjustly
enriched by PSECU’s cancelling and replacing its members’
Visa cards. We cannot agree.
The district court held that BJ’s and Fifth Third received
no benefit from PSECU’s cancelling and reissuing of its
members’ Visa cards because PSECU replaced the cards
pursuant to its contractual obligation with its cardholders. The
district court relied on Allegheny Gen. Hosp. v. Philip Morris,
Inc., 228 F.3d 429 (3d Cir. 2000), in holding that any benefit
that BJ’s or Fifth Third may have derived was purely incidental,
and could not form the basis of an unjust enrichment claim.
398 F. Supp. 2d at 331.
In Allegheny Gen. Hospital, a group of hospitals sued
various tobacco companies asserting an unjust enrichment claim
65
for unreimbursed medical care the hospitals had provided to
nonpaying, diseased smokers. The hospitals claimed that “by
paying for the medical services required by nonpaying patients,
the Hospitals discharged the Tobacco Companies’ legal duties
and saved them from bearing costs caused by their fraudulent
and wrongful conduct.” 228 F.3d at 447. We held that a claim
for unjust enrichment may not be based on the performance of
an obligation that is independently owed to third parties:
In addition, since the Hospitals had an
independent obligation to provide health care to
the nonpaying patients [through Medicaid],
incidental benefit to the Tobacco Companies is
not enough to maintain an action; the nonpaying
patients get the main benefit, not the Tobacco
companies. See Restatement of Restitution § 106
(1937) (“A person who, incidentally to the
performance of his own duty . . . has conferred a
benefit upon another, is not thereby entitled to
contribution.”).
Id.
PSECU’s unjust enrichment claims against BJ’s and
66
Fifth Third are analogous to the hospital’s failed unjust
enrichment claim against the tobacco companies. PSECU
attempts to distinguish Allegheny by arguing that, unlike the
hospitals, it did not replace its members’ Visa cards pursuant to
an independent obligation. However, PSECU’s amended
complaint fatally undermines that contention. There, PSECU
alleged that it replaced its members’ Visa cards “to fulfill a
contractual obligation to its customers.” Am. Compl. ¶ 65.
Although PSECU’s attempt to salvage its unjust enrichment
claim now requires that it take a contrary position, the allegation
in the amended complaint is a binding judicial admission. See
Parilla v. IAP Worldwide Serv., VI, Inc., 368 F.3d 269, 275 (3d
Cir. 2004) (“Judicial admissions are formal concessions in the
pleadings, or stipulations by the party or its counsel, that are
binding upon the party making them.”). Accordingly, the
district court properly dismissed the unjust enrichment claim.
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Finally, PSECU tries to distinguish this case from
Allegheny. According to PSECU, this case should be governed
by the Restatement of Restitution § 81, which provides:
Unless otherwise agreed, a person who has
discharged more than his proportionate share of
a duty owed by himself and another as to which,
between the two, neither had a prior duty of
performance, is entitled to contribution from the
other, except where the payor is barred by the
wrongful nature of his conduct.
Comment (b) offers the following guidance:
The rule stated in this Section applies where two
or more persons are interested in an enterprise out
of which the obligation arises, whether as primary
or secondary obligors, and where neither of them
with respect to the other has a prior duty of
performance, irrespective of the question
whether, as between them and the creditor, one of
them appears to be primarily responsible.
Comment (c) explains the limited scope of § 81:
The rule stated in this Section is limited to those
who are parties to a single transaction or series of
transactions. If there is but one debt or duty, the
fact that there are a number of separate
68
agreements which guarantee its performance does
not prevent contribution between all the
secondary obligors.
Id. at comment (c).
PSECU argues that it entered into the series of contracts
that make up the Visa system with BJ’s and Fifth Third, but it
does not have any “prior duty of performance” within the Visa
system. PSECU concedes that it did allege that it replaced its
members’ cards pursuant to its contractual obligations within
the Visa system. However, it submits that Visa’s designated
representative’s deposition testimony establishes that
cancellation and reissuance of its members cards is only one of
a number of options an Issuer may take in response to a breach
of Cardholder Information by a Merchant or Acquirer.
According to PSECU, this establishes that it had no
obligation to cancel and reissue the cards; rather, doing so was
just one of PSECU’s options under the Visa system. PSECU
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claims that by promptly cancelling and replacing cards, it
protected BJ’s and Fifth Third from greater fraud losses, which
would have been shifted to Fifth Third’s compliance process
(and then shifted to BJ’s for indemnification to Fifth Third).
PSECU concludes that it, BJ’s and Fifth Third are all
“interested in an enterprise [the Visa system, and its associated
network of contracts] out of which [obligations] arise,” as to
which none of the three have a prior duty of performance.”
PSECU’s Br. at 55 (quoting Restatement of Restitution § 81,
comment (b)). It further says that by cancelling and reissuing
its members’ Visa cards, it “discharged more than [its]
proportionate share of a duty owed by [PSECU, BJ’s and Fifth
Third]” “as to which, between the [three], neither had a prior
duty of performance.” Id. (quoting Restatement of Restitution
§ 81). Therefore, PSECU contends that it is entitled to
contribution from BJ’s and Fifth Third on its unjust enrichment
70
theory, regardless of whether PSECU, BJ’s or Fifth Third
“appears to be primarily responsible” for reissuance of Visa
cards. Id. (quoting Restatement of Restitution § 81, comment
(b)).
This argument has some facial appeal. However,
PSECU did not make this argument in the district court, and we
therefore need not determine its merit now. “Generally, barring
exceptional circumstances, like an intervening change in the law
or the lack of representation by an attorney, this Court does not
review issues raised for the first time at the appellate level.”
Gleason v. Norwest Mortgage, Inc., 243 F.3d 130, 142 (3d Cir.
2001). PSECU does not contend that there are exceptional
circumstances present here, and we do not find any.
Accordingly, this argument has been waived, and we will reject
it without discussion.
We conclude that the district court did not err in
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dismissing PSECU’s unjust enrichment claim against either
BJ’s or Fifth Third.
D. CONCLUSION
For all of the above reasons, we will reverse the district
court’s grant of summary judgment to Fifth Third on PSECU’s
breach of contract claim, but affirm that court’s dismissal of
PSECU’s negligence and unjust enrichment claims against Fifth
Third and BJ’s.
72