The Fifth Circuit Addresses New Jersey’s Economic Loss Doctrine

Lone Star Nat’l Bank, N.A. v. Heartland Payment Systems, Inc., 729 F.3d 421 (5th Cir. 2013).  In September, the Fifth Circuit issued this short opinion that interprets and applies New Jersey’s economic loss doctrine.  That doctrine, embodied in leading cases such as Spring Motors Distribs., Inc. v. Ford Motor Co.,  98 N.J. 555 (1985), and People Express Airlines, Inc. v. Consolidated Rail Corp., 100 N.J. 246 (1985), “generally limits a plaintiff seeking to recover purely economic losses, such as lost profits, to contractual remedies,” and precludes suit on tort theories.  As the Fifth Circuit went on to note, however, “the economic loss doctrine does not bar tort recovery where the defendant causes an identifiable class of plaintiffs to which it owes a duty of care to suffer economic loss that does not result in boundless liability.”

This case involved a chain of parties.  The plaintiff banks had contracts with Visa and MasterCard that allowed those “Issuer Banks” to issue credit and debit cards to customers.  When customers use those cards at a merchant, the card information is sent from the merchant through an “Acquirer Bank” to a processor, here, defendant Heartland, for verification.  The processor then notifies the Issuer Bank.  “The approval or disapproval of use of the card is then transmitted back to the merchant through this chain.”

The Acquirer Banks had contracts with Heartland, but the Issuer Banks, who were remote in this chain, did not.  A data breach occurred at Heartland, and the Issuer Banks allegedly incurred costs associated with replacing their customers’ affected credit or debit cards and in reimbursing customers for fraudulent charges that resulted from the data breach.  The Issuer Banks sued Heartland, but since they had no direct contractual relationship, the Issuer Banks made claims based on a negligence theory and on the idea that the Issuer Banks were third party beneficiaries of the contracts between the Acquirer Banks and Heartland.

Heartland moved to dismiss for failure to state a claim.  The district court granted that motion, relying on the economic loss doctrine.  The Issuer Banks appealed, and the Fifth Circuit reversed.

After discussing Spring Motors and People Express, as well as some District of New Jersey cases and a Third Circuit opinion, the panel concluded that the Issuer Banks were an “identifiable class” to whom Heartland had a duty, since the Issuer Banks were in the reporting chain, as Heartland knew, and that there was no “boundless liability.”  Moreover, it would defy the “notions of fairness, common sense and morality” that People Express emphasized if the Issuer Banks could not bring their tort-based claims.  Accordingly, “[m]indful that [t]he New Jersey Supreme Court has long been a leader in expanding tort liabliity,” and “in light of the lack of a developed record illuminating any contractual remedies available to the Issuer Banks,” the economic loss doctrine was not a basis to dismiss the case at the pleadings stage.

The Fifth Circuit is not known as a plaintiff-friendly venue.  Having decided to apply New Jersey law, however, rather than Texas law as Heartland requested, the panel showed great intellectual integrity in abiding by the Supreme Court of New Jersey’s approach to the economic loss doctrine.

Thanks to a faithful reader of this blog for bringing this case to my attention.