Genesco Wins One, Loses One in Its Case Challenging PCI DSS Fines and Assessments

On November 25, 2013, Chief Judge William Haynes filed the latest order in Genesco v. Visa, Civ. No. 3:13-cv-00202 (M.D. Tenn.).  In his one-line order, Judge Haynes denied Genesco’s motion for partial summary judgment “without prejudice to renew after a reasonable period of discovery.”  Dkt # 217.  Genesco had asked for judgment as a matter of law on its claims that Visa’s fines for Genesco’s alleged noncompliance with the Payment Card Industry Data Security Standard (“PCI DSS”) violated Genesco’s acquiring banks’ contracts with Visa, violated the California Unfair Businesses Practices Act (“UCL”), or unjustly enriched Visa.  See Genesco’s Memo. in Support of its Motion for PSJ, Dkt # 54, pp. 2-6.  The court’s denial of Genesco’s motion leaves most of the key issues in this important case to be resolved.

Genesco, a retailer with 2,440 stores in the U.S., U.K., Canada, and Ireland, sued the three Visa entities in March 2013 after Visa imposed a total of $13,298,900 in PCI DSS noncompliance fines and assessments.  Complaint, Dkt # 1, ¶ 1.  Genesco alleges that California law applies because the Visa defendants have their principal offices in California.  Id., ¶¶ 3-6.  Visa imposed the fines and assessments against Genesco’s acquiring banks, Wells Fargo and Fifth Third (Id.), after criminals penetrated Genesco’s cardholder environment and allegedly exfiltrated card data from December 2009 to December 2010.  Answer, Dkt # 51, ¶ 17.  Visa asserts that the Genesco breach “was one of the largest in the history of the Visa system, lasting more than a year and placing millions of Visa accounts at risk.”  Visa Reply in Support of Motion to Dismiss, Dkt # 45, p. 2.

Genesco claims it should recover the Visa fines and assessments for several reasons, including because “at the time of the Intrusion and at all relevant times Genesco was in compliance with the PCI DSS requirements . . . .”  Complaint, Dkt # 1, ¶ 48.  Although Visa collected the fines and assessments from Genesco’s acquiring banks, Genesco alleges that Wells Fargo assigned its right to challenge the fines and assessments to Genesco in the reserve account agreement between Wells Fargo and Genesco.  Id., ¶ 38.  Genesco also asserts that it is an equitable subrogee of Wells Fargo and Fifth Third that may proceed against Visa in the place of the banks because Genesco agreed to indemnify the banks and, in fact, reimbursed them.  Id., ¶¶ 11-13; see also Genesco’s Memo in Support of its Motion for PSJ, Dkt # 54, p. 10 & n.2.

Judge Haynes earlier denied Visa’s motion to dismiss Genesco’s UCL and unjust enrichment claims.  Genesco, Inc. v. VISA U.S.A., Inc., et al, 2013 WL 3790647 (M.D. Tenn. July 18, 2013).  In that order, the court held:

• The UCL is broad and covers claims unconscionable commercial contract terms where the terms of the contract implicate the public interest (Id. at *20);
• Visa’s contracts could be found to be harmful to merchant competition and may be unfair in the market for credit and debit card transactions if Genesco shows, as it alleges, that Visa imposed fines and assessments without a factual basis or in violation of Visa’s standards and procedures (Id. at *21); and
• The fines and assessments may be an unenforceable penalty under California law because they may bear no relationship to actual losses (Id. at *21-22).

Genesco filed its motion for partial summary judgment a few weeks after the court denied Visa’s motion to dismiss, asking the court to determine as a matter of law that Visa’s PCI noncompliance fines violated Visa’s contracts with the acquiring banks and were unenforceable penalties. See Genesco’s Memo. in Support of its Motion for PSJ, Dkt # 54, pp. 2-6.  Visa raised six defenses to Genesco’s motion, arguing among other things that Genesco’s motion ignored that Genesco had the burden of proof to show there were no disputed facts regarding its breach of contract, UCL, and unjust enrichment claims.  Visa’s Memo in Opp. to Genesco’s Motion for PSJ, Dkt # 66, pp. 2-4.  Visa argued that Genesco was asking the court “to issue a far-reaching decision attacking the structure and integrity of the global electronic payments network” based on “Genesco’s miniscule factual showing in support of its own case.”  Id. at 2-3.

While Judge Haynes’s one-line order denying Genesco’s PSJ motion does not provide much  insight into why he denied the motion, some potential clues can be found in the parties’ discovery-related filings.  For example, in a Joint Statement of Matters at Issue filed October 18, 2013 (Dkt # 139), the parties set out their respective positions on a Motion to Compel filed by Visa regarding some of its discovery requests.  Visa argued in the Joint Statement that it is entitled to Genesco documents regarding Genesco’s compliance with PCI DSS requirements before and after the intrusion into its cardholder environment, while Genesco argued that Visa should get only a subset of those documents, i.e., those related to its compliance with the PCI DSS requirements that Visa relied on in imposing the fines and assessments.  Similarly, in Visa’s Supplemental Brief in Support of its Motion to Compel filed November 22, 2013 (Dkt # 210), Visa argued that it was entitled to impose the fines and assessments if Genesco violated any PCI DSS requirements that could have permitted the attack.  Id. at 2-7.  Genesco, on the other hand, argued in the Joint Statement that documents related to any alleged violation of PCI DSS requirements that Visa did not rely on when it imposed the fines and assessments are irrelevant.  Joint Statement, Dkt # 139, p. 4.  It is likely that Judge Haynes concluded he must resolve the parties’ disputes about these issues, among others, before he could decide the claims on which Genesco sought summary judgment.

The Genesco case provides a rare public airing of the debate between merchants and the card brands regarding the PCI DSS and the fines and assessments that the card brands impose.  The case may continue to expose some of those issues and, if the case is not settled, Judge Haynes and a jury will have to resolve them.  Trial is currently scheduled to begin July 22, 2014.  Case Management Order No. 2, Dkt # 26.