Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca11-14-14258/USCOURTS-ca11-14-14258-0/pdf.json

Parties Involved:
Leading Market Technologies, Inc.
Appellant
Silverpop Systems, Inc
Appellee

Document Text:

[DO NOT PUBLISH]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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I. FACTUAL BACKGROUNDPlaintiff 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-mailmarketing tool (Engage). In accordance with the terms of the agreement, LMTwould upload digital advertising content and recipient e-mail addresses to the

Engage system. That advertising content would then be transmitted to the e-mailaddresses provided. The list of e-mail addresses provided by LMT was stored onthe 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 Engagesystem. 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 MarketBrowersoftware ("LMT List").

In November 2010, Silverpop's computer network experienced an

unauthorized intrusion by unidentified parties ("hackers") who gained access to theinformation stored on the Engage system by 110 of Silverpop's 1,500

customers("data breach"). LMT was one of the customers affected by the databreach. 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 ASMOOT.2 Plaintiff's second motion in limine Doc, No. 66J is incorrectly identified as such. It is in fact the memorandum insupport 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 summaryjudgment 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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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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List was property outside of the subject of the contract and the List lost all value asa saleable asset because no reasonable business would buy a list which had beenthe 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), 460S.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 dutyimposed 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 arisingfrom the breach of a contractual duty. . . or whether the plaintiff seeks to recoverfor 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 contendsthat 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 LMTList 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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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 incidentresulting in the data breach was a sudden and calamitous event that caused damageto 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 aproduct. But even if the Engage system was considered a "product" that LMT hadthe 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 somecatastrophic 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 apecuniary interest has a duty of reasonable care and competence to

parties who rely upon the information in circumstances in which themaker was manifestly aware of the use to which the information wasto 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 andits 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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misrepresentation claims.. . fell within the misrepresentation exception" to the

economic loss rule a claim based on any other tort would have to be encompassedby 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 ruleapplies to bar LMT's recovery in tort.

3. LMT'S COUNTERCLAIM FOR BREACH OF CONTRACT6Each 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 thebreach were direct rather than consequential and, thus, recoverable under the

contract, and even if those damages were consequential, its recovery is not barredunder the damages limitation provision of the contract. Silverpop, on the otherhand, 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 damageswere caused by Silverpop's alleged breach of the contract, and cannot recover thedamages it seeks because they are consequential damages and the contract bars therecovery 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 areconsequential rather than direct. It is important here to categorize the damagessought 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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measures to protect against the November 2010 data breach and, as a result, anunauthorized third party was able to access the LMT List. LMT contends that itslist, 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.7Assuming, 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 wasa confidential document that Silverpop was required to protect from disclosureunder Section 4.1 of the parties' agreement, the question that must be answered iswhich of the two categories of damages (direct or consequential) does the loss ofsale 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 fromsuch 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., consequentialdamages]." 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 veryperformance promised" and consequential damages as those damages that "seek to

compensate a plaintiff for additional losses (other than the value of the promisedperformance) 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, whichwould 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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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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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 thesurvival provision encompass all the terms and provisions included in theagreement. Thus, according to LMT, the only provisions that survived thetermination 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 notrepresent a performance obligation) would be extinguished. While the agreementwas in force, the choice of law provision in the agreement would dictate the statelaw 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 incidentfollowing the agreement's termination. There is no cogent reason why the partieswould have elected to apply the law of a particular state to a dispute litigated whilethe 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 relevantprovisions. Under that interpretation, structural provisions (such as the choice oflaw provision) remain unaffected by the termination of the agreement and applyuniformly regardless of whether the agreement is in force or has been terminated.

The damages limitation provision in the parties' agreement is not a performanceobligation that is extinguished upon an agreement's termination. Rather, thatprovision, which limits the damages LMT may recoup, is more akin to a structuralprovision governing remedies and the resolution of disputes under a contract. As

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