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Eleventh Circuit Decides Marketing Company Not Liable for Failure to Protect Client’s Email List Despite Contract’s Confidentiality Provision

hacker-public-domainIn a commercial contract breach case with facts that were very timely, a software company sued its digital marketing services firm for a breach of contract after the marketing firm got hacked, and the software company’s half-a-million-strong list of customer emails was potentially compromised. The 11th Circuit Court of Appeals adopted the ruling of a lower court that sided with the marketing firm, since recovery for the type of contract damages the software company incurred was barred by the terms of the agreement, and the software company didn’t present the necessary evidence to go forward on its negligence claim. The ruling is an important one in terms of assessing just how far an entity’s obligation under a contract’s confidentiality provision reaches.

The underlying events in this case dated to a contract executed in 2005, in which Silverpop Systems, Inc. agreed to provide digital marketing services to Leading Market Technologies, Inc. As part of this agreement, Silverpop was authorized to access Leading’s master list of nearly 500,000 email addresses. This list represented the email of everyone who ever registered for Leading’s MarketBrowser product for researching, monitoring, and analyzing securities. The agreement, as is common in many commercial contracts, contained a provision requiring each side to hold sensitive information in confidence.

The problem erupted when Silverpop got hacked in the fall of 2010. After the breach, Leading stopped paying Silverpop, and Silverpop cut off Leading’s access to its system a few months later. The following summer, Silverpop sued Leading for its nonpayment. Leading countersued, alleging that Silverpop breached the contract, committed fraud by lying about the extent of Silverpop’s defenses against hackers, and committed negligence by failing to maintain the list’s security.

With any breach of contract case, the allegedly injured party, in order to succeed, must show that it suffered damages, that the damages were caused by the other side’s breach, and that the recovery sought is not barred by the contract. Silverpop argued that Leading fell short on all of these points. On the last point, it contended that the damages Leading would have suffered were special (or “consequential”) damages, and recovery for that type of loss was specifically barred by the terms of the agreement.

This third argument proved to be a winner for Silverpop. The court explained that, in contrast with direct damages, which seek to compensate a party for the value of the performance promised by the other side, consequential damages are additional losses beyond direct damages that arise as a result of the other side’s misconduct. In this case, the service that was the subject of this agreement was the provision of digital marketing services, not digital security services. Silverpop’s failure to keep the list secure did not constitute a failure to perform its job under the agreement, since it provided the marketing services it said it would. Silverpop’s failure was a failure to uphold one specific term of the contract (the confidentiality provision), and, based on that, any damages from Silverpop’s lack of security were consequential damages and were not recoverable.

Leading’s negligence claim also failed because it lacked enough proof to carry it forward. With any negligence claim like the one advanced by Leading, the allegedly injured party must show that the other side failed to live up to the applicable standard of care, which means that it must establish what the applicable standard of care was. Leading did not bring forward evidence to show the applicable standard of care in terms of digital security against hackers, so its negligence claim could not proceed.

If you have a commercial contract dispute, especially one that involves additional tort claims, there may be many various aspects of levels of proof and evidence required to proceed and succeed. Having skilled commercial litigation counsel on your side is essential. The diligent Florida commercial litigation attorneys at Stok Folk + Kon can help. Our attorneys have the extensive experience and knowledge you need to protect your interests.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

What to Do When Your Florida Business is Not Paid for Services Rendered, Florida Business Lawyers Blog, Aug. 21, 2015

Company’s Lack of Bad Intent Allows It to Escape Contempt in Florida Breach of Contract Case, Florida Business Lawyers Blog, May 27, 2015