Today, in an effort raise awareness of privacy and data privacy, the United States, Canada and 27 countries of the European Union celebrate International Data Privacy Day. Many organizations use Data Privacy Day as an opportunity to educate their employees and stakeholders about privacy-related topics. With the recent, high-profile data breaches as Target, Neiman Marcus, and potentially, Michaels, the need for training and instruction on data security is more critical than ever before. In this vein, we’ve set forth our views on what we see as the year ahead in legal developments relating to data security and what companies can do to prepare.
Legislation Introduced but on the Move?
Data security and data breaches will continue to be the focus of regulators and Congress through 2014. In fact, Congress summoned Target’s Chief Financial Officer to appear before the Senate Judiciary Committee on February 4th and a House committee is seeking extensive documents from Target about its security program. Meanwhile, Senator Leahy re-introduced data breach legislation which would set a federal standard for data breach notifications (most states now require notifications, though the requirements differ state-to-state).
Senators Carper and Blunt introduced a separate bipartisan bill intended to establish national data security standards, set a federal breach notification requirement, and also require notification to federal agencies, police, and consumer reporting agencies when breaches affect more than 5,000 persons. Many companies have suffered data breaches and then faced civil lawsuits under various causes of actions, including allegations that they did not notify customers promptly. As a result, there may be strong support for federal standards rather than facing a patchwork of state laws. While the Target breach has certainly renewed interest in data security, and we expect Congress will conduct numerous hearings, ultimate passage of data breach legislation this Congress is still probably a longshot.
Watching Wyndham Take on FTC
As covered in this blog, various Wyndham entities have struck back at the FTC, challenging the FTC’s authority to bring an action against Wyndham for alleged data security failures. The Wyndham entities claim that the FTC may not set data security standards absent specific authority from Congress. Yet, with Congress having not set data security standards thus far, the court in oral arguments seemed concerned about leaving a void in the data security area. Wyndham’s motion to dismiss remains pending in federal court in New Jersey. Most observers think the court will be hard pressed to limit the FTC’s authority under Section 5 of the FTC Act, which broadly prohibits ”unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce” and provides the FTC with administrative and civil litigation enforcement authority. The agency has used this administrative authority with great success, bringing numerous data privacy actions that usually result in settlements by companies rather than risk further litigation expenses, penalties, and reputational damage. We think the FTC will remain vigilant in this space, including attention on the security of mobile apps.
Class Actions Jump on Breaches
Whether breaches affect Sony Playstation, Adobe, Target, or some other company, the class action firms have been busy filing lawsuits based upon data breaches. For example, by year end, at least 40 suits had already been filed against Target, with seven filed the day Target disclosed the breach. The plaintiffs use various theories – including violations of consumer protection statutes, negligence, fraud, breach of contract, breach of fiduciary duty, invasion of privacy and conversion. But, if a consumer’s information was potentially breached, yet nothing happened to the consumer as a result, does that consumer have cognizable damages? That has been a huge sticking point for these lawsuits. Yet, the class action lawyers will continue to file these suits and some companies will settle to avoid further reputational damages and litigation expenses.
Don’t Count out the States
States have taken the lead in setting data breach notification standards, and in some cases data security requirements. For instance, in March 2010, Massachusetts enacted strict data security regulations. Organizations that own or license personal information of Massachusetts residents are required to develop and implement a written comprehensive information security program (“CISP”) to protect that information. Almost all of the states have standards setting forth what types of information are covered by data breaches, who gets notified, what content goes in the notifications and, the timing of the notifications. Multiple states are investigating the Target breach; certainly less well known breaches get state regulators’ attention as well. We predict the states will continue to be active regulators and enforcers of data security and data breaches, and will likely continue to “rule the roost” while federal legislation lags behind.
Preparation and Training Still Key
We’ve said before that, unfortunately, no company is immune from data breaches. Companies cannot assume that they have the best anti-malware or security features and that these other newsworthy breaches resulted from lapses that would not apply to them. Whether it is a sophisticated hacker or, more commonly, a well-meaning but negligent employee, data loss and data breaches will occur. All organizations should have procedures in place NOW to prevent data loss and to prepare for a breach. This includes IT, human resources, legal, and communications resources. Companies should designate a “data security/data breach” team with representatives from these key departments (working with outside counsel and other privacy breach specialists when needed). The team should meet periodically to review procedures, recommend improvements, and engage in periodic training on data security.
We can’t stress here enough about employee training. An employee who, for instance, wants to finish a project at home after stopping by the gym might download information that contains sensitive personal information onto a flash drive. Let’s say the gym bag gets stolen, along with the flash drive. Well, the employee’s unlucky company may now have a huge data breach situation on its hands requiring notices to customers, state attorneys general, and potential litigation and other expenses (such as paying for creditor monitoring, now industry standard). Employees need training about securing sensitive information – from shredding documents instead of putting them in the dumpster, to encrypting information that is being taken offsite, to avoiding “phishing” scams, to having unique passwords they change periodically. According to recent reports, “password” and “123456” are still among the most popular passwords. While data breaches cannot be avoided completely, we can ameliorate some risks with better practices in our organizations.