3 Data Breach Liability and Care Standards to Know Now

by Robins Kaplan LLP

Privacy and Cyber Security Litigation (PCS Litigation) has recently experienced extensive growth, particularly when it comes to the liabilities associated with a data breach. PCS Litigation involving data breach may be brought under multiple liability theories. Trying to anticipate which theory—and the accompanying standard of care under which liability will be imposed—complicates PCS Litigation and can create unforeseen challenges.

This article identifies three of the most common causes of action within PCS Litigation and the standard of care that applies in each. Understanding the risks inherent in each kind of case provides an excellent foundation to build upon when creating a comprehensive cyber security preparedness plan.

#1: Data Breach and Negligence
Negligence is the most basic cause of action for a data breach. Ordinarily, a claim for negligence occurs when a company allows private customer data to fall into the wrong hands.  Many of the lawsuits brought after the data breach at Target Corporation are founded in negligence.  In those cases, the claims are based on the allegation that Target negligently stored consumer credit card information in a way that allowed third-party hackers to steal millions of records. 

In any negligence action, the breached company’s conduct will be assessed against the duty of care owed by a reasonable person in similar circumstances.  In these situations, the exact standard required depends on the sensitivity of the stolen data, laws or regulations regarding data storage precautions, and common practices in the industry. For instance, potential sources for standards of care may come from the National Institute of Standards and Technology (NIST) and The Department of Homeland Security's United States Computer Emergency Readiness Team (US-CERT) Bulletins.  Adopting, using, and enforcing these kinds of standards in way that is industry-appropriate should help refute claims in data breach founded in negligence.

#2: Data Breach and Misappropriation of Trade Secrets
Misappropriation of trade secrets is another common cause of action in PCS Litigation.  Data breaches of this sort are occurring with greater frequency, as competing businesses (and countries) seek to gain an advantage in an increasingly competitive global marketplace. 

In a trade-secrets claim, a court will scrutinize the breached company’s conduct to see if it took steps that were reasonable under the circumstances to preserve the secrecy of the information. Again, what constitutes “reasonable” is a highly contextual inquiry and will depend on the nature of the information at issue, as well as the means reasonably available for protecting it. A good potential source on this topic is court decisions that have addressed the reasonable-steps issue in one’s specific industry or with respect to a specific class of data.

#3: Data Breach and Violation of Consumer Protection Laws
Finally, the Federal Trade Commission (“FTC”) is generating a growing amount of PCS Litigation under the auspices of its consumer-protection mandate.  Pursuant to Section 5 of the FTC Act, the FTC has initiated dozens of cases against companies that have allegedly either violated consumer’s privacy rights or misled consumers by failing to adequately protect consumer information. 

The FTC’s data-privacy enforcement efforts are based on the FTC Act’s prohibition against “unfair and deceptive acts and practices in or affecting commerce.” The FTC generally alleges that a company made certain promises or guarantees regarding the protection of consumer information, and then failed to follow through.  Thus the standard is tied to a company’s own words and statements—making it easier to discern that actions in negligence or trade secret.  In essence, a company must actually live up to the statements it makes and the assurances it gives about protecting consumer’s private information, making it important that a company always chooses its words carefully.

The three causes of action highlighted here are just the beginning of many more areas —like HIPPA—that require further exploration. Yet, no matter the type of cause of action, the message companies should hear is the same: to best anticipate potential litigation, you must appreciate the types of legal action you might encounter and the issues that will arise during it. By knowing today the type of data involved, the reasonable steps being taken to protect it, and the assurance that exist regarding those protective measures, you can prepare to meet—and defeat— potential breach, conflict, and litigation tomorrow.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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