Should Companies Terminate Third Party Vendors That Cause A Data Breach?

Jackson Lewis P.C.

According to reports, bank customers in Australia (yes, data breach notification requirements exist down under) have been affected by “an industry-wide” data breach experienced by a third-party service provider to the banks – property valuation firm, LandMark White. As expected, the banks are investigating and in some cases notifying customers about the incident. However, there are reports that some of the affected banks are suspending this vendor from the group of valuation firms they use. This is not an unusual reaction by organizations whose third party service providers have or are believed to have caused a data breach affecting the organization’s customers, patients, students, employees, etc. But, it is worth thinking about whether that is the best course of action.

In the United States, there is a growing number of states that require businesses to contractually bind their third party services providers to maintain reasonable safeguards to protect personal information made available to the third parties to perform services. For example, under the Illinois Personal Information Protection Act:

A contract for the disclosure of personal information concerning an Illinois resident that is maintained by a data collector must include a provision requiring the person to whom the information is disclosed to implement and maintain reasonable security measures to protect those records from unauthorized access, acquisition, destruction, use, modification, or disclosure.

Personal information under this law includes information such as name coupled with Social Security number, drivers license number, medical information, and unique biometric data used to authenticate an individual, such as a fingerprint, retina or iris image, or other unique physical representation or digital representation of biometric data. In connection with obtaining written assurances from a third party vendor, many companies engage their vendors in an assessment process to get a better sense of the security of the vendor’s environment. Assessments can take many forms including interviewing the vendor’s chief information security officer, reviewing policies and procedures, subjecting the vendor to a detailed security questionnaire, penetration tests, and more. When organizations think of best practices for data security, assessment procedures of some kind certainly should be on the list.

But after the assessments and contract negotiations are completed, data breaches can still happen. In many cases, when a third party vendor experiences a breach affecting personal information, the owners of that information are the vendor’s customers. Uncomfortable as it may be, breach notification laws generally require the vendor maintaining the breached personal information to notify the owner, the vendor’s customer(s). At that point, the parties typically work through the incident response process, which in many cases could be driven by contract, although many agreements are silent on this issue.

In any event, organizations will almost invariably begin to think about whether this is a vendor they want on their team going forward. Of course, there are a number of reasons that might support terminating the relationship, such as:

  • The vendor may not have been protecting the information they way it should have under the contract and applicable law, resulting in the breach.
  • The vendor has not been transparent, responsive, or cooperative with the organization during the incident response process.
  • The vendor has not taken sufficient steps to ensure a similar breach will not happen again.
  • The organization is getting pressure from its customers who are serviced or supported, in part, by the vendor.
  • The organization has been unhappy with the vendor for some time (unrelated to the breach) and this is the last straw.

However, there also are reasons for maintaining the relationship, which include:

  • “The grass is always greener on the other side” – it may not be. There is no guarantee that a new vendor will have greater data security, be able to avoid a sophisticated attack, or be willing to work with the owner of the data as transparently as the current vendor.
  • The current vendor arguably is “battle-tested” with data security and incident response more top of mind.
  • There is a long-standing, trusted relationship with the vendor whose products and/or services are too important to the organization.
  • Both the organization and the vendor may be more inclined following a breach to collaborate on enhanced security measures and incident response planning.

The author takes no position here on whether to stay or go, as such a decision requires consideration of a number of factors. Third party service providers play important roles for many organizations, and their selection and continued utilization are decisions that should be made following an appropriate level of due diligence and analysis.

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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Jackson Lewis P.C.

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