The Legal Issues of Cloud-based Computing Services

by Bennett Jones LLP
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Business leaders are under tremendous pressure to maximize the value of their company's IT and data. Staying on top of the ever-changing technology and tools available today can be daunting and give rise to complex legal issues and risks. Done well, cloud computing has the power to transform organizations, giving businesses greater competitive advantage, increasing their bottom line and shareholder value. At the very least, the use of cloud services may provide an opportunity to reduce capital costs and conceive of IT services as a variable cost or expense, in particular for new or replacement IT functionalities. Done poorly and without proper analysis and mitigation of the risks, cloud computing can be disastrous, including data corruption or unauthorized access, violations of the law, serious harm to the organization's reputation, and (although rare) potentially fines and imprisonment for directors and officers.

What would you do if you could implement safe and secure cloud-based computing services? By following the strategies discussed in this article, and obtaining legal advice from an experienced IT lawyer, you could manage your cloud services for security and efficiency, gain control of the explosively growing data that your business generates, rapidly and inexpensively provision the latest technology (such as mobile, wireless, or "big data" analytics), instantly scale infrastructure for peak performance, and deliver measurable cost savings and value to your stakeholders.

Addressing Privacy and Security Concerns

The cloud model has been highly criticized for risk of data privacy and security breaches. In Canada and many other countries throughout the world, there are numerous privacy laws at both the Federal and local (state or provincial) levels. In addition, entities in regulated industry sectors, such as financial services and health care, have specific rules and regulations governing their customers' and patients' data storage, and the communication, hosting, transfer and disclosure of related information, as well as the outsourcing of services to third parties, in particular in foreign jurisdictions. The complexity of legal compliance is sometimes overwhelming and many organizations have mistakenly assumed, or simply taken the position, that they cannot use a cloud service. However, that is not necessarily the case. For example, the Canadian federal Personal Information Protection and Electronic Documents Act (PIPEDA) does not prohibit cloud computing or cross-border data transfer by private sector entities in most industries, even when the cloud service provider (or a part of the cloud service provided) is in another country (BC and Nova Scotia public sector statutes prohibit cross-border outsourcing or cloud services unless certain exceptions apply. Numerous guidelines and public sector policies must also be followed). However, PIPEDA (and other private sector privacy laws and outsourcing guidelines) establish rules governing use of the cloud and data transfer — particularly with respect to obtaining consent for the collection, use and disclosure of personal information, notification of cross-border information transfer, securing the data, and ensuring accountability for the information and transparency in terms of practices.

By using cloud-based computing services, organizations must make sure that, before they hand over their data to a cloud service provider, their organization and the cloud service provider have structured their operations and their respective rights and obligations under their agreements such that they are legally permitted to do so, that the data will be safely maintained with access to only those people who have the appropriate legal rights, and that the organization remains in control of their data to the extent required by law. This may mean that consumer-targeted cloud services are not amenable for use by large enterprises or those with sensitive information needs, but it does not mean use of the cloud (or a variant of cloud services) is out of the question.

Legal Strategies for Successful Cloud Computing

In order to obtain successful cloud-based computing services, with the benefits of safety and security as well as legal compliance, an organization must first make an informed business decision about the type and sensitivity of data and service it plans to migrate to the cloud, specific configurations and type of cloud service required (e.g., private, hybrid or public), in order to comply with the organization's legal obligations. The enterprise must consider whether certain components of its data, information and ICT operations are compatible with data computing being resident, and control being held at least partially, outside of the enterprise. Some mission-critical and reputationally-sensitive ICT functions may not be amenable to any type of outsourcing. When ICT functions which are amenable to migration to the cloud are identified, the functions, goals, system requirements, and enterprise aspirations for those functions can be analyzed and potential cloud services and providers can be identified and examined. Prior to contracting with a particular cloud service provider the enterprise should insist upon transparency, identifying all of the parties involved (e.g., subcontractors), the data process flow, uses and locations. A detailed audit and assessment of the cloud service provider's security protocols and technology is recommended, and a roadmap of the service provider's future plans is also helpful. As well, a migration plan should be developed, including an assessment of current state architecture, applications, data and performance metrics, so that one knows what needs to be changed and to have a baseline to make future service level measurements meaningful. Similarly, a transition plan for exiting the cloud service relationship should be constructed in advance.

Second, the organization must properly negotiate and draft the legal contract between the organization and the cloud service provider. IT managers may not have the authority to agree to the terms of the contract or accept the risks. Organizations sometimes find that cloud providers, in particular the low-cost online service providers, present “take it or leave it” contracts that are non-negotiable. The risks of doing business with these cloud service providers and accepting their boilerplate contracts are that many of them:

  • lack critical enterprise-protective terms, 
  • do not adequately protect the customer's data, 
  • do not contain any guarantee as to quality of service, and 
  • allow for more liberal usage of personal information, which would not be sufficient for an organization to meet its privacy and other legal obligations.

Often, cloud service contracts fail to deal with proper transitioning of the data and services to another cloud provider (or back to the customer organization) when the contract or the relationship comes to an end, leaving the organization vulnerable to loss of, or inaccessible, data and interruption of critical services. This is why engagement of experienced IT counsel can be invaluable. Generally speaking, more industry-specific cloud offerings are available, but at costs which are higher than consumer-based or generic services that are more suitable to non-enterprise or non-regulated businesses.

A successful procurement of cloud services takes time and requires the involvement of informed and experienced legal counsel who can spot the issues and advise on whether the cloud services contract terms are adequate. If the contract terms are not acceptable and cannot be amended, the business leaders should consider finding a different cloud service provider, or maintain certain services in-house and restrict the type of data or service that will be migrated to the cloud.

Terms which need to be thoroughly covered in a cloud service contract include:

  • ownership of data,
  • termination rights and termination assistance, 
  • uptime, 
  • service availability, 
  • performance levels, 
  • security warranties, 
  • allocation of liability risk, 
  • privacy, 
  • data security and breach notification requirements, 
  • compliance with laws and regulations,
  • representations about jurisdictional exposure of information and operations, and
  • remedies for breach of the contract.

Cloud service contracts should also include proper terms dealing with:

  • change,
  • problem resolution,
  • subcontracting, 
  • use of open source software, 
  • application re-development, 
  • ownership of any intellectual property, 
  • trade-secret protection, 
  • confidentiality,
  • testing, 
  • data integrity, 
  • potential secondary uses of data,
  • assurance of data segregation and isolation, 
  • encryption in transit and in storage, 
  • backup and data recovery, 
  • what happens to the data and the infrastructure upon termination of the agreement or in the event of a failure or insolvency of one of the parties, 
  • how maintenance or service interruption will be handled, 
  • what geographical limitations must be imposed, 
  • the right to audit the entities and the technology, etc.

The foregoing is not an all inclusive list. Each cloud service needs to be looked at separately and carefully analyzed to determine the full extent of the business and legal risks, before your legal counsel can advise on what contract terms are appropriate and which ones need to be revised.

The third step to achieve success with cloud-based computing is to implement appropriate internal organizational and transitional governance, policies and controls. Business processes and operations may need to be realigned. Monitoring and reporting structures up to senior management and Board levels need to be implemented. Policies dealing with confidentiality, security, privacy, business continuity plans, ongoing risk identification and management, technical problem escalation, and electronic data retention need to be prepared or revised as well as disseminated, clarified and enforced throughout the organization. Data cleansing, encryption and backup activities may need to be incorporated into the organization's business processes. Employee policies should also be developed or modified to deal with employee use of cloud-based services (in particular when accessed via their own personal devices for business purposes), such as e-mail for business correspondence, customer database/sales management, document sharing or presentations, etc. Business leaders need to remember that they are accountable for their organization's use and outsourcing of data or other services to a cloud provider and must ensure that their organization's information management and privacy practices are compliant with the law and consistently applied across the organization at all levels.

Cloud-based computing can have numerous advantages and be accomplished successfully if all the legal considerations are taken into account. Failing to take the appropriate steps or rushing through to secure a cloud deal without thorough legal review, can have a large negative impact to the business and its stakeholders.

If you would like to ensure your cloud strategy is successful and that the cloud services deliver the full benefits and value to your organization, contact any member of our Technology Law practice.

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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