Australia: When will an employer be vicariously liable for cybercrime by an employee?

Insurance a 'valid answer' to doomsday arguments

Introduction

The English case of Various claimants v William Morrisons Supermarket plc [2017] EWHC 313 (Morrisons) was the first class action in the United Kingdom dealing with cyber risks and breach of data. The first instance decision, handed down in December 2017, and the Court of Appeal's endorsement of that decision on 22 October 2018, examines employers' vicarious liability for their employees' cybercrime.

This case serves as useful guidance for insurers and underwriters when considering the renewal or issue of insurance policies covering cyber risks.

The cyber breach

Mr Skelton was an employed senior IT internal auditor of Morrisons, the supermarket chain. He posted personal details of 100,000 of Morrisons' employees on a file sharing website and sent the data to three newspapers. The data included the employees' names, addresses, gender, dates of birth, bank details and salary.

As part of his role, Mr Skelton was required to send payroll data to an external auditor. Mr Skelton held a grudge against Morrisons and over several months, he sought to cause embarrassment to Morrisons by copying sensitive payroll data onto a personal USB stick and then posting this data online, immediately prior to Morrisons releasing its financial statements.

Newspapers notified Morrisons of the data breach and the leaked information was taken down within 24 hours.

Civil class action against Morrisons

Mr Skelton was found guilty of fraud, securing unauthorised access to computer material1 and disclosing personal data2 and was given an eight year sentence.

About 5,500 affected employees sued Morrisons for breach of the Data Protection Act 1998 (UK), for the tort of misuse of private information and in equity for breach of confidence.

Each of the claims were advanced on the basis of Morrisons' primary liability and for Morrisons' vicarious liability for Mr Skelton's conduct.

UK Cyber legislation

The Data Protection Act protects personal data stored on computers. It defines eight data protection principles to ensure that information is processed lawfully.

Similar Australian legislation is found in the Privacy Act 1988 (Cth) and its Privacy Principles, which outline how Australian government agencies, private sector and not-for-profit organisations with an annual turnover of more than $3 million, must handle, use and manage personal information.

First instance

Justice Langstaff held that under the Data Protection Act, Morrisons was not the 'data controller' once Skelton had copied the data onto his personal USB stick. Morrisons had also done everything it should have done to ensure the security of the data. Therefore, Morrisons had no personal liability for the data breach.

However, notwithstanding the malicious intent of Mr Skelton and his criminal conviction, Justice Langstaff found Morrisons was vicariously liable for Mr Skelton's data breach.

His Honour reached that view by adopting the 'broad and evaluative' approach in English law (which his Honour applied from another case involving Morrisons)3. His Honour concluded that Mr Skelton's conduct was within the 'field of activities' assigned to him and there was a 'sufficient connection' between his employment at Morrisons and his wrongful conduct. Morrisons had taken the risk of placing Mr Skelton in the position, and entrusting him, to handle and disclose data as part of his usual duties.

Counsel for Morrisons argued that a finding of vicarious liability would render the Court as an accessory to further Mr Skelton's criminal aims. For this reason, his Honour granted Morrisons leave to appeal.

Appeal

Morrisons raised three grounds of appeal:

  1. The Data Protection Act excludes the application of causes of action for misuse of private information and breach of confidence and/or the imposition of vicarious liability for such breaches.

    Morrisons conceded in argument that the tort of misuse of private information and the cause of action for breach of confidence in relation to the processing of personal data was not excluded by the Data Protection Act. Instead it was argued that this exclusion only applied to vicarious liability for those torts. The Court of Appeal was unwilling to accept this argument.

    If Morrisons were correct on those two points then, in its submission, there would be no scope for vicarious liability at all. The Court of Appeal rejected this argument.
  2. The Data Protection Act excludes the application of vicarious liability for breaches of its provisions.

    The Court of Appeal held that the vicarious liability of an employer for misuse of private information by an employee and for breach of confidence by an employee had not been excluded by the Data Protection Act.
  3. The wrongful acts of Mr Skelton did not occur during the course of his employment by Morrisons and therefore Morrisons was not vicariously liable for those wrongful acts.

    The Court of Appeal had little difficulty in accepting that the tortious acts of the Morrisons' employee in sending data to third parties were within the field of activities assigned to him by Morrisons and that this was the relevant test when considering vicarious liability, despite the intentions behind those acts. Something that had troubled the Judge at first instance.

    Morrisons have said that it will seek to appeal to the Supreme Court, being the ultimate court of appeal. We will provide an update should such an appeal proceed.

Australian law on vicarious liability

In Australia, the High Court in Prince Alfred College Incorporated v ADC [2016] HCA 37, gave the following guidance as to when an employer might be vicariously liable for a criminal act committed by its employee:

'...the relevant approach is to consider any special role that the employer has assigned to the employee and the position in which the employee is thereby placed vis-à-vis the victim. In determining whether the apparent performance of such a role may be said to give the "occasion" for the wrongful act, particular features may be taken into account. They include authority, power, trust, control and the ability to achieve intimacy with the victim. The latter feature may be especially important. Where, in such circumstances, the employee takes advantage of his or her position with respect to the victim, that may suffice to determine that the wrongful act should be regarded as committed in the course or scope of employment and as such render the employer vicariously liable.'

This is not an absolute rule and consideration of its application will need to be given on a case-by-case basis. In cases of cybercrime, it will depend on whether the employment gave occasion for the data breach to be committed.

The test in the United Kingdom for the imposition of vicarious liability appears easier to meet than the Australian test. That is because vicarious liability in the UK is likely to be found where employment provides no more than an opportunity, rather than also the occasion, for the wrongful act to be committed.

However, the Morrisons case would have been arguably decided the same way in Australia due to Mr Skelton's special role to gain access to, use and disclose sensitive employee data (with Morrisons and his colleagues entrusting and relying on him to perform his role).

Issues for insurers

Even though this was the first class action of its kind in the United Kingdom, Justice Langstaff was not concerned about 'opening the flood gates', as the Data Protection Act has been in force since the late eighties, and before then in an earlier iteration.

However, as business becomes more mobile than ever, and where vast amounts of information can now be contained on small personal and business devices, this decision should be given special attention by employers and insurers.

Justice Langstaff was unmoved by the argument that imposing vicarious liability on Morrisons would cause an undue burden on corporations, as he had no doubt that many commercial entities would cover the potential losses through insurance. The Court of Appeal gave a resounding endorsement of this notion where the Court observed that insurance was 'a valid answer to the Doomsday or Armageddon arguments' but it also observed the fact that a defendant is insured is not a reason for imposing liability.

The Court of Appeal's reference to insurance puts in focus another important trend. A range of widely available insurance covers now potentially respond to liabilities arising from the infringement of data security and privacy rights. This would include extensions to general liability covers that have become increasingly common in recent years. Court decisions like this one will bring into even closer focus for insurers a range of coverage issues about where such exposures are being insured.

Footnotes

1 An offence under the Computer Misuse Act 1990 (UK). Similar Australian legislation is the Cybercrime Act 2001 (Cth).

2 An offence under the Data Protection Act 1998 (UK).

3 Mohamud v William Morrison Supermarkets plc [2016] UKSC 11.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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