United States: Counsel's Capacity To Control Cybersecurity Costs

Last Updated: August 17 2015
Article by Jonathan A. Trafimow and Steven S. Rubin

As the average cost of a data breach in the United States approaches $7 million,1 companies must prepare to mitigate such an incident or close their doors. Appropriate legal and technical preparation can help to reduce the adverse consequences of an attack. Currently, based on the nature of a company's business and the information it collects, a myriad of laws and regulations may apply. Failure to take appropriate steps to adequately come into compliance subjects a business to enforcement actions by agencies, lawsuits from affected consumers and fines under various state regulations.

Compliance with the number and complexity of federal and state cybersecurity laws and regulations is no simple task. An essential part of a cybersecurity program is a written information security plan (WISP),2 which sets forth the company's methodologies in identifying, protecting, detecting and responding to incidents and creates a network of relationships with experts to contact in the event of a suspected breach. WISPs, which have been used by various government agencies over the past several years in developing security procedures, are now being used by many companies.

A WISP not only allows a company to identify and address potential compliance issues, but also incorporates legal principles to mitigate damages in the event of an incident. A WISP also provides guidance and procedures to each department on how it should handle information. A WISP provides a structure to manage a company's compliance and respond to incidents.

Authority to Regulate

It is not clear what authority various administrative agencies have to regulate cybersecurity under existing laws. We do know, however, that where an agency has statutory authority to regulate, courts usually will accept the agency's reasonable interpretation of the extent of that authority.

For example, under section 5(a) of the Federal Trade Commission Act (FTCA), the Federal Trade Commission (FTC) may sue any business subject to its jurisdiction for engaging in "acts or practices in or affecting commerce" that are "unfair" or "deceptive." 15 U.S.C. §45(a)(1) (2006). In FTC v. Wyndham Worldwide Corp., 10 F.Supp.3d 602 (D.N.J. 2014), the FTC alleged that a private company that manages hotels and time shares violated the FTCA by failing to take appropriate security measures to protect the sensitive personal data it collected and maintained of consumers.

The FTC is not the only federal agency to assert the jurisdiction to regulate cybersecurity practices. The SEC, Office of Comptroller of the Currency (OCC) and Federal Communications Commission have all implemented regulations requiring companies to adopt policies and procedures that address administrative, technical, and physical safeguards. Several agencies have gone even farther, implementing industry specific regulations.

The SEC announced that companies should disclose in their registration statements (pursuant to the Securities Act of 1933) and in their periodic reports (pursuant to the Securities Exchange Act of 1934) cyber risks and incidents which may affect the value of a security.3 The OCC requires the implementation of a comprehensive written information security program for any national banks and federal savings associations. For these and other regulations, the agency responsible for enforcement has provided little guidance as to what would constitute legally compliant security standards.

As the law develops, WISPs may become an industry best practice. Some states have already implemented statutes that require companies to develop and maintain an information security program. Massachusetts law requires any person who owns or licenses information about a resident to develop, implement and maintain a writ-ten information security program. The program must include administrative, technical and physical safeguards appropriate to the business' size, information exposure, storage and type. In Oregon, any business in possession of personal information must implement a similar information security program. However, the Oregon regulation specifically requires that the business set in place methods to identify reasonably foreseeable internal and external risks, address the risks that come up and regularly test to make sure such methods are functioning appropriately.

Cybersecurity Framework

On Feb. 12, 2013, President Barack Obama signed Executive Order 13636 which, among other things, identified 16 industries deemed essential to the nation's Cybersecurity Infrastructure (the "Critical Infrastructure"), and directed The National Institute of Standards and Technology to develop a Cybersecurity Framework (NIST Framework). Following the release of the draft standards, on Feb. 12, 2014 the final NIST Framework took effect. This standard, having its origins from a Presidential Executive Order, has quickly become the authority for companies seeking to assess their cybersecurity compliance.

For companies that are and are not in the Critical Infrastructure, promulgation of the NIST Framework along with cases like FTC v. Wyndham raise challenging questions of regulatory compliance. The FTC has already stated that the NIST Framework "is fully consistent with the FTC's enforcement framework"4 as to matters of risk assessment and mitigation. In fact, several FTC enforcement actions arose from failure to implement measures consistent with the NIST Framework's subcategories.

In CBR Systems, the FTC brought an action against the defendant for failing to implement measures to protect data in transit (NIST Framework PR.DS-2) and further failing to implement sufficient measures to prevent, detect, and respond to unauthorized access to their computer networks.5 In BJ's Wholesale Club, the FTC brought an enforcement action alleging that the defendant failed to: transmit data in an encrypted format (NIST Framework PR.DS-2), disable default usernames/ passwords (NIST Framework PR.AC-1) and implement intrusion detection systems (NIST Framework DE.CM-1).6 As a result, both companies were subjected to fines, were required to implement a comprehensive information security plan and obligated to obtain audits by an independent third-party security professional every other year for 20 years. These remedial measures could have been avoided if these companies had a properly implemented WISP.

Role of WISP

The FTC has made it clear that reasonable cybersecurity does not mean perfect security, but it does mean a business must continuously assess and address current risks.7 A WISP structures a company's review and organization of its cybersecurity infrastructure and facilitates improvements. For example, a WISP can develop a record of how a company: identifies sensitive information, addresses threats, manages risk and continuously improves its security infrastructure by learning from previous incidents. Without such a structure, a business may fail to recognize a critical component of its cybersecurity framework and will be less prepared to respond to a security breach quickly and effectively.

A WISP can also potentially limit legal liability by showing that the company took reasonable steps to protect its data. Victims of a data breach may assert a variety of statutory, contractual, quasicontractual and tort causes of action, such as: negligence, breach of contract, conversion, unjust enrichment, violation of state consumer protection statutes and misrepresentation. Many of these actions originate from a company having failed to implement security mechanisms that were deemed reasonable industry practices. However, if a company can prove its data was protected by cybersecurity practices consistent with industry best practices a court may be inclined to consider an early dismissal of the action.

Thus, a properly drafted WISP will require that a company's breach response be documented and will be consistent with evidentiary rules. In responding to an incident, a company should know not only the appropriate information to preserve but also, how to maintain that information in an admissible format. As shown below, a company's awareness and ability to demonstrate its compliance is imperative to avoiding legal liability.

Privilege and Work Product

Legal counsel is an integral part of the WISP creation process, among other reasons, because the utilization of legal advice in connection with the WISP creates an argument that at least some aspects of the process are shielded from disclosure in litigation because of the attorney-client privilege or attorney work product doctrine. If legal counsel played no role, information provided to a company from a computer security professional would most likely be discoverable in litigation. For example, if a security professional advised a company of the need to install a virus scan, the company failed to implement that suggestion, and later, was breached because an employee downloaded malware onto the unprotected computer, plaintiff's attorney most likely could obtain the professional's report and offer evidence that the company received and ignored the precaution.

While a court may or may not accept assertions of privilege in this context, courts have repeatedly recognized that "full and frank communication between attorneys and their clients...promote broader public interests in the observance of law and administration of justice." Upjohn Co. v. United States, 449 U. S. 383, 389 (1981), quoted in Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998).

In the corporate context, the U.S. Supreme Court identified a number of factors that bear on whether a communication is privileged, including: Were the communications made by company employees to company lawyers, each acting in that capacity; whether the communications concerned matters within the employees' scope of corporate duties; whether the employees' communications were made to counsel at the direction of corporate security; whether the communications were made to secure the corporation legal advice from counsel and the employees understood that they were being questioned so that the corporation could obtain legal advice; whether the communications were confidential and employees understood them to be confidential; whether the information needed from the investigation could be obtained from senior management; and whether the communications were kept confidential by limiting their dissemination. Upjohn, 449 U.S. at 394-95.

The New York Court of Appeals has endorsed the Upjohn standard as an "intermediate standard" which extends to "communications with low- and midlevel employees." See Niesig v. Team I, 76 N.Y.2d 363, 371 (N.Y. 1990);.

Privileged information shared with a consultant who has been retained by a law firm for the purpose of assisting with legal advice also may be protected under the attorney-client privilege. Where a lawyer needs outside help to provide effective consultation to the lawyer's client, the attorney-client privilege may attach. United States v. Kovel, 296 F.2d 918, 922 (2d Cir. 1961) ("What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.") "Nevertheless, the extension has always been a cabined one, and '[t]o that end, the privilege protects communications between a client and an attorney, not communications that prove important to an attorney's legal advice to a client.'" United States v. Mejia, 655 F.3d 126, 132 (2d Cir. 2011) (quoting United States v. Ackert, 169 F.3d 136, 139 (2d Cir. 1999).

The work product doctrine, partially codified by Rule 26(b)(3) of the Federal Rules of Civil Procedure, "is intended to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy 'with an eye toward litigation,' free from unnecessary intrusion by his adversaries." United States v. Ghavami, 882 F.Supp.2d 532, 539 (S.D.N.Y. 2012) (internal citations omitted); see also Doe v. Poe, 244 A.D.2d 450, 451-52 (App. Div. 1997) aff'd, 92 N.Y.2d 864 (App. Div. 1998).

To be covered by the doctrine, a document must have "been prepared in anticipation of litigation by or for a party, or by the party's representative." Ghavami, 882 F.Supp.2d at 539 (internal citations omitted). The doctrine encompasses an attorney's mental impressions, which is entitled to virtually unlimited protection, as well as fact work product, which may be ordered disclosed upon a showing of substantial need. Id. at 540 (internal citations omitted). Both the attorney-client privilege and attorney work product can be waived. Id. (internal citations omitted).

The generation of a WISP may require the hiring of outside vendors as well as communication with different levels of staff hierarchy. All communications should include provisions explaining that the information is confidential and being gathered for the purpose of rendering legal advice. The communications should be limited and the attorney should assess: (1) what information is being communicated, (2) whether the employee being communicated with is in the best position to know the information being sought, (3) how the information relates to the law the business is attempting to comply with and (4) that the employee being communicated with understands the company intends to keep the information confidential.8

While questions an attorney asks are protected, the subject matter obtained by those questions is not. For example, even if a court held that company's WISP was privileged in a particular case, the court could also decide that other information about the company's cybersecurity practices was discoverable. Alternatively, if the underlying information was unavailable, our hypothetical plaintiffs' counsel might renew the argument for access to at least certain sections of the WISP. Information that is attorney work product may nevertheless be discoverable if: (1) the facts are essential to the case and (2) cannot be obtained without undue hardship. Fed. R. Civ. P. 26. Suffice it to say that litigation involving WISPs drafted with the assistance of legal counsel may involve disputes regarding assertions of both the attorney-client privilege and the attorney work product doctrine.

Most businesses face complex and growing cybersecurity concerns. Business lawyers can bring real value to their clients by addressing these concerns and reducing their clients' liability risks. WISPs are an important option to consider.

This article was originally published in the New York Law Journal

Footnotes

1 Ponemon Institute, 2015 Cost of Data Breach Study: Global Analysis 2 (2015), http://www-03.ibm.com/security/data-breach/.

2 See, e.g., 12 C.F.R. Part 364, app. B; 16 C.F.R. §314.3.

3 Division of Corporation Finance, SEC, CF Disclosure Guidance: Topic No. 2 (October 13, 2011), http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.

4 Julie Brill, FTC, On the Front Lines: The FTC's Role in Data Security (Sept. 17, 2004),http://www.ftc.gov/system/files/documents/public_statements/582841/140917csisspeech.pdf.

5 FTC, Cord Blood Bank Settles FTC Charges that it Failed to Protect Consumers Sensitive Personal Information (Jan. 28, 2013), http://www.ftc. gov/news-events/press-releases/2013/01/cordblood- bank-settles-ftc-charges-it-failed-protectconsumers.

6 FTC, BJ's Wholesale Club Settles FTC Charges (June 16, 2005), http://www.ftc.gov/news-events/press-releases/2005/06/bjs-wholesale-club-settles-ftc-charges .

7 FTC, Discussion Draft of H.R.__, Data Security and Breach Notification Act of 2015 (March 18, 2014), https://www.ftc.gov/system/files/documents/public_statements/630961/150318datasecurity.pdf.

8 Upjohn Co., 449 U.S. at 395-96.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jonathan A. Trafimow
Steven S. Rubin
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions