United States: What Is Reasonable? The Emerging Legalities Of Cybersecurity Post-Wyndham

Last Updated: October 8 2015
Article by Colin J. Zick

This month's edition of the Advanced Cyber Security Center's newletter includes my discussion of lessons to be learned from the Wyndham decision:

Historically, security was an issue reserved in a back room for the IT department, if there were even a budget and ample resources. To the public, cybersecurity meant identity theft and proceeded with business as usual with the comfort of an anti-virus protection that may have come with their computer.

On the other hand, large enterprises, especially those that dealt with classified information, intellectual property, and customer financials, began to keenly invest in cybersecurity infrastructure and build stronger defense postures. Password protections and network protocols became common business practices.

Soon the proliferation of data breaches caused major reputational damages, where the fallout landed on the office door of the CEO. Think Target. Cybersecurity was no longer an IT issue, but rather a significant business issue. Most recently, corporate boards took an active role in funding cybersecurity and the C-Suite became well-versed in firewalls, encryption, and even threat sharing. Cybersecurity made headlines as one hack after another mobilized not only corporate America, but the federal government.

"Today we are entering a new era in cybersecurity driven by accountability and responsibility," said Charlie Benway, ACSC executive director. "There is no room for lax security regardless of the size of the company. From an IT issue to a business issue to now a legal issue, cybersecurity is something that can no longer be ignored or deferred. As recent as this week, precedent is being established and rulings are being decided that should be changing how all businesses treat cybersecurity."

Entering a New Era

The legal ramifications of cybersecurity are now taking center stage. In other words, for what are organizations reasonably responsible when it comes to protecting the data they collect? Several recent cases are seemingly answering that question and defining the gray area that has dwelled under the surface of cybersecurity.

Last month, Third Circuit Court of Appeals decided in Federal Trade Commission v. Wyndham Worldwide Corp. that "the FTC has authority to regulate the way companies safeguard personal information not simply for 'deceptive' acts, but as an 'unfair' business practice. This decision highlights the need for companies to familiarize themselves with the FTC's guidance on cybersecurity measures," as reported in the National Law Review.

After Windham's network was hacked three different times in 2008 and 2009, the FTC sued the hotel enterprise. According to Colin Zick, partner at Foley Hoag and member of ACSC, Wyndham spent millions of dollars on some of the most prominent cybersecurity lawyers in the country, to argue that the FTC couldn't regulate it with regard to three occasions in 2008 and 2009 when hackers successfully accessed Wyndham's computer systems. In total, the hackers stole personal and financial information for hundreds of thousands of consumers leading to over $10.6 million dollars in fraudulent charges.

Said Zick, "Seven years later, Wyndham lost again, spectacularly; this time in court. And the hackers won again. Rather than address the issue and move on, Wyndham has perpetuated the issue and the harm to its corporate brand."

Lessons Learned

According to Zick, the most important takeaway from this case is that you have to know and follow your own privacy and security policies. While this may seem basic, it is deceptively easy to lose touch with those policies or to adopt practices that are at odds with them. The Wyndham case is also instructive to cybersecurity professionals that there are still companies that have failed to adopt the basic elements of a cybersecurity plan:

  • maintaining firewalls,
  • changing default passwords,
  • encrypting credit card information,
  • monitoring networks that hold customers' personal information, and
  • limiting third-party access to a company's networks and computers.

While there is legitimate concern about sophisticated threats at home and from abroad, Zick noted the importance of "establishing and maintaining the foundational elements and fundamental tasks that comprise every data privacy and security program."

Lessons Not Learned

In another case last month, according to statement by the US Securities and Exchange Commission, "The Securities and Exchange Commission today announced that a St. Louis-based investment adviser has agreed to settle charges that it failed to establish the required cybersecurity policies and procedures in advance of a breach that compromised the personally identifiable information (PII) of approximately 100,000 individuals, including thousands of the firm's clients."

Added Benway from the ACSC, "Mitigating risk begins with understanding the threat landscape, identifying the weaknesses, and addressing the gaps. Protecting assets can take many forms and even for those with the most mature cybersecurity posture, it begins with a concerted plan. So although in this incident there was no damage, the ignored risk was justification for legal action."

"As we see an increasing barrage of cyber attacks on financial firms, it is important to enforce the safeguards rule even in cases like this when there is no apparent financial harm to clients," said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division's Asset Management Unit in the statement. "Firms must adopt written policies to protect their clients' private information and they need to anticipate potential cybersecurity events and have clear procedures in place rather than waiting to react once a breach occurs."

Filling in the gray

To help firms navigate the gray area of compliance, both the FTC and the SEC have published guidelines to help build the foundations of cybersecurity plans. The SEC's Office of Investor Education and Advocacy published a new Investor Alert, " Identity Theft, Data Breaches, and Your Investment Accounts." The alert, also available on Investor.gov, the SEC's website for individual investors, offers steps for investors to take regarding their investment accounts if they become victims of identity theft or a data breach.

Also, the FTC published " Start With Security, a Guide for Business," which summarizes lessons learned from the more than 50 data security settlements the FTC has announced to date and provides 10 common-sense suggestions to help companies think about what they need to do next to optimize their cybersecurity efforts.

So while the federal government struggles with more definitive cyber laws and regulations, the SEC and FTC rulings should serve as advance notice. As noted in the National Law Review this week, "All web‑facing companies which collect personally identifiable information are on notice that they routinely must maintain the integrity and security of such consumer data. Companies also must make sure that their privacy policies are accurate and not deceptive."

"No one is immune to the threat landscape," said Benway. "And it should be clear now, no one is absolved from accountability."

To view Foley Hoag's Security, Privacy and The Law Blog please click here

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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