United States: Directors And Officers: Be Wary Of Growing Cyber Responsibilities

The increased reliance of businesses on the Internet has led to faster communication and greater efficiency, but such reliance comes with possible tales of woe when technology fails or is misused. Directors and officers (D&Os) are often the ones who put the final stamp of approval on such things, and there is a growing trend to hold those same people personally liable when there is a turn for the worse. Cyber exposure for businesses has only increased in the past couple of years and the laws and regulations are starting to catch up. This exposure has been in the form of data breaches and the subsequent data restoration and notification costs, as well as in lawsuits and government regulations. Recent lawsuits targeting D&Os for their alleged failure to address cyber risk provide examples of potential liability as more regulations are passed in the United States and around the world. D&Os should be aware of the informal and formal standards that are being set regarding appropriate company cyber risk management.

Lawsuits against D&Os in the United States Related to Cyber Risk

Private actions aimed to hold D&Os accountable for cyber risk in the United States is nothing new. Securities class action lawsuits, such as those against Wyndham, Heartland Payment, and Target were brought alleging breach of fiduciary duty with respect to handling a cyber breach.1 Specifically, the allegations in these litigations against the D&Os were for failing to (1) implement and enforce effective internal controls with respect to data security, (2) disclose the effectiveness of a company's data security policies, (3) disclose the scope of the data breach, and (4) exercise oversight duties on how a security breach could adversely affect the company's business. These claims often focus on alleged breach of duty when there is a failure to adequately implement cyber security defense in the first place, or involve failing to respond to and otherwise monitor cyber security plans after a breach has occurred. What all these referenced cases also have in common is that they were defended and dismissed without any liability to the D&Os.

The success of the D&Os' defenses in these matters has neither deterred more lawsuits from being filed in the United States nor stopped D&Os from settling cases alleging breach of fiduciary duty in connection with cyber risk. The D&Os of Home Depot were successful in defending such a claim, but chose to settle the matter when the dismissal was appealed.2 The D&Os of Wendy's, while their motion to dismiss was pending, also chose to settle.3 It remains to be seen how the D&Os of Yahoo, Equifax, and Google will respond to the pending claims against them for alleged cyber security failures.4

Regulations Impacting Corporate Cyber Risk

Coupled with these recent litigations are new government regulations to which D&Os must respond in connection with corporate responsibility and disclosure on cyber risk. While the General Data Protection Regulation (GDPR) has gotten most of the headlines, there have been other regulations in the United States and Canada that are impacting D&Os.

The GDPR, effective May 2018, has been a big topic of discussion because it addresses, amongst other things, information collected and data breach responsibilities. Per a recent 2018 Advisen Ltd. survey, nearly 40% of large companies, defined as over $1 billion in revenue, have made changes with respect to cyber issues as a result of the GDPR. As the GDPR focuses on the control, processing, and use of the data and information of European Union citizens, D&Os are the ones responsible for implementing the corporate governance framework. Article 5(2) of the GDPR specifically reads that the "controller shall be responsible for, and be able to demonstrate compliance with, [the other data protection principles]." Article 24 describes in greater detail the responsibility of the controller, which includes implementing "appropriate technical and organizational measures to ensure and to be able to demonstrate the processing is performed in accordance with this regulation." The regulation also requires under Article 37 that certain businesses designate a data protection officer who must report to the highest level of management, operate independently, and have adequate resources to carry out their tasks. Since the GDPR has been in effect only for a couple of months, it remains to be seen how it will be enforced.

Another recent cyber regulation is promulgated by the New York State Department of Financial Services (NYSDFS) for those companies subject to its jurisdiction. Under 23 NYCRR Part 500, effective in March 2017, New York provided clear notice that it intends to hold directors and officers more responsible for ensuring that their companies are undertaking more active assessment of their own security policies and procedures. These include the enactment of a comprehensive cybersecurity policy, a written incident response plan that reports breaches within 72 hours to the NYSDFS, and security policies for third-party service providers who access nonpublic information. The new rules also put more responsibilities on directors and officers, requiring not only the designation of a chief information security officer (CISO) but also board certification to the NYSDFS of compliance with the regulations. As of September 3, 2018, regulated entities are required to (1) maintain financial and cyber audit trails; (2) maintain written procedures for evaluating, assessing, or testing cybersecurity; (3) maintain policies and procedures on secure disposal on a periodic basis of nonpublic information no longer necessary for business operations; (4) have a training program to monitor activity of authorized users; and (5) have encryption controls to protect nonpublic information held. By March 1, 2019, the transition period under the NYSDFS regulation will be over and compliance with the full cyber regulation will be required.

Another regulation in the United States that will be coming into effect soon is the California Consumer Privacy Act (CaCPA), which was passed on June 28, 2018, and will be effective January 1, 2020, with enforcement by July 1, 2020. Businesses that collect or sell personal information either from or about California consumers must comply with the CaCPA. The regulated businesses subject to the CaCPA also must (1) have annual gross revenue of $25 million; (2) collect personal information of at least 50,000 consumers, households, or devises; or (3) obtains at least 50 percent of annual revenue from selling consumers' personal information. Similar to the GDPR, the CaCPA was designed to give California residents control over the use, including the sale, of their personal information. One key aspect of the CaCPA is that a business cannot provide a different level or quality of services based on a consumer objecting to their sale of the data, except where it is "reasonably related to the value provided to the consumer by the consumer's data." Since the CaCPA will not be in effect until 2020, there will likely be some further clarifications to its regulations.

The most recent cyber protection law, the Personal Information Protection and Electronic Documents Act (PIPEDA), effective November 1, 2018, is a Canadian law that applies to the collection, use, and disclosure of personal information in the course of commercial activities in all of Canada. Foreign and domestic organizations subject to PIPEDA will be required to (1) notify individuals about privacy breaches when there is "a real risk of significant harm to an individual," (2) keep records of such breaches, and (3) report cyber breaches to the Canadian government. Failure to comply can lead to fines up to CAD$100,000. While this potential fine is far less than that levied by the GDPR, the regulation still has some teeth.

The regulations in the EU, Canada, New York, and, soon California stress to D&Os the importance that governments are putting on cyber security.

Takeaways

While the advantages of the Internet usually outweigh the potential liabilities, D&Os need to be aware of the risks posed by cyber exposure. It is important to implement written policies and procedures and training that (1) provide guidance to officers and employees concerning applicable threats and measures to prevent, detect, and respond to such threats, and (2) monitor compliance with cybersecurity policies and procedures.

The risks are not limited to a company's computers; they also exist in the company's use of wearables and products connected to the Internet of Things. Exposure to cyber security threats exists everywhere, so what is disclosed to shareholders and the public by D&Os about such risks takes on heightened importance. The cyber risks are growing by the day, and with them, potential liability for D&Os. Being aware of the changing standards of care and rules and regulations is an essential first step for D&Os in their challenge to serve the best interests of their respective companies.

Footnotes

1 Wyndham - Dennis Palkon, et al. v. Stephen P. Holmes, et al. 14-cv-01234, (U.S. District Court for the District of New Jersey); In re Heartland Payment Systems, Inc., 09-CV-01043 (U.S. District Court for the District of New Jersey); Target - Mary Davis et al. v. Gregg W. Steinhafel et al., 14-cv-00203, (U.S. District Court for the District of Minnesota).

2 In Re The Home Depot, Inc. Shareholder Derivative Litigation, 15-CV-2999 (U.S. District Court for the Northern District of Georgia).

3 Graham, et al. v. Nelson Peltz, et al., 16-cv-1153, (U.S. District Court for the Southern District of Ohio).

4 Madrack v. Yahoo! Inc., Marissa Mayer, et al., 17-cv-0037 (U.S. District Court for the Northern District of California); Kuhns v. Equifax, Inc., et al., 17- cv-3463, (U.S. District Court for the Northern District of Georgia); Mawardy v. Alphabet, Inc., et al. 18-cv-5704 (U.S. District Court for the Eastern District of New York).

First published: BLD Bach Langheid Dallmayr Financial Lines Newsletter November 2018

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
 
In association with
Related Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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