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Incident Response: The Increasing Risks to Corporate Legal Departments

Posted in Data Breach, Data Breach, Data Security

The consequences of a data breach reached new heights last week when Yahoo announced the resignation of its General Counsel in response to a series of security incidents the company suffered.  A more fulsome explanation of the security incidents and Yahoo’s response can be found in item seven of the company’s 10-K, but here are the highlights:

  • Yahoo suffered three security incidents from 2013 to 2016, one of which involved the theft of approximately 500 million user accounts from Yahoo’s network by a state-sponsored actor in late 2014. The stolen information included names, email addresses, telephone numbers, dates of birth, hashed passwords and encrypted or unencrypted security questions and answers.  (Note that under most, but not all, data breach notification laws, unauthorized access of these data elements would not create a legal obligation to notify affected individuals).
  • An independent committee of Yahoo’s board of directors undertook an investigation with the assistance of a forensic firm and outside counsel.
  • The committee concluded that Yahoo’s information security team knew of the 2014 security incident at that time, but the incident was not disclosed until September 2016.
  • “[S]enior executives did not properly comprehend or investigate, and therefore failed to act sufficiently upon, the full extent of knowledge known internally by the Company’s information security team.”
  • Yahoo knew, as early as December 2014, that an attacker had acquired personal data of Yahoo users, but it is not clear whether and to what extent this information was conveyed to those outside the information security team.
  • The legal team, however, “had sufficient information to warrant substantial further inquiry in 2014, and they did not sufficiently pursue it. As a result, the 2014 Security Incident was not properly investigated and analyzed at the time, and the Company was not adequately advised with respect to the legal and business risks associated with the 2014 Security Incident.”  (Emphasis added).  The 10-K does not identify the “sufficient information” or explain what “further inquiry” would have been required (or why).
  • The committee found “failures in communication, management, inquiry and internal reporting,” which all contributed to lack of understanding and handling of the 2014 Security Incident.
  • The committee also found that Yahoo’s board of directors was “not adequately informed of the full severity, risks, and potential impacts of the 2014 Security Incident and related matters.”

It’s not clear from the 10-K exactly why Yahoo’s General Counsel was asked to step down.  It’s highly unusual that a General Counsel would be held directly (and publicly) responsible for a data breach.  Nevertheless, the outcome raises a couple of questions:  (1) will this represent a new trend for in house counsel generally, and (2) how will this outcome affect how companies approach investigations of data incidents in the future?

Regarding the latter question, a colleague at another firm suggested that this outcome may make corporate legal departments less inclined to involve themselves in breach response or direct investigations of suspected data breaches.  I disagree.  Looking the other way or sticking one’s head in the sand is never the right response to a data incident.  In fact, the legal department would create bigger problems if it did little or nothing.

So what can a corporate legal department do to minimize its own risks?  Here are a few suggestions:

  • Retain a forensic firm through the legal department or outside counsel in advance of an incident to ensure that resources are available to begin an investigation immediately, and to maximize the applicability of the attorney-client privilege and work product doctrine.
  • Engage outside counsel skilled in privacy and data security law and experienced in helping similarly situated companies prepare for and respond to data incidents. There is a growing glut of lawyers who hold themselves out as privacy experts, so I recommend asking for and contacting references.  Most clients are happy to speak about their level of satisfaction with their outside counsel while avoiding details of the incident that led to the engagement.
  • Prepare written protocols, with the cooperation of your information security department, to guide your investigation when an incident occurs. These protocols are different from incident response plans; they focus specifically on the process of initiating, directing, and concluding an investigation at the direction of legal counsel for the purpose of advising the company on its compliance with privacy and data security laws.  They include rules on communication, documentation, and scope.
  • Engage in real dialogue with the information security officer(s) before an incident occurs, in an effort to identify appropriate rules of engagement for when the corporate legal department should be involved in incident response. Some companies involve legal in every data incident (that’s too much), some don’t involve them at all and maintain that data incidents are entirely within the purview of information security (that’s too little . . . and create significant legal risks), but the challenge lies in defining the middle ground.  It is easy to say “legal gets involved when Information Security determines that an incident is serious,” but it is often difficult to know at the outset of an incident whether it will become serious, and by the time you’ve figured that out it may be too late.  There is, however, a way to strike that balance.
  • Test, test, test – regularly simulate data incidents to test the protocols, rules of engagement, and incident response plans. I’ve been involved in some phenomenal tabletop exercises, which clients have used to benchmark their response readiness against other similarly situated companies.  I’ve been consistently impressed with one particular forensic firm in this space.  Legal and information security departments can and should work together to undertake these exercises.

Information security officers will not be the only high-level executives to have their feet held to the fire when a data breach occurs.  I predict that C-level executives and boards of directors will increasingly hold corporate legal departments responsible (at least in part) for how the company investigates and responds to a suspected data breach.  So it will be important for legal departments to proactively educate themselves on the legal issues that arise when an incident occurs, identify their roles in the incident response procedure, and prepare to act quickly and thoroughly when the time comes.

 

DISCLAIMER:  The opinions expressed here represent those of Al Saikali and not those of Shook, Hardy & Bacon, LLP or its clients.  Similarly, the opinions expressed by those providing comments are theirs alone, and do not reflect the opinions of Al Saikali, Shook, Hardy & Bacon, or its clients.  All of the data and information provided on this site is for informational purposes only.  It is not legal advice nor should it be relied on as legal advice.