Published by Al Saikali

An identical version of the Illinois Biometric Information Privacy Act (BIPA) has been introduced in the Florida Senate.  The bill includes the same private right of action.  The Illinois BIPA has become an enormous revenue earner for the plaintiff’s bar, who have filed gotcha lawsuits against companies seeking millions of dollars on the ground that the companies did not comply with all of the technical requirements of the law.  I suspect that is a similar driving force behind the Florida version.

Like the Illinois version, the Florida version does not take into consideration how biometric technology actually works.  It is based on a misunderstanding that devices using biometrics for authentication are storing libraries of fingerprints, iris scans, etc., that can be hacked, stolen, and misused.  Hopefully, if the legislation proceeds to receive serious consideration, the Florida Legislature will hold hearings to learn more about how biometric technology works, the massive liability a bill like this could create for companies doing business in Florida, and the possibility that companies will stop using what is the most secure form of authentication out of a fear of liability.

Given the politically conservative makeup of the Florida state legislature and Governor’s office, I do not anticipate that this bill will become law.  Nevertheless, it is definitely under-the-radar legislation that has not received attention in the media and we should monitor it moving forward.

The Illinois Supreme Court’s decision last week in Rosenbach v. Six Flags may have closed the first of what will be several chapters in class action litigation arising from the Illinois Biometric Information Privacy Act (BIPA).  The court addressed the very narrow issue of what it means for a person to be “aggrieved” under BIPA.  Ultimately, the court held that a violation of the notice, consent, disclosure, or other requirements of BIPA alone, without proof of actual harm, is sufficient for a person to be considered “aggrieved” by a violation of the law.

There are several important issues, however, that were not before the court and remain to be litigated.  One of those issues is implied notice and consent. Defendants will argue that the plaintiffs who checked in/out at work using fingerscan timekeeping systems (which is the fact pattern of almost all of the almost 200 class action lawsuits filed in state court) knew that the fingerscans were being collected and used by their employers for timekeeping purposes, and they voluntarily provided that information.

Federal courts have dismissed such lawsuits, reasoning that plaintiffs effectively received notice and gave consent.  In Howe v. Speedway LLC, for example, the court in a fingerscan timekeeping case held that the plaintiff’s “fingerprints were collected in circumstances under which any reasonable person should have known that his biometric data was being collected.”  Similarly, in Santana v.Take-Two Interactive Software, Inc.the U.S. Court of Appeals for the Second Circuit held that plaintiffs essentially received the notice and consent contemplated by BIPA because “the plaintiffs, at the very least, understood that Take-Two had to collect data based upon their faces in order to create the personalized basketball avatars, and that a derivative of the data would be stored in the resulting digital faces of those avatars so long as those avatars existed.”  In dismissing for lack of standing, the McGinnis court reasoned that the plaintiff “knew his fingerprints were being collected because he scanned them in every time he clocked in or out of work.”

Another significant defense is constitutional standing.  Federal courts have recently dismissed BIPA lawsuits on the ground that they do not meet Article III standing requirements.  Defendants in state court will argue that Illinois constitutional standing (which Illinois state courts have held should be similar to federal law) requires a level of harm that, at a minimum, should be what Article III of the U.S. Constitution requires. To hold otherwise would lead to a different result for a party based entirely on whether the lawsuit is filed in federal or state court.

Defendants will argue that most of the claims are barred by the one-year statute of limitations that applies to claims involving the right of privacy.  Assuming that the one-year statute of limitations is applied, the classes of affected individuals will shrink considerably.

Defendants will also contend that the information collected/stored by the timekeeping devices is not considered biometric information under BIPA.  There is no library of fingerprints stored by these timekeeping devices.  Instead, the devices measure minutiae points and convert those measurements into mathematical representations using a proprietary formula that cannot be used to create a fingerprint.  More security is layered on top of that — the mathematical representation is encrypted.  For these reasons, no plaintiff in any of these biometric cases has been able to point to a single data breach involving biometric information.  The technology is essentially tokenization(similar to Apple Pay), where if a hacker were to access the actual device, he’d find nothing there to steal because the valuable thing (the credit card number or, in this case, fingerprint) is not stored on the device but is instead replaced by a numerical representation.

Plaintiffs will also have to prove that the defendants didn’t just violate BIPA, but did so negligently or intentionally.  This is not an easy standard to meet, especially if the trier of fact determines that these are “gotcha” lawsuits, meant to catch companies off-guard about a little known and rarely used state law.

Assuming the plaintiffs jump all these hurdles, they must still demonstrate that these cases are appropriate for class certification. The cases involve different facts regarding whether individual plaintiffs received notice, whether they gave consent, whether they used the fingerscan method of authentication or another method like PIN number or RFID card, whether they enrolled in Illinois, and whether their claim involves a violation of BIPA beyond collection or storage. Given these differences between plaintiffs, it will be difficult for them to meet the commonality and fairness requirements for class certification.

To be sure, some Defendants will face their own challenges.  A line of cases has held that where companies used their time-clock provider’s cloud service to store or back up timekeeping information from the clock, they may be in violation of BIPA’s prohibition against disclosure of biometric identifiers to a third party.  But at least one court has disagreed with that logic, stating that not all disclosures to a third party automatically present a concrete injury, and whether the third party has strong protocols and practices in place to protect data is relevant to the inquiry.

Defendants need only win one of these (or several other) defenses.  Plaintiffs must win them all.  In the meantime, plaintiffs must hope that the Illinois legislature does not notice that hundreds of BIPA lawsuits are flooding the Illinois state court system creating potentially crippling liability for companies that tried to adopt more secure methods of authentication, which could lead to an amendment that would make the law more consistent with its original intent. 

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.

On Friday afternoon an Illinois intermediate appellate court decided that the bar for a plaintiff bringing a class action lawsuit under the Illinois Biometric Information Privacy Act (BIPA) is low, creating a conflict with its sister intermediate appellate court. The Illinois Supreme Court is expected to resolve the conflict early next year. How the court resolves the conflict will significantly impact companies doing business in Illinois.

Background

BIPA requires companies to provide notice and obtain consent from Illinois residents before collecting their biometric information. It also limits what companies can do with biometric information and requires the adoption of certain security safeguards. Any person “aggrieved by a violation” of the law may sue for actual damages or statutory damages ranging from $1,000 to $5,000 per violation. You can learn more about BIPA from my earlier blog post.

Beginning in the fall of 2017, Illinois businesses of all sizes were hit with “gotcha” class action lawsuits brought by former employees looking for reasons to sue their former employers. Those companies used timekeeping systems that required employees to scan their fingers to punch in and out of work. Ironically, the timekeeping systems improved security by reducing fraud and strengthening authentication. Nevertheless, many companies were not aware of BIPA or the possibility that it might apply to their timekeeping systems. The plaintiff’s bar was quick to pounce. Over 150 class actions were filed by former employees claiming that they did not receive BIPA’s requisite notice and consent (despite the fact the employees voluntarily placed their fingers on these devices every day). The lawsuits in aggregate seek tens of millions of dollars from companies doing business in Illinois.

Requisite Harm for a Private Cause of Action

A key question in the BIPA litigation is what it means to be “aggrieved by a violation.” Is it enough that an employee doesn’t receive notice and consent, or must they show that they suffered some actual harm (e.g., financial loss or identity theft) as a result of the violation, as would be necessary in a typical data breach lawsuit?

In December of 2017, the Illinois Appellate Court (Second District) in Rosenbach v. Six Flags Entertainment Corp. held that a person aggrieved must allege some actual injury, adverse effect, or harm. The outcome makes sense because BIPA does not say that the data subject can sue “for a violation.” It requires two things: a violation of BIPA and that someone be aggrieved.

Nevertheless, last week the Illinois Appellate Court (First District) weighed in on the issue and reached an opposite conclusion, holding that a mere violation of BIPA, without additional harm, is all that is necessary to meet the “aggrieved by” standard for a private cause of action. The case, Sekura v. Krishna Schaumburg Tan, Inc., was brought against a tanning salon that used finger scans to admit members into its salons. The court rejected its sister court’s ruling in Rosenbach and held that aggrieved means only the deprivation of a legal right. The court further held that disclosure of biometric information to a third party (e.g., storing the information in the cloud) was sufficient to meet the “aggrieved by” standard, as was an allegation of mental injury. In short, the bar for meeting the “aggrieved by” standard, according to the First District’s conclusion, should be incredibly low.

What’s Next and When?

Presumably, the Sekura decision will be appealed quickly and joined with the Rosenbach case already pending at the Illinois Supreme Court. It is unclear what impact Sekura will have on the timing of a ruling from the Supreme Court on the issue, as briefing in the Rosenbach case was finished in September and the parties were simply awaiting the scheduling of an oral argument. It’s possible the court will wait for briefing to be perfected in the Sekura case before scheduling oral argument, or an expedited briefing process may take place because the issues in the two cases are so similar.

Substantively, one of the most significant consequences of the Sekura decision is that it could give the Illinois Supreme Court something to cite if it were inclined to reverse Rosenbach. I would argue that the reasoning in Rosenbach actually appears stronger in contrast to the Sekura decision. For example, the Sekura analogy of disclosing encrypted biometric information to a third party as equivalent to a disclosure of whether someone has AIDS under the AIDS Confidentiality Act is misplaced. Similarly, the Sekura reasoning makes the words “aggrieved by” meaningless as a mere violation of the statute also is all that is necessary to bring a private cause of action under the decision.

A Final Observation

Most concerning to me about the BIPA litigation generally is that it appears to be based on an unfounded fear and misunderstanding of the underlying technology companies use to collect, store, and share the subject information. Businesses are not collecting, storing, or sharing images of fingerprints, which might be accessed without permission and/or potentially misused. The finger scanning machines in question measure minutiae points and turn them into mathematical representations, which cannot be reverse engineered into a fingerprint. As a belt on these suspenders, the information is encrypted.

Two facts in the biometric privacy context are particularly telling and dispositive. First, no plaintiff or amici in any briefing in the more than 150 BIPA class actions has identified an example where biometric information was compromised. Why? Because the manner in which the finger scan information is collected is much like tokenization (a technology companies use to replace credit card numbers with valueless characters) – if a bad guy breaks in, all he can steal is a random set of characters that have no value.

Another important fact: all state data breach notification laws exempt encrypted information from the definition of personal information and the obligation to notify if it is the subject of a data breach. Why? Because there is no risk that a hacker can access the information and misuse it. Here, the subject information is encrypted so there is no risk of harm to the individuals bringing these lawsuits. The lawsuits are instead based on an unfounded fear of what could happen.

I wonder what impact a more fulsome explanation of the technology would have on the outcome of these cases. In the meantime, companies continue to spend significant sums of money defending these lawsuits and they face the risk of millions of dollars in potential liability.

In three months, the EU’s General Data Protection Regulation (GDPR), one of the strictest privacy laws in the world, will go into effect.  It will apply to companies that collect or process personal data of EU residents, regardless of whether the company is physically located in the EU.  Companies that violate the law will be penalized up to 4% of their annual worldwide revenue for the preceding financial year or 20,000,000 EUR, whichever is greater.  Is your organization ready?

Shook’s Privacy and Data Security Team regularly counsels multinational companies to comply with international privacy laws like the GDPR.  In an effort to help in-house lawyers understand whether the GDPR applies to their organizations and how to minimize its risks, we have prepared a webinar that provides tips on developing a GDPR compliance program.  The webinar is on-demand and complimentary.  Check it out here, and feel free to leave comments.

 

Does your company collect biometric information?  Are you not entirely sure what “biometric information” means?  Would you like to understand the differences between the different state biometric privacy laws?  Do you want to know why more than 50 companies were hit with class action lawsuits within a period of three months as a result of their biometric privacy practices?

If the answer to any of these questions is “yes” then check out this complimentary, on-demand webinar on Biometric Privacy prepared by Shook’s Privacy and Data Security team.  Then feel free to get in touch with any of the members of our Biometric Privacy Task Force (contact information at the end of the webinar).  Feel free to leave comments below.

While the privacy world is focused on the Equifax data breach, another development is taking place that could have a more lasting effect on privacy law.  In the last month, plaintiffs’ lawyers in Illinois have filed over 20 lawsuits against companies that authenticate their employees or customers with their fingerprints.  The lawsuits are based on the Illinois Biometric Information Privacy Act (BIPA), which requires companies that possess or collect biometric information to provide notice to and obtain a written release from individuals whose biometric information the companies collect.

Why Do These Lawsuits Matter?

Companies are increasingly collecting biometric information from their customers and employees (“data subjects”) because this information helps authenticate users with greater accuracy.  It allows the company to provide customers a more seamless, secure, and tailored experience.  It also allows employees to securely and conveniently punch in and out of work by placing their finger on an electronic reader, which has the additional benefit of minimizing “buddy punching” (where employees ask their colleagues to check them in/out of work improperly).

What Is Biometric Information?

BIPA applies to “biometric Identifiers” and “biometric Information.”  A biometric identifier is a retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry.  Biometric identifiers do not include, among other things, writing samples, written signatures, photographs, human biological samples used for valid scientific testing or screening, demographic data, tattoo descriptions, or physical descriptions such as height, weight, hair color, or eye color.  Biometric information means any information based on an individual’s biometric identifier used to identify an individual.  Because BIPA does not treat biometric identifiers differently from biometric information, this blog post refers to both categories collectively as “biometric information.”

To Whom Does BIPA Apply?

BIPA applies to companies in possession of biometric information or companies that collect, capture, purchase, receive through trade or otherwise obtain biometric information about Illinois residents.  BIPA does NOT apply to entities governed by HIPAA or GLBA.  Nor does it apply to state or local government agencies or any court of Illinois.

What Does BIPA Require?

Companies that possess biometric information must develop a written policy, made available to the public, that establishes a retention schedule and guidelines for permanently destroying biometric information when the initial purpose for collecting or obtaining the information has been satisfied, or within three years of the individual’s last interaction with the private entity, whichever occurs first.  The company must comply with this retention schedule and destruction guidelines, unless a valid warrant or subpoena issued by a court of competent jurisdiction provides otherwise.  The company must also adopt reasonable security safeguards to protect the storage and transmission of biometric information.  These safeguards must be at least the same as or more protective than the manner in which the private entity stores, transmits, and protects other confidential and sensitive information.

Companies that collect, capture, purchase, receive through trade, or otherwise obtain a person’s biometric information must:  (1) inform the subject in writing that biometric information is being collected or stored, and the specific purpose and length of term for which the information is being collected, stored, and used; and (2) obtain a written release executed by the subject of the biometric information.

What Conduct Does BIPA Prohibit?

Companies that possess biometric information are not allowed to sell, lease, trade, or otherwise profit from a person’s biometric information.  Additionally, disclosure, redisclosure, and other dissemination of the information is prohibited unless:  (1) the data subject consents to the disclosure; (2) the disclosure completes a financial transaction requested or authorized by the data subject; (3) the disclosure is required by law; or (4) the disclosure is required pursuant to a valid warrant or subpoena issued by a court of competent jurisdiction.

Can My Company Be Sued For Violating BIPA?

Any person “aggrieved by a violation” of BIPA can sue the violating company.  He or she may be entitled to $1,000 in liquidated damages for a negligent statutory violation or $5,000 in liquidated damages for an intentional statutory violation.  (If actual damages are greater, the plaintiff may seek those instead, but for the reasons discussed below, this is not usually the case).  Additionally, the prevailing party (plaintiff or defendant) may recover attorney’s fees and costs.

What Is This Latest Wave Of BIPA Lawsuits All About?

Between BIPA’s enactment in 2008 and a couple months ago there were relatively few lawsuits based on violations of BIPA.  Within the last couple of months, however, the Illinois plaintiffs’ bar has filed over 20 BIPA lawsuits.  Almost all of those lawsuits are based on the same underlying factual scenario:  an employee places his/her finger on a time clock to authenticate himself/herself when checking in or out of work.  In addition to suing the employer, plaintiffs are also suing the companies that sell/distribute the time clocks that use fingerprint readers.

Given the timing of the lawsuits and their almost identical language, this is surely a coordinated effort by the plaintiff’s bar to obtain quick settlements from risk-averse companies that would prefer to avoid or cannot afford the cost of litigation.  It is also a shotgun approach to flood the courts with these lawsuits in the hope that one or two of them will result in favorable precedent that can be used to file more lawsuits, so I don’t see this trend ending anytime soon.

Do The Lawsuits Have Merit?

No.  You can expect to see strong arguments by the defendants on the underlying technology and the meaning of biometric information.  But these lawsuits are meritless primarily because the plaintiffs didn’t suffer any real harm.  The lawsuits appear to be filed by former employees with axes to grind against their former employers.  Setting that aside, however, the arguments in the complaints are not persuasive.

The complaints allege that BIPA was designed to ensure that the plaintiffs receive notice that their biometric information is being collected, and that the plaintiffs should have been asked to sign written releases.  This lack of notice argument is silly when you remember that these individuals were essentially receiving notice every day by placing their fingers on a time clock to log in and out of work.  This latest wave of cases does not present the situation, as other BIPA cases have, where biometric information is being collected without the data subject’s knowledge.

The complaints also allege that the plaintiffs were not provided a policy explaining the use of their information. If we assume first that the plaintiffs would have read these policies (because we all read policies provided to us during the onboarding process), then what would those policies have told the employees?  Anyone familiar with the technology will tell you that the policies would say that the company does not actually collect fingerprint images at all, that there isn’t a database of employee fingerprints somewhere, that to the extent the company has access to numerical representations of their fingerprints those representations are useless to anyone else because they can’t be reverse-engineered, and the information is not shared with third parties (primarily because it serves no use).

The complaints are also significant in what they do NOT allege.  They do not allege, for example, that unauthorized third parties (like hackers) accessed the information.  Nor do the complaints allege that the employers shared the information with any authorized third parties.  So again, what is the harm suffered?

For these reasons, most courts that have addressed the lack of harm argument in the BIPA context have dismissed the lawsuits.  See, e.g., McCollough v. Smarte Carte, Inc. (N.D. Ill. Aug. 1, 2016); Vigil v. Take-Two Interactive Software, Inc. (S.D.N.Y. Jan. 27, 2017).  Those courts concluded that even if there was a technical violation of BIPA, the plaintiffs were not “aggrieved by those violations.”

What Can Companies Do To Minimize These Risks?

First, determine whether BIPA even applies to you.  This may require consulting with counsel knowledgeable in the requirements of BIPA and the underlying technology.  Even if you are not currently collecting biometric information from Illinois residents, could you in the future?  Additionally, while Illinois is currently the only state that creates a private right of action for violation of its biometric information privacy statute, other states have similar laws enforced by their respective Attorneys General.

Second, if BIPA applies, use experienced counsel to ensure that you comply with BIPA – draft a BIPA retention policy, prepare and obtain written releases, and evaluate the security and use of the information.  This process may require coordination with your information technology staff and the vendor you use for your authentication devices.

Finally, if your company has already been sued, there are strategies that counsel should immediately bring to your attention that will lower the cost of litigation, increase the likelihood of success, and help you identify traps for the unwary.

 

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.

One of the most significant questions in data security law is whether reports created by forensic firms investigating data breaches at the direction of counsel are protected from discovery in civil class action lawsuits.  They are, at least according to an order issued last week in In re Experian Data Breach Litigation. 15-01592 (C.D. Cal. May 18, 2017).  This post analyzes the decision, identifies important practical takeaways for counsel, and places it in context with the two other cases that have addressed this issue.

Why Do Lawyers Hire Forensic Firms?

When a breach occurs, companies often retain legal counsel to advise them on legal issues like whether the company adopted “reasonable” security safeguards; whether the company is obligated to notify affected customers and, if so, when and how; whether notice to regulators is required; and, what remedial measures are required.  To properly advise clients on these issues, legal counsel needs to know whether personally identifiable information (PII) was affected by the incident, when the intrusion occurred, whether the PII was actually accessed or acquired, what safeguards were in place to prevent the attack, and how the vulnerability was remediated.  A good forensic firm will help you answer these questions so you can advise clients accurately.  The reports often contain information that plaintiffs’ lawyers would love to get their hands on – it can provide details about why the breach occurred, how it could have been prevented, and whether the company’s safeguards were consistent with standards of reasonableness.  It is important that the forensic firm be able to perform its investigation without fear that its reports will be subject to misinterpretation and criticism by a plaintiff’s lawyer or other third party.  Hence the need for protection of these reports in civil litigation.  For the time being, there is no statutory protection for these types of documents (though there should be) so we must turn to the attorney-client privilege and work-product doctrine for protection.

What Happened In Experian?

In October 2015, Experian announced that it suffered a data breach.  A class action was filed the next day.  Experian immediately hired legal counsel who in turn hired Mandiant, one of the world’s leading forensic firms, to investigate the data breach and identify facts that would allow outside counsel to provide legal advice to Experian.

The plaintiffs requested a copy of Mandiant’s report and documents related to that investigation.  Experian objected, arguing that the documents are privileged and protected by the work-product doctrine because they were prepared in anticipation of litigation for the purpose of allowing counsel to advise Experian on its legal obligations.  The plaintiffs moved to compel production of the documents.

The court held that the documents were protected from discovery by the work-product doctrine.  Plaintiffs had argued that Experian had an independent business obligation to investigate the data breach, and it hired Mandiant to do that after realizing its own experts lacked sufficient resources.  The court rejected this argument because Mandiant conducted the investigation and prepared the report for outside counsel in anticipation of litigation, “even if that wasn’t Mandiant’s only purpose.”  The court pointed to, among other things, the fact that Mandiant’s full report was not provided to Experian’s internal incident response team.

Plaintiffs argued that the report should not be protected because it was prepared in the ordinary course of business.  Plaintiffs cited the fact Mandiant had previously worked for Experian.  The court disagreed because Mandiant’s previous work for Experian was separate from the work it did for Experian regarding the subject breach.

Plaintiffs argued that even if the documents were created to allow counsel to advise Experian, plaintiffs were not able to obtain the information that was included in the Mandiant report by other means because Mandiant accessed Experian’s live servers to do its analysis, which plaintiffs’ experts would not be able to do.  The court disagreed, citing information in the record demonstrating that Mandiant never in fact accessed the live servers, but only observed server images to create its report.

Lastly, the plaintiffs argued that even if the information was protected by the work-product doctrine, Experian waived the protection by sharing the documents with a co-defendant (T-Mobile’s counsel).  In what I believe will be the most underrated yet arguably most important part of the order, the court ruled that the sharing of the report with the co-defendant pursuant to a joint defense agreement did not constitute a waiver of the work product doctrine.

There are some limitations to the court’s order:

  1. The court only ruled on whether the work-product doctrine applied to the Mandiant documents, not whether the attorney-client privilege applied.
  1. Mandiant delivered its report to outside counsel only, who shared the reports with in house counsel.  The full report was not shared with Experian’s incident response team (it is not clear who comprised that team).
  1. Mandiant performed an analysis of Experian’s systems two years before this incident. The court did not conclude that the 2013 report was privileged.  The court also did not conclude that any work Mandiant performed before outside counsel was hired is privileged. It is not clear from the order whether the court was ruling that the pre-incident and pre-engagement materials were not protected at all, not protected by the attorney-client privilege, or simply not ruling one way or the other.  My interpretation is that it is the latter.

How Have Other Courts Ruled?

Only two other courts have addressed the applicability of privilege or work-product protection to the production of forensic reports.  Both have applied privilege and/or work product to the documents.

In In re: Target Corporation Customer Data Security Breach Litigation, No. 14-2522 (D. Minn. Oct. 23, 2015), the court held that documents relating to a forensic investigation performed to provide legal advice to the company was privileged and work product.  Following its breach, Target established a data breach task force at the request of Target’s in-house lawyers and its retained outside counsel so that the task force could educate Target’s attorneys about aspects of the breach and counsel could provide Target with informed legal advice.  What makes the Target case different from Experian is that Target undertook two forensic investigations (both by the forensic firm, Verizon) – one as described (to enable counsel to advise Target in anticipation of litigation and regulatory inquiries) and a second was required by several credit card brands (commonly referred to as a “PFI” or payment card forensic investigation).  This second investigation, Target conceded, was not protected by privilege or the work-product doctrine.  The court allowed production of certain information (emails to Target’s Board of Directors which updated the Board on Target’s business-related interests), but held that information relating to Verizon’s investigation for the data breach task force was protected by the attorney-client privilege and work-product doctrine.  The court reasoned that there were forensic images and the PFI documents that plaintiffs could use to learn how the data breach occurred and how Target responded.

In Genesco, Inc. v. Visa U.S.A., Inc., No. 3:13-cv-00202 (M.D. Tenn. Mar. 25, 2015), the court denied Visa’s request for discovery related to remediation measures performed by IBM on Genesco’s behalf.  The court reasoned that Genesco retained IBM to provide consulting and technical services to assist counsel in rendering legal advice to Genesco. Therefore, the documents were privileged.

Experian came out the same way as Target and Genesco, but there are subtle differences that should be kept in mind whenever a company decides to retain a forensic company and expects privilege or work product to apply.  Experian is arguably the most important of the three because it is the far more common scenario.  Most companies will not spend money to hire two forensic firms (or one firm with two teams) to perform two separate investigations on the same incident.  So where only one investigation is performed, the company and counsel would be wise to read the Experian filings and order before commencing the engagement of counsel and a forensic firm.

Takeaways

Here are some practical takeaways if a breached entity wants to minimize the risk of disclosure of a forensic report:

  • The forensic firm should be hired by outside counsel, not by the incident response team or the information security department.
  • Create a record and think about privilege issues early in the engagement by doing the following:
    • ensuring that the engagement letter between the breached entity and outside counsel envisions that outside counsel may need to retain a forensic firm to help counsel provide legal advice;
    • the MSA and/or SOW between outside counsel and the forensic firm makes clear that the forensic firm is being hired for the purpose of helping counsel provide legal advice to the client;
    • limit the scope of the forensic firm’s work to those issues relevant to and necessary for counsel to render legal advice;
    • ensure that the forensic firm communicates directly (and only) with counsel in a secure and confidential manner;
    • not sharing the forensic firm’s full report with anyone other than in house counsel; and
    • incorporate the forensic firm’s report into a written legal memorandum to demonstrate how the forensic firm’s findings were used to help counsel provide legal advice to the client.
  • Work a forensic firm undertakes before outside counsel is involved will not be protected, so the breached entity should engage counsel immediately.

 

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.

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.

Earlier this year, Bloomberg Law reported that Edelson PC, a leading plaintiffs’ firm in privacy and data security law, filed a class action lawsuit against a regional law firm that had vulnerabilities in its information security systems.  This week, the identity of the firm and the allegations of the lawsuit were unsealed.  The case, Shore v. Johnson & Bell, LTD, No. 1:16-cv-04363 (N.D. Ill. Apr. 15, 2016), alleges that Johnson & Bell (“the firm”), a Chicago-based law firm, was negligent and engaged in malpractice by allowing information security vulnerabilities to develop that created risks to client information.  This blog post explains the alleged vulnerabilities, analyzes the merits of the lawsuit, and discusses what it means for other law firms, their clients, and service providers.

By coincidence, Fortune reported earlier this week that China stole data from major U.S. law firms:  “The evidence obtained by Fortune did not disclose a clear motive for the attack but did show the names of law firm partners targeted by the hackers. The practice areas of those partners include mergers and acquisitions and intellectual property, suggesting the goal of the email theft may indeed have been economic in nature.”  These developments are reminders that information security must be a high priority for all law firms.

The Johnson & Bell Lawsuit

The lawsuit is based on three alleged vulnerabilities in the firm’s information security infrastructure.  According to a court filing, the vulnerabilities have now been addressed and fixed.

First, the lawsuit alleges that the firm’s Webtime Server, an application attorneys use via any web browser to remotely log in and record their time, was based on the 2005 version of the Java application JBoss.  The Complaint alleges that the 2005 version of JBoss has been identified by the National Institute of Standards and Technology as having an exploitable vulnerability. Plaintiffs also allege hackers have taken advantage of the vulnerability in other situations to conduct ransomware attacks.

Second, the lawsuit alleges that the firm’s virtual private network (VPN) server contains a vulnerability.  Companies use VPNs to allow their employees to remotely access company information in an encrypted, secured manner.  The secured nature of a VPN connection allows companies to feel comfortable providing access to highly sensitive internal resources and databases.  Sometimes, a temporary disconnection occurs while an employee is using a VPN connection.  The Complaint alleges generally that when the firm’s VPN sessions were disconnected, the renegotiation (or re-connection of the VPN session) was insecure, making it vulnerable to a “man-in-the-middle” attack.  A man-in-the-middle attack is a cyberattack in which the hacker gains access to a system to eavesdrop on communications and steal confidential information.

Finally, the Complaint alleges that the firm’s email system was vulnerable because it supports version 2.0 of SSL.  Secure Sockets Layer (SSL) is a form of technology that creates an encrypted tunnel between a web server and a browser to ensure that information passing through the tunnel is protected from hackers. Version 2.0 was replaced by version 3.0 in 1996.  In 1999, Transport Layer Security (TLS) replaced SSL entirely.  Since then, TLS has been updated at least twice.  According to the Complaint, the use of SSL 2.0 made the firm susceptible to a DROWN (Decrypting RSA with Obsolete Weakened Encryption) attack that could allow hackers to access the contents of the firm’s emails and attachments.  The Complaint claims that the Panama Papers breach was a result of a similar attack.

Notably, the Complaint does not allege that the firm actually suffered a compromise of sensitive information, that a successful cyberattack occurred, or even that a cyberattack was attempted.  In other words, the lawsuit is based on the firm’s alleged state of security that may make it vulnerable to an attack in the future.

Who is the class?  Plaintiffs (Jason Shore and Coinabul, LLS) are former clients of the Johnson & Bell firm.  The firm defended Plaintiffs in a class action lawsuit alleging that Plaintiffs defrauded consumers by accepting payments in the form of bitcoins while refusing to ship gold or silver ordered by customers.  See Hussein v. Coinabul, LLC, No. 14 C 5735 (N.D. Ill. 2014).  Plaintiffs define the class as all of the firm’s clients within the statute of limitations period except insurance companies and clients operating in the healthcare industry. Why insurance and healthcare companies are not included in the proposed class is not evident from the allegations.  It could be that those industries are more highly regulated in privacy and data security and therefore would have had a greater duty to ask questions of the firm about its information security practices.  Though why financial institutions, the most highly regulated sector in data security, would not also have been included in this group is not clear.

The Complaint is based on four causes of action:

  1. Breach of implied contract – Plaintiffs allege that, as a term of the engagement agreement, the firm promised to keep a file for the work they performed on Plaintiffs’ matter.  The Complaint claims there was an implied promise that the firm would use reasonable methods to keep Plaintiffs’ information confidential, which was breached by the firm’s security vulnerabilities.
  2. Negligence – Plaintiffs claim the attorney-client relationship automatically created a duty to adopt industry standard data security measures, which was breached as evident by the alleged vulnerabilities.
  3. Unjust enrichment – Plaintiffs argue that a portion of the attorney’s fees they paid to the firm was for the administrative cost of data security to maintain the confidentiality of client information.  Plaintiffs seek return of that amount of the fees paid.
  4. Breach of fiduciary duty – Plaintiffs claim that the failure to implement industry standard data security measures and resulting vulnerabilities were breaches of the firm’s fiduciary duty to Plaintiffs.

What is the injury? Plaintiffs allege they were injured because the security vulnerabilities created (1) a diminished value of the services they received from the firm, and (2) a risk that their sensitive information may be compromised at some point in the future (which could result in damages from that theft).  Plaintiffs measure their damages as the portion of fees paid to the firm that were meant to be for the administrative cost of securing client information.  Plaintiffs have also asked the court to require an independent third-party security audit of the firm’s systems.

Is a Vulnerability by Itself Enough to Meet Standing Requirements?

In my opinion, the lawsuit is fatally flawed because there was no attack or attempted attack on Plaintiffs’ information, let alone actual unauthorized access or acquisition of the information.  The firm’s security system was analogous to an unlocked door to a home that nobody burglarized.  The plaintiffs indisputably suffered no financial damages as a result of the alleged vulnerabilities, and the vulnerabilities were identified (albeit by this lawsuit) and addressed before any actual harm occurred.

If the mere risk of harm at some point in the future is enough to allow a lawsuit to proceed, then every company in America should be concerned.  Most companies probably have similar unknown vulnerabilities in their systems.  The challenge with information security is that it is like a game of “Whack-A-Mole” — the fast-paced and constantly changing threats and defenses means that new vulnerabilities are always emerging so it is almost impossible to eliminate all vulnerabilities entirely.  The floodgates will be blown wide open if a lawsuit based only on the mere existence of a vulnerability is considered actionable.

That said, the Edelson firm is one of the most creative plaintiffs’ privacy and data security firms in the country.  They have made their name by doing things differently from their peers.  They are known for pushing the envelope and expanding the boundaries of liability in privacy and data security law.  For example, in Resnick v. AvMed they were the first firm to persuade a U.S. Circuit Court of Appeals to apply the unjust enrichment theory to data breach class actions.  Other courts have since applied that theory in allowing data breach class action lawsuits to proceed. The Resnick case subsequently settled for over $3 million.

In In re: LinkedIn User Privacy Litigation, No. 5:12-cv-03088 (N.D. Cal. 2012), at a time when other plaintiffs firms were pursuing data breach liability based on a failure to adopt reasonable security safeguards, they persuaded the court of a new theory:  that the gravamen was not the failure to adopt certain security safeguards, but the misrepresentations in consumer-facing statements about the safeguards that were actually in place.  The LinkedIn case settled for $1.25 million.

In Spokeo v. Robins, a case that was appealed all the way to the U.S. Supreme Court, the Edelson firm argued to the Court that the mere violation of a privacy statute without other damages or harm is sufficient to confer standing on a plaintiff.  The Court’s decision gave plaintiffs a roadmap for circumventing the standing problem.

But no case has gone this far – to hold that a mere vulnerability without a compromise of information, an attack, or an attempted attack, is actionable.  Doing so would essentially change the data security class action litigation “ball game” once again.

The Impact on Everyone Else

This lawsuit is important because of its potential impact to several key groups.  First, is other law firms.  Every firm should immediately determine whether it has the same vulnerabilities alleged in the Complaint.  Law firms should be concerned that similar vulnerabilities could lead to similar lawsuits, whether or not an actual attack has occurred.  They should be prepared to respond to client inquiries explaining what safeguards they have adopted to protect sensitive client information, consistent with their legal and ethical obligations. (For a discussion of these obligations, read my July 2013 blog post on the subject).  Firms should review and update their engagement letters for promises and disclaimers to their clients about information security.

This leads to the second group of impacted individuals:  the law firms’ clients.  Every company should have in place a vendor management program that incorporates information security as part of the due diligence process, and law firms are service providers like the rest of the companies’ vendors.  Companies should be asking their outside counsel as part of the due diligence process how they protect client data:  what administrative, technical, and physical safeguards are in place?  Has the firm obtained an independent third-party certification (like ISO 27001) or performed a risk assessment by an information security expert?  (I was pleasantly surprised to see the Complaint refer to Shook, Hardy & Bacon’s ISO 27001 certification as an example of what law firms should be doing).

Beyond asking questions, clients need to identify what they expect from their law firms in terms of specific security requirements and communication about vulnerabilities or notifications of data incidents.  This lawsuit may have been avoided if the engagement letter had required notice of material vulnerabilities.  The questions clients should be asking their law firms can (and will) be the focus of an entirely separate blog post.

The third group impacted by this lawsuit will be the service providers law firms use for information security services.  Small firms commonly outsource most or all of their information security to these providers.  Even large firms use service providers for information security services that include threat detection, data loss prevention, firewall implementation, and cloud storage.

Firms also purchase licenses for applications that may present security risks, similar to the alleged vulnerability in the Webtime service. These applications require a separate security vetting by the law firm before they can be used.

I suspect this is the first of what will be a series of lawsuits relating to law firm security brought by the Edelson firm and plaintiffs’ firms that follow their lead.  It will be interesting to see whether courts allow a lawsuit based on a security vulnerability alone to proceed or dismiss it for lack of standing.

 

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.

The SEC recently agreed to a $1,000,000 settlement of an enforcement action against Morgan Stanley for its failure to have sufficient data security policies and procedures to protect customer data. The settlement was significant for its amount. The true noteworthiness here, however, lies not in the end result but the implications of how it was reached: (1) the “reasonableness” of a company’s data security safeguards shall be judged in hindsight, and (2) almost any data breach could give rise to liability. The SEC has left no room for error in making sure that your cybersecurity procedures and controls actually and always work.

What Happened?

Morgan Stanley maintained personally identifiable information collected from its brokerage and investment advisory services customers on two internal company portals. Between 2011 and 2014, an employee unlawfully downloaded and transferred confidential data for approximately 730,000 accounts from the portals to his own personal data storage device/website. It is unclear whether the transfer of information was for the employee’s personal convenience or a more nefarious purpose. Soon thereafter, however, the employee suffered a cyberattack on his personal storage device, leading to portions of the data being posted to at least three publicly available Internet sites. Morgan Stanley discovered the information leak through a routine Internet sweep, they immediately confronted the employee, and voluntarily brought the matter to law enforcement’s attention.

The employee who transferred the information to his personal device was criminally convicted for violating the Computer Fraud and Abuse Act by exceeding his access to a computer, he was sentenced to 36 months probation, and ordered to pay $600,000 in restitution. He also entered into a consent order with the SEC barring him from association with any broker, dealer, and investment adviser for five years.

Morgan Stanley entered into a consent order with the SEC pursuant to which Morgan Stanley agreed to pay a $1,000,000 fine, but did not admit or deny the findings in the order.

SIDE NOTE TO COMPLIANCE OFFICERS READING THIS BLOG POST – if ever you need a way to deter your employees from sending corporate information to their personal devices or email accounts, tell them about this case.

What Does The Law Require?

Federal security laws (Rule 30(a) of Regulation S-P – the “Safeguards Rule”) require registered broker-dealers and investment advisers to adopt written policies and procedures reasonably designed to:

  1. Insure the security and confidentiality of customer records and information;
  2. Protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
  3. Protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.

Here, the SEC based Morgan Stanley’s liability on the fact that Morgan Stanley:

failed to ensure the reasonable design and proper operation of its policies and procedures in safeguarding confidential customer data. In particular, the authorization modules were ineffective in limiting access with respect to one report available through one of the portals and absent with respect to a couple of the reports available through the portals. Moreover, Morgan Stanley failed to conduct any auditing or testing of the authorization modules for the portals at any point since their creation, and that testing would likely have revealed the deficiencies in the modules. Finally, Morgan Stanley did not monitor user activity in the portals to identify any unusual or suspicious patterns.

In other words, the authorization modules did not work in this instance, nor was there auditing to test and possibly identify the problem, nor had Morgan Stanley invested in sophisticated monitoring applications that would have identified that the employee was engaging in suspicious activity.

Why Should Companies Worry?

The most concerning part of the Morgan Stanley consent order is this paragraph, which describes some robust safeguards Morgan Stanley had implemented before the incident occurred:

MSSB [Morgan Stanley] adopted certain policies and restrictions with respect to employees’ access to and handling of confidential customer data available through the Portals. MSSB had written policies, including its Code of Conduct, that prohibited employees from accessing confidential information other than what employees had been authorized to access in order to perform their responsibilities. In addition, MSSB designed and installed authorization modules that, if properly implemented, should have permitted each employee to run reports via the Portals only with respect to the data for customers whom that employee supported. These modules required FAs [Financial Advisors] and CSAs [Client Service Associates] to input numbers associated with the user’s branch and FA or FA group number. MSSB’s systems then should have permitted the user to access data only with respect to those customers whose data the user was properly entitled to view. Finally, MSSB installed and maintained technology controls that, among other things, restricted employees from copying data onto removable storage devices and from accessing certain categories of websites.

Lesson learned: it doesn’t matter how robustly designed your policies and procedures may be, if they don’t actually work as designed then you could be liable under the Safeguards Rule.

Commentary

The standard applied by the SEC in this enforcement action is higher than a “reasonableness” standard. It is easy, after the fact, to find a weakness that could have been exploited. Indeed, it is unusual if you cannot identify such a vulnerability after the fact. If a criminal or departing employee is set on unlawfully accessing sensitive information he can likely do so no matter what hurdles you place in his way. A company should not be held liable for failing to stop every data incident. Some may argue that a company like Morgan Stanley must be held to a higher standard because of the known threats to the financial services industry and the potentially significant consequences to consumers of a financial services company suffering a data breach. Nevertheless, the law as written requires policies and procedures that are only “reasonably designed” to protect sensitive information; the law does not require that these policies and procedures be perfectly designed nor that they be effective 100% of the time, nor could it.

Hindsight is 20/20 and regulators would be hard pressed to find any organization that could show their policies and procedures are always followed. Could audits and testing have detected the fact that Morgan Stanley’s authorization module was not preventing the type of unauthorized access and transfer of sensitive information in this case? Possibly, depending on the depth of the audit and foresight of the auditors. But little benefit appears to have inured to Morgan Stanley for the fact it actually had an authorization module, data security training for its employees, policies and restrictions regarding employee access of information, controls that prevented the copying of data onto removable storage devices, and the fact that it voluntarily brought this matter to law enforcement’s attention.

Is there a risk now that the SEC’s interpretation of “reasonableness” will be applied similarly by state Attorneys General, the Health and Human Services’ Office of Civil Rights, the Federal Trade Commission, or other regulators? All of this reminds us that the definition of reasonableness in the context of data security is subjective, and that subjectivity is a risk that companies must address.

Takeaways

There are some important practical takeaways for companies from this settlement: (1) perform a risk assessment to determine how your organization could suffer from a similar risk (employee transferring corporate information to a personal device); (2) implement an authorization module and other policies and procedures to limit access (and identify unauthorized access) to sensitive information to those who have a legitimate business need; and (3) make sure you audit and test these controls so ensure that they actually work. Additionally, CISOs, compliance officers, and in house counsel would be well served to ensure that the story of this enforcement action becomes part of their organization’s data security training as part of the onboarding and annual training process.

 

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.