California disclosure law has national reach

A new California law requiring companies to notify their customers of computer security breaches applies to any online business that counts Californians as customers, even if the company isn't based in the Golden State.

So warned Scott Pink, deputy chair of the American Bar Association's Cybersecurity Task Force, in a conference call Monday organized by an industry trade group and attended by approximately 50 representatives of technology companies and law firms concerned about the scope of the new law, which will take effect on July 1st of this year.

"If you are selling products or providing services to residents of California, it would probably be determined that you're conducting business in California under this law," said Pink. "This is something that has captured the attention of many corporate counsel and many IT managers around the United States, as they try to understand what the law requires and how it impacts them."

The law, called "SB 1386," is intended to combat identity theft. It passed last September in the wake of a high-profile computer intrusion into a California state government system that housed payroll information on 200,000 state workers, in which the victim employees were not warned that their personal information was stolen until weeks after the incident. The law passed over strong objections from industry groups.

To trigger the law, a breach must expose certain type of information: specifically, customers' names in association with their social security number, drivers license number, or a credit card or bank account number. After such an intrusion, the company must notify the effected customers in "the most expedient time possible and without unreasonable delay."

Other types of information are not covered, and the disclosure only needs to be made to California residents. But as a practical matter, Pink said, online businesses may find it easier to notify everyone impacted by a breach, rather than trying to cherry-pick Californians for special treatment.

"Many, many companies outside California are likely to be governed by this law," said Pink. "The question for them is to what extent do they find it convenient to only notify California residents, and do they find it easier to just notify everybody?"

Companies that ignore the law face potential exposure to class action lawsuits.

The law addresses a chronic problem in e-commerce - companies that are hacked are often reluctant to go public for fear of bad publicity or civil liability. But in forcing companies to come clean, the California law takes the opposite approach of the Bush administration's emerging cyber security policies, which encourage secret disclosure to government officials, rather than public warnings.

In Monday's talk, organized by the Information Technology Association Of America, Pink called the law "revolutionary," and said he believes that other states will follow California's lead. But he also pointed out some ambiguities in the law's language that are still waiting to be resolved.:

• The ROT13 loophole? An exception in the law says companies don't have to disclose a breach if the stolen data was stored in an encrypted form. But it doesn't say the encryption has to be strong. "If someone were to hack into the system... obtain the encrypted contents, and are able to unencrypt them, does that trigger the disclosure requirements?," asks Pink. "As I read the legislation, that' s not entirely clear."
  
  
• Willful Ignorance. Disclosure isn't just triggered by drop-dead, caught-'em-red-handed intrusions, but by any incident in which customer data is "reasonably believed" to have been compromised. That's a vague term that leaves much room for legal wrangling, Pink says. And what constitutes knowledge, anyway? "If a lower level IT person notices some unauthorized activity... is that knowledge of the company as a whole, and does that trigger disclosure?"
• Law enforcement investigations. Companies are permitted to delay disclosure to meet "the legitimate needs of law enforcement," a provision intended to keep the law from acting as an early warning system for cyber crooks who've fallen under police scrutiny. But who decides what a legitimate need is?

That last provision means that law enforcement officials effectively hold the power to grant a stay of execution on disclosure, giving a company time to examine its liability and plan a public relations strategy. That could mean a boost in the number of intrusions companies report to police, something the law enforcement community has been trying to achieve for years.

As one participant in Monday's conference call -- an executive at a large Silicon Valley software company -- put it, reporting the crime would be a way of "buying time." ("I'm not trying to get around the law," the exec added).

Pink suggested that any company relying on the law enforcement exception first get an explicit request from officials to delay disclosure. And resist the temptation to notify a local traffic cop and consider the matter closed. "The agency you're reporting it to should at least have jurisdiction," said Pink.

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