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Citing California's security breach disclosure law, Texas-based Allegiance Telecom notified 4,000 Web hosting customers this week of a recent computer intrusion that exposed their usernames and passwords, in a case that experts say illustrates the security sunshine law's national influence.

The law, called SB 1386, took effect on 1 July. It obliges companies doing business in California to warn their customers in "the most expedient time possible" about any security breach that exposes certain types of information: specifically, customers' names in association with their social security number, driver's license number, or a credit card or bank account number.

While similar federal legislation is stalled in Congress, attorneys have warned that SB 1386 applies to ecommerce companies nationwide if they house information on residents of the Golden State.

The 3 March intrusion at Allegiance's Hosting.com business did not directly expose information covered by the law, according to the company. Instead, the intruder pilfered thousands of passwords protecting Allegiance customers' Web hosting accounts. Because many of those accounts are held by ecommerce companies, Allegiance issued the notice anyway, informing clients that SB 1386 may now oblige them to pass on the warning to their California customers if they accept personally identifiable information.

"It's the correct thing to do under the circumstances," said Allegiance spokesman Jerry Ostergaard. "If there's a potential problem you want people to know about it."

"That's an interesting twist because the actual hacking incident is not a direct acquisition of personal information... it's sort of once-removed," says Scott Pink, special counsel at the California law firm Gray Cary, and chair of the American Bar Association's cybersecurity task force. "But I think they took the prudent course of action in deciding to send notice anyway."

Earlier in the week the company sent an additional notice under the law to about 200 customers disclosing another breach last fall of an Allegiance ecommerce server. The earlier attack directly compromised personally identifiable information, said Ostergaard, but company officials only became aware of it recently when the U.S. Secret Service uncovered evidence of a breach in the course of a cybercrime investigation.

Ostergaard says Allegiance is working to beef up security.

Garter analyst John Pescatore says companies around the country are taking some kind of action as a result of the California law. "We have seen a lot of clients do one of two things: the first is, do notification, and the second is, ask us about encrypting databases, because they really don't want to do the notification." Theft of information stored in an encrypted form does not have to be disclosed under the law.

"I think 1386 is a great thing," says Pescatore. "The fear of having to let me know makes you protect the data more."

"The California law, I think, certainly spurred a lot of companies to have contingency plans if they didn't have them already," agrees Ostergaard. "You want to make sure there's full and complete disclosure as required by law." But he insists that Allegiance would have issued some sort of notification either way. "It's obviously the right thing to do."

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