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Comment A recent case involving a stolen laptop containing 550,000 people's full credit information sheds new night on what "reasonable" protections a company must make to secure its customer data - and what customers need to prove in order to sue for damages.

Let's say you open your mailbox, and there is a letter from the financial organization that holds your student loan. "Dear valued customer.." the letter begins, and then it informs you that "due to circumstances beyond their control" your personal information has been compromised. Your name, home address, social security number, credit information, account balances - everything - is now sitting on a computer in Belarus, with the information being hocked for sale on a half a dozen websites. Perhaps thousands of dollars of fraudulent charges have been added to your account. Maybe even a new credit card has been issued in your name to an address in Saskatchewan.

You order a credit report, and put yourself on a credit fraud watch list. You pay for a service to inform you whenever there has been any extension of credit in your name. You call all your credit card issuers and get new credit cards. You cancel all automatic payments on your credit cards, including all your online purchases where your card is stored (such as Amazon and PayPal) and give them your new numbers.

Dozens of hours later, you may or may not have corrected some of the problems created by your lender's failure to protect your data. Finally, you go to your lawyer, and ask the dumbest question you can ever ask a lawyer: "can I sue?" Of course, the answer is always "yes". But the bigger question is, will you win? A recent case from Minnesota (PDF) raises the question of what the duty is of a regulated entity such as this to actually protect their customer's data.

A recent case

Stacy Guin had a student loan with Brazos Higher Education Service Corporation. Brazos employed a financial analyst to review its loan portfolio and decide which loans to buy and sell. The financial analyst worked from his house in Maryland, and had files related to as many as 550,000 of these loans on his laptop at home. Stop me if you have heard this before, or can anticipate what comes next. Of course, the analyst's house was burgled, and the unencrypted files stolen.

Brazos then sent out what I call the "Otter" letter. In the movie Animal House, some frat boys borrow and destroy Kent "Flounder" Dorfman's brother's car. Tim Matheson's character, Eric "Otter" Stratton, consoling his fraternity brother, utters the immortal words of faith, "You F&^#ed Up - You Trusted Us." This is exactly the sort of letter Brazos sent to its customers like Stacy Guin.

Brazos did take other remedial measures. They notified all 550,000 customers of the potential breach. They told customers they could put a free 90 day security alert on their credit files, and established a call centre to track ID theft. Indeed, there were no reported incidents of credit or identity fraud resulting from the stolen laptop, and no evidence that Stacy Guin's credit or identity were misused. In fact, what probably happened is that somebody in Silver Spring has themselves a brand new laptop, and never even noticed or used the data that was inside. Nevertheless, Stacy Guin decided to sue Brazos for breach of contract, breach of fiduciary duty and negligence.

FTC data protection guidelines

Brazos, as a lender, is a financial institution and therefore regulated in the US under the Gramm Leach Bliley Act (GLBA), 15 USC 6801. The GLBA Security Guidelines require regulated entities to, "establish appropriate standards for the financial institutions subject to their jurisdiction relating to administrative, technical, and physical safeguards - (1) to insure the security and confidentiality of customer records and information; (2) to protect against any anticipated threats or hazards to the security or integrity of such records; and (3) to protect against unauthorised access to or use of such records or information which could result in substantial harm or inconvenience to any customer. The Security Guidelines issued pursuant to the GLBA, 16 CFR 314.4(a)-(c) mandates that financial institutions develop computer security programs, identify foreseeable risks to consumer information, and put in place measures to monitor and reduce the risk of such programs.

Of course, Brazos had a security program, a written security policy, risk assessment reports, and what the court termed "proper safeguards for its customers' personal information", according to an affidavit prepared by a defence expert. Brazos determined that its analyst needed to have access to the information for Brazos' business purpose, and that this was acceptable to Brazos under its security program. What Brazos failed to do, however, was to actually prevent the information from being compromised.

What is "reasonable?"

In order to prevail, Guin had to show that the loan company owed him a duty to protect his information, that the theft of the laptop was reasonably foreseeable, and that Brazos failed to take reasonable efforts to prevent the loss of the data. Guin would also have to show that this failure was the legal cause of some damage or injury. The standard of care for the prevention of harm is typically what the law calls the "reasonable man" standard. What would a reasonable person (or company) of ordinary prudence do? In addition, laws or regulations can impose a higher standard of care than ordinary negligence, and failure to adhere to a law or regulation is typically deemed to be negligence per se. So, what would a "reasonable" holder of personal information have done?

Internet Security Threat Report 2014

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