Strict liability for data breaches?
'An ounce of protection is worth a kilogram of cure'
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?
The law doesn't define reasonable. There are lots of ways to define it - common practice, industry standards, best practices, whatever everybody else is doing. If nobody else is securing the data, then you don't have to either, do you? I mean, ten thousand lemmings can't possibly be wrong, can they?
Indeed, in this case the federal court found that the mortgage company was not negligent. The court found that the mortgage company had written security policies (but did not address the adequacy of these policies), had current risk assessment reports (but didn't address what the company actually did with these reports) - and, at least according to an affidavit of the expert hired by the mortgage company (no conflict of interest there), had "proper safeguards for its customers' personal information". Thus, the court concluded, they had complied with the statutory provisions of the GLBA, and couldn't have been negligent, could they? Indeed, the court noted dismissively and literally, "despite Guin's persistent argument that any nonpublic personal information stored on a laptop computer should be encrypted, the GLB Act does not contain any such requirement." Well, duh. The GLBA just says have reasonable measures to protect the data - it also doesn't say that you have to use SSL on their website, or that you have to have a firewall, or that the firewall has to be properly configured, or that you have to change the default passwords, or that you have to do a thousand other security things that are reasonable to do. Indeed, the entire security guidelines of GLBA can be printed on the back of a napkin. It establishes goals - not procedures. It is not surprising that the GLBA does not require encryption on stored data.
The court concluded that it was not foreseeable that the laptop containing this information, being kept in this home office, might be the subject of a burglary. The court even deemed the location to be a "relatively safe" neighborhood in suburban Washington DC. This is despite the fact that last year alone there were a large number of laptop thefts across the United States.
The court also found that the people whose data was lost (well, stolen) could not demonstrate any "damages" as a result of the conduct. Indeed, it is more than likely that in this case - as in the case of most "losses" of data through misplaced disks or stolen computers - the data was either simply mislaid or the computer was stolen for the hardware itself. However, it is different for the court to say that the plaintiff's damages are "slight" from saying there are none at all.
Was the company negligent?
When personal data is lost, customers suffer some minimal anxiety and fear, have to run credit checks and review them, may have to put themselves on credit fraud watch lists, obtain new credit and debit cards, and change their direct deposit, withdrawal or transfer information. This is not the end of the world, but a nuisance to be sure. Why should the customer bear this cost themselves when the only thing the customer did wrong was to place their faith in the financial institution? The goal of the tort system is to make the parties whole. Maybe Guin's damages amounted to $20 to $50 dollars worth of time. Maybe more, maybe less, but certainly not zero. Of course, we also know that those who do steal personal information for identity theft can be very patient indeed - not exploiting the data for weeks, months or years. By that time, Mr Guinn may never know that the loan application filed in his name in Islamabad was the result of a simple two bit burglary in the outskirts of Washington, DC. Nor, for that matter, will any of Brazos' other customers.
Indeed, the court found that it was so obvious that the mortgage company did nothing negligent, and that nobody could ever anticipate that a laptop containing thousands of bits of personal information might be stolen. The court also found that the customers who put their faith in the mortgage company suffered no ill effects, despite the fact that their personal information was now floating around the ether. In fact the court did not even let the case go to trial, but instead granted the defendants summary judgment.
Now, the court wasn't entirely wrong. The negligence system is not intended to be an insurance policy against all harm. It is intended to compensate those who are injured by someone else's failure to adhere to a reasonable standard of care. Lets face it: most companies don't routinely encrypt data, even sensitive personal data, stored on laptops. Or their old hard drives sold on eBay, for that matter.
Laptops are typically kept at home, taken on vacations, thrown in overhead bins on airplanes and trains, kept in cars, and sometimes they're accidentally left at Starbucks. The data in them may be transferred to PDAs, CD-Rs, or USB thumb drives - unencrypted. This is pretty much standard industry practice. What the court failed to do however is to ask the question: should it be? Can we reasonably do better?
In addressing portable sensitive information, entities should reasonably ask themselves a few simply questions, such as: (1) does this information really need to be portable; (2) can it be simply made remotely accessible, and can this be done more securely; (3) does all of the information need to be accessible at all times; (4) can all or part of the information be encrypted at any time; (5) are there reasonable technologies that will, if deployed, better protect this data?
You can still conclude that what the mortgage company did was reasonable, but only after asking and answering these questions. The tort law should force companies to address the true economic consequences of not protecting data. In that way, we can prove the adage that, as NASA learned in their ill-fated Mars probe that crashed due to a programming failure in converting from old British measurements to metric, "an ounce of prevention is worth a kilogram of cure".
Copyright © 2006, SecurityFocus 
Mark D. Rasch, J.D., is a former head of the Justice Department's computer crime unit, and now serves as Senior Vice President and Chief Security Counsel at Solutionary Inc.