—Donald Rumsfeld, Feb. 12, 2002
Regardless of what one thinks of Donald Rumsfeld’s tenure as Secretary of Defense, these words hold a pearl of wisdom that applies to organizations struggling to comply with privacy and security laws. One of the major difficulties for modern organizations working with private personal information is simply knowing what privacy and security laws apply to their operations. This problem is exacerbated by the fact that, even for smaller- and medium-sized organizations, modern commerce often involves transacting with consumers in multiple legal jurisdictions (e.g. local, State, Federal and international). In short, since privacy and security laws from several jurisdictions may apply, it is highly likely that a lot of “unknown unknowns” exist, which can cause adverse impacts. This month’s newsletter explores an instance where unknown unknowns may have come into play in the privacy context, and how organizations can begin to address the problem.
Too Much Information?
FACTA Credit Card Receipt Class Action Suits a Cause for Serious Concern.
In what appears to be a classic case of “unknown unknowns,” a rash of over 100 class action lawsuits have been filed in California alleging violation of the Fair and Accurate Transaction Act of 2003 (“FACTA”). Section 15 U.S.C. § 1681c(g) of FACTA limits the information that can be printed on an electronically printed credit card receipt to the last five digits of the credit card number, and specifically prohibits printing a credit card’s expiration date on the receipt. Organizations were provided with a three-year grace period to comply with this Federal law (December 4, 2006 was the first date that compliance was required).
A single willful violation of FACTA (which is incorporated into and part of the Fair Credit Reporting Act [“FCRA”]) could result in damages ranging from $100 to $1,000. Plaintiffs are also entitled to actual damages if they can prove a negligent violation of the FACTA. With companies processing millions of credit card transactions each year the damage potential for these lawsuits is staggering.
These class action suits have been filed against companies such as: Urban Outfitters; IKEA; Chanel Inc.; Toys-R-Us Delaware Inc.; Oakley, Inc.; Rite Aid Corp.; Costco Wholesale Inc.; The Walt Disney Parks and Resorts; California Pizza Kitchen Inc.; El Pollo Loco; Levy Restaurants; United Artists Theatre Circuit Inc.; FedEx Kinkos Office and Print Services Inc.; Valero Energy Corp.; and Avis Rent-A-Car Systems Inc. Lawsuits are also spreading outside of
Thus far, many of the cases have survived motions to dismiss. Defendants have argued that dismissal is warranted because, while section 1681c(g) of FACTA applies to “cardholders,” private rights of action are only available to “consumers” under section 1681n of FCRA. This argument was rejected by
The success of these cases could ultimately hinge on the meaning of “willfully fails to comply” under section 1681n of FCRA. Two 9th Circuit cases (the Federal Appellate Court for
In sum, if a company knowingly and intentionally performs an act that violates FCRA, either knowing that the action violates the rights of consumers or in reckless disregard of those rights, the company will be liable under 15 U.S.C. § 1681n for willfully violating consumers’ rights. A company will not have acted in reckless disregard of a consumers’ rights if it has diligently and in good faith attempted to fulfill its statutory obligations and to determine the correct legal meaning of the statute and has thereby come to a tenable, albeit erroneous, interpretation of the statute. In contrast, neither a deliberate failure to determine the extent of its obligations nor reliance on creative lawyering that provides indefensible answers will ordinarily be sufficient to avoid a conclusion that a company acted with willful disregard of FCRA’s requirement. Reliance on such implausible interpretations may constitute reckless disregard for the law and therefore amount to a willful violation of the law (emphasis added).
This interpretation differs from interpretations in other Federal Appellate Districts, and this issue has now been argued before the U.S. Supreme Court (additional Supreme Court briefs and other information can be found here). If the Supreme Court disagrees with the 9th Circuit’s (and the 3rd Circuit’s) interpretation of “willfully,” then these class actions may be difficult for plaintiffs to win (it is doubtful that plaintiffs will be able to establish actual damages to recover for “negligent” failure to comply with FCRA).
Many corporate defendants reported that they were “surprised” by the FACTA credit card receipt requirements despite the three-year grace period to achieve compliance. That seems like a plausible explanation considering that most rational companies, had they known of this requirement, would most likely have chosen to limit the information on their credit card receipts rather than face a potential fine of up to $1000 per violation and expensive attorney fees to defend class action lawsuits. Nonetheless, these companies are now experiencing the risks and expense associated with unknown privacy laws.
What should companies do to address “unknown unknowns” when it comes to privacy laws?
Organizations are not omnipotent – they cannot possibly know all things at all times at all places. However, they can take action to minimize their risk of unknown privacy and security laws, including: (1) designing their privacy programs consistent with Fair Information Practice Principles; (2) acquiring resources to stay on top of privacy and security regulations and case law; and (3) insuring against the unknown.
Fair Information Practice Principles. While the legal requirement to limit credit card receipt data may not be intuitive to all companies, there are certain general activities that rational actors know could get them into trouble when it comes to handling customer information. For example, selling or collecting personal information without notice or consent can obviously be problematic, and as a result there are laws that address those general categories of privacy violations. Addressing general privacy activities and principles can decrease risk even if specific regulatory requirements are unknown.
In fact many, if not most, privacy and security-related laws reflect the principles and framework set forth in the Fair Information Practice Principles (“FIPP”). FIPP includes: notice/awareness, choice/consent, access/participation, security/integrity and enforcement/redress. If FIPP is the goal and the organization strives to meet that goal with due diligence, that organization will likely have reduced its regulatory privacy risks (relative to organizations that do not consider FIPP).
The problem, of course, is that FIPP does not address every single detail of every privacy law. Some organizations that follow FIPP may have missed the specific requirements of FACTA or may not be aware of the specific notices (and fines) required under the CAN-SPAM Act, HIPAA, GLB and other more obscure laws. These class action lawsuits demonstrate how compliance to FIPP can help. Those companies diligently concerned about the security/integrity prong of FIPP, even without knowledge of FACTA’s specific legal requirement, may have made an independent determination that truncating credit card numbers on receipts is a good practice to secure credit card information from identity theft. In fact, some organizations likely adopted this practice prior to the FACTA law as the result of due diligence with general privacy principles.
Due Diligence Investigation. Legal violations arising out of privacy or security incidents increasingly threaten organizations in terms of reputation damage, legal fees and damage awards. In fact, more and more companies are dedicating specific resources toward addressing privacy and security legal compliance. The first step is establishing accountability within the organization by creating a manager solely responsible for privacy compliance (a C-level executive with direct reporting to the CEO is a best case), and providing he or she with a budget. The lead privacy compliance officer should hire or work with attorneys to develop a formal process for inventorying the personal information the company handles, tracking the flow of that information across jurisdictions from collection to storage/disposal and determining the laws that apply to the organization.
Companies should attempt to address the lowest hanging fruit first. In certain industries, such as finance and healthcare, comprehensive privacy laws exist such as GLB and HIPAA. If the personal information of European or Canadian companies is at issue, the national privacy law of those countries should be considered.
Determining the applicability of privacy and security laws requires a continuous effort that considers changes in both the organization’s internal privacy practices and the law. Those responsible for privacy compliance should engage in frequent and comprehensive communications with business managers whose units collect and handle personal information. Companies should track laws and legislation, and subscribe to privacy and security reporters and websites (feel free to contact me for a list of sources). A person who can make the link between organizational practices and changes in privacy laws, and how those practices laws might impact the organization, should be dedicated to tracking internal practices and privacy laws.
Privacy and Security Liability Insurance – Risk Transfer. Insurance is a very important tool for managing the “unknown unknowns.” For companies that operate across multiple jurisdictions, it is virtually impossible to know every law and how every part of an organization is reacting or failing to react to that law. This means that residual risk exists that must either be tolerated by the organization or transferred to a third party.
Privacy and security liability insurance is an excellent tool for decreasing a company’s risk load under these circumstances. While the uncertainty inherent in complying with every security or privacy law still exists for insurers, insurers can spread their risk across thousands of organizations. Moreover, even if aggregated events occur, as long as the insurer has a good financial rating, they should be able to absorb the loss. Even insurance companies without the highest financial ratings are typically reinsured by large reinsurers who are able to weather adverse situations.
The ability of insurers to underwrite privacy and security liability risks in a world where such risks are sometimes “unknown” addresses the main problem of modern organizations. Instead of expending huge amounts of resources to achieve an unattainable level of “perfect security,” or researching, discovering and analyzing every possible privacy law that applies to them, insurers can take the risk and help their insureds avoids those expenses.
That is not to say that insurers will insure companies with bad privacy practices or poor information security. To be insurable, at a minimum, “reasonable” security and privacy practices must be present (and what is reasonable can vary from insurer to insurer). Nonetheless, most companies that can establish “due diligence,” and have practices and policies adhering to FIPP and generally accepted security standards such as ISO 17799, will likely be insurable.
There are two key challenges for companies that want to use insurance as a risk management tool in this context. First is implementing security and privacy practices that meet a level of reasonableness at the lowest price. As long as insurance is available, spending more to achieve “more than reasonable” privacy/security may not be cost-effective. Moreover, large security and privacy overhauls can be disruptive to business. The risk avoided by implementing costly controls can be transferred for the price of an insurance policy which typically costs less than the controls.
Second, and perhaps most important for an organization that wants to manage risk through insurance, is ensuring that the privacy and security insurance policy it chooses actually covers the risks the organization desires to transfer. If it does not, the organization will be left handling the costs of that risk on its own. It takes a concerted effort by risk managers and key business stakeholders to understand not only the potential risks, but also how they might impact the organization if the risk is realized.
On the other side of the equation, since the current crop of security and privacy policies vary in their approach and coverage scope, it is not always easy to get a clear picture of what is covered. Organizations should make sure they have good brokers or insurance consultants who understand the specific risks of their company and the insurance products available to cover such risks. In all, if some time and effort is taken to understand the range of security and privacy insurance options, insurance can be a very cost-effective and efficient tool for dealing with “unknown unknowns.”
While the risks and problems associated with unknown privacy or security regulations may never be fully solved, the awareness of organizations and the skill and talent available to address the problem are probably at their highest. Companies simply need to acknowledge the fact that unknown unknowns exist in the privacy world, and dedicate time and resources toward at least converting them into “known unknowns.” Even unaddressed privacy laws are better than unknown laws because at least the organization is aware of some risk and presumably has factored it into their overall risk management scheme. Organizations that are serious about understanding the full scope of their risk need to engage in a due diligence investigation, and need to at least try to adhere to common industry privacy practices and security standards. Companies should also seriously consider transferring their residual risk rather than engaging in potentially never-ending and expensive attempts to “eliminate” their risk. When these steps are taken, organizations can decrease the risk and loss associated with unknown security and privacy laws.