Category: cybersecurity

“WannaCry” Ransomware Attack Causes Disruption Globally – With Worst Yet to Come

A ransomware known as “WannaCry” affected 200,000 people in 150 countries over the weekend, locking computer files and demanding payment to release them. As of this morning, Australia and New Zealand users seem to have avoided the brunt of the attack, with the Federal Government only confirming three reports of Australian companies being affected.  Not that ransomware attacks tend to be the subject of reporting – there is quite a high rate of payment of affected users as the pricing is deliberately cheaper than most alternatives unless your back-up process is very good.

The ransomware utilises vulnerabilities in out-of-date, unpatched versions of Microsoft Windows to infect devices. It spreads from computer for computer as it finds exposed targets, without the user having to open an e-mail attachment or click a link as is commonplace in most attacks. Ransom demands start at US$300 and doubles after three days.

The U.K. National Health Service (NHS) was among the worst hit organisations, forcing hospitals to cancel appointments and delay operations as they could not access their patients’ medical records. The Telegraph suggested that 90 percent of NHS trusts were using a 16 year old version of Windows XP which was particularly vulnerable to the attack. More attacks are anticipated throughout the working week as companies and organisations turn on their devices.

The U.K. National Cyber Security Center has released guidance to help both home users and organisations limit the impact of the attacks. It can be read here.

Edwin Tan is co-author of this article. 

Company Awarded Damages After Former Employee Hacks Its Systems and Hijacks Its Website

A company can recover damages from its former employee in connection with his hacking into its payroll system to inflate his pay, accessing its proprietary files without authorization and hijacking its website, a federal court ruled. Tyan, Inc. v. Yovan Garcia, Case No. CV 15-05443- MWF (JPRx) (C.D. Cali. May 2, 2017).

data security privacy FCC cybersecurityThe Defendant worked as a patrol officer for a security company. The company noticed that its payroll system indicated that the Defendant was working substantial overtime hours that were inconsistent with his scheduled hours. Upon further investigation, the company learned that that the Defendant accessed the payroll system without authorization from the laptop in his patrol car. When the company confronted him, the Defendant claimed a competitor hacked the payroll system as a means to pay him to keep quiet about his discovery that the competitor had taken confidential information from the company. A few months later, shortly after the Defendant left the company, the company’s computer system was hacked and its website was hijacked. The company later filed suit against the Defendant alleging he was responsible for the hack and the hijacking.

Following a bench trial, the court concluded the Defendant had used an administrative password the company had not given him to inflate his hours in its payroll system. The court also found the Defendant hijacked the company’s website and posted an unflattering image of the company’s owner on the website. In addition, the court found the Defendant engaged in a conspiracy to steal confidential files from the company’s computer system by accessing it remotely without authorization and destroyed some of the company’s computer files and servers.

The court concluded that the aim of the conspiracy in which the Defendant was engaged was twofold: first, to damage his former employer in an effort to reduce its competitive advantage; and second, to obtain access to those files that gave his former employer its business advantage, and use them to solicit its clients on behalf of a company he started. The court also found that by accessing the company’s protected network to artificially inflate his hours and by participating in the conspiracy to hack the company’s systems, the Defendant was liable for violations of the Computer Fraud Abuse Act, the Stored Communications Act, the California Computer Data Access and Fraud Act, and the California Uniform Trade Secrets Act.

As a result of Defendant’s misconduct, the court awarded the company $318,661.70 in actual damages, including damages for the inflated wages the company paid the Defendant, the cost of consultant services to repair the damage from the hack, increased payroll costs for time spent by employees rebuilding records and databases destroyed in the hack, the resale value of the company’s proprietary files, and lost profits caused by the hack. The court declined to award punitive damages under the California Uniform Trade Secrets Act, but left open the possibility that the Plaintiff may recover its attorneys’ fees at a later date.

Take Away

Companies are reminded that malicious insiders, in particular disgruntled former employees, with access to areas of the system external hackers generally can’t easily access, often result in the most costly data breaches.

Steps should be taken to mitigate insider threats including:

  • Limiting remote access to company systems
  • Increased monitoring of company systems following a negative workplace event such as the departure of a disgruntled employee
  • Changing passwords and deactivating accounts during the termination process

Appeal in Home Depot Data Breach Derivative Action Results in Settlement of Corporate Governance Claims

Home Depot Data BreachSnatching victory of a sort from the jaws of defeat, shareholders who brought a derivative action alleging that the 2014 Home Depot data breach resulted from officers’ and directors’ breaches of fiduciary duties have reached a settlement of those claims. As previously reported, that derivative action was dismissed on November 30, 2016.  That dismissal followed on the heels of dismissals of derivative actions alleging management breaches of fiduciary duties in connection with the Wyndham and Target data breaches. Despite that discouraging precedent, the Home Depot shareholder plaintiffs noticed an appeal from the trial court’s order of dismissal.  The parties subsequently resumed settlement discussions that had broken off in the fall of 2016, on the eve of argument and decision of Home Depot’s motion to dismiss.  On April 28, 2017, the parties submitted a joint motion disclosing and seeking preliminary approval of the proposed settlement.  If approved, the proposed settlement would result in dismissal of the shareholders’ appeal and an exchange of mutual releases, thereby terminating the fiduciary claims arising from the Home Depot data breach.

The Stipulation of Settlement filed with the court specifies that Home Depot will agree to implement the following nine changes to its information governance practices (which are a checklist of best practices for any business):

  1. Document the duties and responsibilities of the Chief Information Security Officer (“CISO”);

  2. Periodically conduct Table Top “Cyber Exercises” to prepare for emergencies and train personnel to respond to data security threats;

  3. Monitor and periodically assess key indicators of compromise on computer network endpoints;

  4. Maintain and periodically assess the Company’s partnership with a dark web mining service to search for confidential Home Depot information;

  5. Maintain an executive-level committee focused on the Company’s data security;

  6. Receive periodic reports from management regarding the amount of the Company’s IT budget and what percentage of the IT budget is spent on cybersecurity measures;

  7. Maintain an Incident Response Team and an Incident Response Plan;

  8. Maintain membership in at least one Information Sharing and Analysis Center (ISAC) or Information Sharing and Analysis Organization (ISAO); and

  9. Retain their own IT, data and security experts and consultants as they deem necessary.

It is unknown whether Home Depot had independently contemplated implementing any of these practices in the aftermath of the breach.

The proposed settlement assigns credit for the changes to the derivative action and, by making them part of a court-approved settlement, does allow for judicial enforcement in the event that Home Depot fails to comply with the remediation program.  More significantly, wrapping these practices into the derivative action settlement provides a justification for the shareholders’ counsel to request a fee award of $1,125,000.  Significantly, Home Depot continues to deny any wrongdoing, and the Settlement Agreement expressly states that it may not be construed as evidence or admission of fault, liability or wrongdoing.

The amount of the requested fee award, which is relatively modest by the standards of large scale derivative litigation, suggests that this may have been a nuisance value settlement of an appeal with slim prospects for success.  Given the prior failures of derivative claims in data breach cases, it remains to be seen whether this settlement will encourage shareholders in future data breach cases to attempt to buck the odds by asserting derivative claims.

ARTICLE BY Kevin M. McGinty of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Trump’s First Hundred Days and Cybersecurity

calendar hundred days Executive Order Delay Trumps Administration Policy Development

President Trump’s first hundred days did not produce the event that most people in the cybersecurity community expected – a Presidential Executive Order supplanting or supplementing the Obama administration’s cyber policy – but that doesn’t mean that this period has been uneventful, particularly for those in the health care space.

The events of the period have cautioned us not to look for an imminent Executive Order. While White House cybersecurity coordinator Robert Joyce recently stated that a forthcoming executive order will reflect the Trump administration’s focus on improving the security of federal networks, protecting critical infrastructure, and establishing a global cyber strategy based on international law and deterrence, other policy demands have intruded. Indeed as the 100-day mark approached, President Trump announced that he has charged his son-in-law, Jared Kushner, with developing a strategy for “innovation” and modernizing the government’s information technology networks. This is further complicating an already arduous process for drafting the long-awaited executive order on cybersecurity, sources and administration officials say.

The Importance of NIST Has Been Manifested Throughout the Hundred Days

The expected cyber order likely will direct federal agencies to assess risks to the government and critical infrastructure by using the framework of cybersecurity standards issued by the National Institute of Standards and Technology, a component of the Department of Commerce.

The NIST framework, which was developed with heavy industry input and released in 2014, was intended as a voluntary process for organizations to manage cybersecurity risks. It is not unlikely that regulatory agencies, including the Office of Civil Rights of the Department of Health and Human Services, the enforcement agency for HIPAA, will mandate the NIST framework, either overtly or by implication, as a compliance hallmark and possible defense against sanctions.

NIST has posted online the extensive public comments on its proposed update to the federal framework of cybersecurity standards that includes new provisions on metrics and supply chain risk management. The comments are part of an ongoing effort to further revise the cybersecurity framework. NIST will host a public workshop on May 16-17, 2017

Health Industry Groups Are Urging NIST to Set up a ‘Common’ Framework for Cybersecurity Compliance

Various health care industry organizations including the College of Healthcare Information Management Executives and the Association for Executives in Healthcare Information Security have asked NIST to help the industry develop a “common” approach for determining compliance with numerous requirements for protecting patient data. Looking for a common security standard for compliance purposes, commenters also argue that the multiplicity of requirements for handling patient data is driving up healthcare costs. Thus, the groups urge NIST to work with the Department of Health and Human Services and the Food and Drug Administration “to push for a consistent standard” on cybersecurity. One expects this effort, given strong voice in the First Hundred Days, to succeed.

The Federal Trade Commission is Emerging as the Pre-eminent Enforcement Agency for Data Security and Privacy

With administration approval, the Federal Communications Commission is about to release today a regulatory proposal to reverse Obama-era rules for the internet that is intended to re-establish the Federal Trade Commission as the pre-eminent regulatory agency for consumer data security and privacy. In repealing the Obama’s “net neutrality” order, ending common carrier treatment for ISP and their concomitant consumer privacy and security rules adopted by the FCC, the result would be, according to FCC Chairman Pai, to “restore FTC to police privacy practices” on the internet in the same way that it did prior to 2015. Federal Trade Commission authority, especially with regard to health care, is not without question, especially considering that the FTC’s enforcement action against LabMD is still pending decision in the 9th Circuit. However, the FTC has settled an increasing number of the largest data breach cases The Federal Trade Commission’s acting bureau chief for consumer protection, Thomas Pahl, this week warned telecom companies against trying to take advantage of any perceived regulatory gap if Congress rolls back the Federal Communications Commission’s recently approved privacy and security rules for internet providers.

OCR Isn’t Abandoning the Field; Neither is DoJ

While there have been no signal actions during the First Hundred Days in either agency. The career leadership of both has signaled their intentions not to make any major changes in enforcement policy.  OCR is considering expanding its policies with respect to overseeing compliance programs and extending that oversight to the conduct off Boards of Directors.

The Supreme Court Reaches Nine

Many would argue that the most important, or at least most durable, accomplishment of the Trump Administration to date is the nomination and confirmation of Neil Gorsuch to the Supreme Court. Justice Gorsuch is a conservative in the Scalia mold and is expected to case a critical eye on agency regulatory actions. There is no cybersecurity matter currently on the Supreme Court’s docket, but there will be as the actions and regulations of agencies like the FTC, FCC and DHHS are challenged.

ARTICLE BY Stuart M. Gerson of Epstein Becker & Green, P.C.

©2017 Epstein Becker & Green, P.C. All rights reserved.

Sharing Cyber Threat Information

HIPAA PRIVACY ISAOsThe Information Sharing and Analysis Organization-Standards Organization (ISAO-SO) was set up under the aegis of the Department of Homeland Security pursuant to a Presidential Executive Order intended to foster threat vector sharing among private entities and with the government. ISAOs are proliferating in many critical infrastructure fields, including health care, where cybersecurity and data privacy are particularly sensitive issues given HIPAA requirements and disproportionate industry human and systems vulnerabilities.  Therefore, in advising their companies’ management, general counsel and others  might benefit from reviewing the FAQ’s and answers contained in the draft document that can be accessed at the link below.

Announcing the April 20 – May 5, 2017 comment period, the Standards Organization has noted the following:

Broadening participation in voluntary information sharing is an important goal, the success of which will fuel the creation of an increasing number of Information Sharing and Analysis Organizations (ISAOs) across a wide range of corporate, institutional and governmental sectors. While information sharing had been occurring for many years, the Cybersecurity Act of 2015 (Pub. L. No. 114-113) (CISA) was intended to encourage participation by even more entities by adding certain express liability protections that apply in several certain circumstances. As such proliferation continues, it likely will be organizational general counsel who will be called upon to recommend to their superiors whether to participate in such an effort.

With the growth of the ISAO movement, it is possible that joint private-public information exchange as contemplated under CISA will result in expanded liability protection and government policy that favors cooperation over an enforcement mentality.

To aid in that decision making, we have set forth a compilation of frequently asked questions and related guidance that might shed light on evaluating the potential risks and rewards of information sharing and the development of policies and procedures to succeed in it. We do not pretend that the listing of either is exhaustive, and nothing contained therein should be considered to contain legal advice. That is the ultimate prerogative of the in-house and outside counsel of each organization. And while this memorandum is targeted at general counsels, we hope that it also might be useful to others who contribute to decisions about cyber-threat information sharing and participation in ISAOs.

The draft FAQ’s can be accessed at :  https://www.isao.org/drafts/isao-sp-8000-frequently-asked-questions-for-isao-general-counsels-v0-01/

ARTICLE BY Stuart M. Gerson of Epstein Becker & Green, P.C.

©2017 Epstein Becker & Green, P.C. All rights reserved.

Broadband Internet Service Providers In Regulatory Limbo After Repeal of FCC Privacy and Data Security Rules

data security privacy FCC cybersecurityPotentially signaling the end of the short-lived stint by the Federal Communication Commission (“FCC”) to regulate consumer data privacy on the internet, the Trump Administration recently repealed Obama-era data privacy and security rules for broadband providers.  The action, passed by Congress and signed by President Trump pursuant to the Congressional Review Act, completely rescinds the rules that would have gone into effect later this year.  While the move has been welcomed by industry insiders, it leaves broadband providers in regulatory limbo as the Trump Administration seeks to determine which agency and what rules will oversee data protection in this sector going forward.

The FCC’s Privacy Order and Its Repeal

In November 2016, the FCC released comprehensive consumer privacy and data security rules (the “2016 Privacy Order”) for broadband internet access service (“BIAS”) providers.1  BIAS providers offer consumers high-speed, continuous access to the internet, typically through cable, telephone, wireless, or fiber-optic connections.  They are different from entities such as Amazon and Facebook, which do not provide connections to the internet but rather offer internet services such as cloud storage, messaging, news, video streaming, and online shopping and are regulated, with respect to data privacy matters, by the Federal Trade Commission (“FTC”).

The 2016 Privacy Order would have, among other things, required BIAS providers to obtain affirmative customer consent (“opt-in” consent) prior to using and sharing, for commercial purposes, confidential customer data, such as a user’s web browsing history, application usage history, or geo-location information, and prohibited them from refusing to serve customers who did not provide such consent.  It also required BIAS providers to adopt “reasonable measures” to protect customer data from unauthorized disclosure, and required them to give notice to customers affected by any data breach “without unreasonable delay” but not later than 30 days after determining that a breach had occurred.

Repeal of the 2016 Privacy Order comes as a welcome development for industry groups, which vigorously opposed them both prior to and subsequent to their finalization.  In January 2017, the FCC received multiple petitions to reconsider and stay the order.2  The BIAS industry complained that some of the new rules – particularly the opt-in rule for the use of sensitive customer information – put BIAS providers at a competitive disadvantage because the rules were more restrictive than FTC rules that applied to other internet entities such as Amazon and Facebook and, further, would have required costly updates to BIAS providers’ systems.  In response, the FCC – now with a Chairman appointed by President Trump and a majority of Republican-appointed commissioners – reversed course and, on March 1, 2017, voted to stay some of the provisions of the 2016 Privacy Order that had been due to come into effect.3  Shortly thereafter, Congress and President Trump used their authority under the Congressional Review Act to completely rescind the 2016 Privacy Order.4

Is Net Neutrality Next?

To answer the question of where the Trump Administration might go from here first requires an explanation of how the FCC came to be responsible for regulating data privacy and security for BIAS providers in the first place.

Until 2015, BIAS providers, like other internet service and content providers, were not considered to be “common carriers” by the FCC and, thus, were not subject to data privacy regulation by the FCC.  Instead, for matters concerning data privacy and protection, BIAS providers looked to the FTC.  That changed in 2015, when the FCC issued the “Open Internet Order,”5 which reclassified BIAS providers as “telecommunications services” and, therefore, subjected them to common carrier regulation by the FCC under Title II of the Communications Act of 1934 (“Title II”).  Among other things, Title II requires “telecommunications services” to furnish services to customers “upon reasonable request” and prohibits “unjust and unreasonable discrimination” in the services that common carriers provide.  Title II further provides that “telecommunications services” have a duty to protect the privacy of customer data.6

This reclassification was necessary for the FCC to promote and establish, as the centerpiece of the Open Internet Order, “net neutrality” rules for BIAS Providers.  “Net neutrality” rules require BIAS providers to allow users equal access to all otherwise lawful internet websites, content, and services, without favoring or restricting access, whether the websites are owned or controlled by the service providers’ affiliates, business partners, or competitors.  For example, absent net neutrality rules, a BIAS provider might, in exchange for a fee or other consideration, agree with a video sharing website, such as YouTube, to provide its customers with faster and better access to YouTube than to a rival video sharing website, such as Vimeo.

Previous attempts by the FCC to impose net neutrality rules on BIAS providers had been rejected by the Court of Appeals for the D.C. Circuit.  Most recently, in 2014, the D.C. Circuit held that the FCC did not have the authority to impose net neutrality rules on BIAS providers because they were not subject to the common carrier rules under Title II.7  In response, the FCC reclassified BIAS providers as common carriers in its Open Internet Order.  The 2016 Privacy Order was an attempt by the FCC to further define the data privacy and protection rules that applied to BIAS providers under Title II.

The Trump Administration now seeks to return the BIAS industry to privacy oversight by the FTC, as both the current FCC and FTC Chairpersons have indicated that “jurisdiction over broadband providers’ privacy and data security practices should be returned to the FTC, the nation’s expert agency with respect to these important subjects.”8  However, this is easier said than done, as it would require that the FCC revoke the Open Internet Order and its accompanying net neutrality rules.  Such a move would be favored by the BIAS industry and the new Chairman of the FCC, Ajit Pai, who regards the net neutrality rules as a “mistake,”9 but would be met by criticism from many major internet content providers and services, such as Amazon, Google, and Facebook.10

In the meantime, the FTC is without authority to regulate BIAS providers regarding data privacy, as the FTC Act contains an express exemption of FTC jurisdiction for common carriers.11  Further complicating matters is an August 2016 decision of the Court of Appeals for the Ninth Circuit, which interpreted the FTC’s common carrier exemption as including all activities of any entity designated as a common carrier, even those activities that are unrelated to the entity’s common carrier business and which otherwise might be subject to FTC jurisdiction if they were carried out by a separate entity.12  If the Ninth Circuit position were to stand and be adopted by other Circuits – the FTC is currently seeking a rehearing en banc – the FCC suddenly might find itself responsible for regulating a host of non-common carrier related business activities merely because they are provided by entities that have been designated as common carriers under Title II.

Many large BIAS providers have faced this uncertainty by pledging to take “reasonable measures to protect customer information” and notify “consumers of data breaches as appropriate” in accordance with the existing FTC data privacy framework (i.e., ensuring that their data security practices are not “unfair or deceptive” in contravention of Section 5 of the FTC Act).[13]

BIAS providers are also presently subject to a host of state laws concerning data privacy and protection, including at least 48 state data breach notification laws, the most recent of which was enacted in New Mexico.14  These laws typically require businesses to notify the state authorities, affected customers, and major credit reporting agencies when the state’s residents’ confidential personal information, such as social security or driver’s license numbers, credit card numbers, and passwords, have been exposed through a data breach.  In addition, some states, such as Massachusetts15 and California,16 also require businesses to implement and maintain reasonable security procedures and practices to protect customer information.  Finally, some states maintain consumer protection laws, which, similar to the FTC Act, generally protect against unfair or deceptive trade practices and have been used by state attorney generals to penalize companies that fail to protect customer data.17

Conclusion

The Trump Administration’s repeal of the 2016 Privacy Order has provided a respite for the BIAS industry from vigorous new requirements that would have gone into effect this year.  However, it also has created a period of regulatory uncertainty as regulators determine the way forward, including the fate of the Open Internet Order.  In the meantime, BIAS providers should, as they have promised, continue to follow reasonable data privacy and protection practices, consistent at least with those required by the FTC, and also carefully consider whether any other applicable federal or state data privacy laws apply to their business.

ARTICLE BY Peter Carey, Joseph Facciponti, Keith M. Gerver & Joseph V. Moreno of Cadwalader, Wickersham & Taft LLP

© Copyright 2017 Cadwalader, Wickersham & Taft LLP

1 Protecting the Privacy of Customers of Broadband and Other Telecommunications Services, Report and Order, 31 FCC Rcd 13911 (2016), available at https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-148A1.pdf.

2 See, e.g., Joint Petition for Stay, available athttps://ecfsapi.fcc.gov/file/101270254521574/012717%20Petition%20for%20Stay.pdf(“Stay Petition”).

3 See Order Granting Stay Petition, available at https://apps.fcc.gov/edocs_public/attachmatch/FCC-17-19A1.pdf.

4 See S.J. Res. 34 – 115th Congress, available at https://www.congress.gov/bill/115th-congress/senate-joint-resolution/34/text.

5 See Protecting and Promoting the Open Internet, Report and Order on Remand, Declaratory Ruling, and Order, 30 FCC Rcd 5601 (2015), available athttps://apps.fcc.gov/edocs_public/attachmatch/FCC-15-24A1.pdf.

6 See 47 U.S.C. § 222(a) (“Every telecommunications carrier has a duty to protect the confidentiality of proprietary information of, and relating to . . . customers.”).

7 See Verizon v. F.C.C., 740 F.3d 623 (D.C. Cir. 2014).

8 See Joint Statement of Acting FTC Chairman Maureen K. Ohlhausen and FCC Chairman Ajit Pai on Protecting Americans’ Online Privacy, available at https://www.ftc.gov/news-events/press-releases/2017/03/joint-statement-acting-ftc-chairman-maureen-k-ohlhausen-fcc.

9 See Remarks of Federal Communications Commission Chairman Ajit Pai at the Mobile World Congress (February 28, 2017), available at https://apps.fcc.gov/edocs_public/attachmatch/DOC-343646A1.pdf.

10 See Google, Facebook and Amazon write to FCC demanding true net neutrality, The Guardian (May 7, 2014), available athttps://www.theguardian.com/technology/2014/may/08/google-facebook-and-amazon-sign-letter-criticising-fcc-net-neutrality-plan.

11 See 15 U.S.C. § 45(a)(2).

12 See F.T.C. v. AT&T Mobility LLC, 835 F.3d 993 (9th Cir. 2016).  The FTC has sought rehearing en banc.

13 See Stay Petition, ISP Privacy Principles.

14 See New Mexico H.B. 15, Data Breach Notification Act (2017).

15 See Mass Gen. Laws Ann. ch. 93H, § 2.

16 See Cal. Civ. Code § 1798.81.5(b).

17 See, e.g., Press Release, A.G. Schneiderman Announces $100K Settlement with E-Retailer after Data Breach Exposes Over 25K Credit Card Numbers, N.Y. State Attorney General’s Office (Aug. 5, 2016), available at https://ag.ny.gov/press-release/ag-schneiderman-announces-100k-settlement-e-retailer-after-data-breach-exposes-over. 

Proposed Federal Cybersecurity Regulations for Financial Institutions Face Uncertain Future

cybersecurity regulations for financial institutionsLast year’s proposed comprehensive framework for cybersecurity rules for large financial institutions is suddenly facing an uncertain future.1With the comment period having closed as of February 2017, the framework was facing criticism as unnecessary for an industry already subject to a host of federal, state, and international cybersecurity regimes. That criticism – now coupled with the Trump Administration’s general retreat from regulatory rulemaking across the board – may result in cybersecurity rules that are ultimately more limited in scope than originally envisioned, or lead to the proposed framework being abandoned altogether. In the meantime, large banks and other financial institutions must continue to comply with existing cybersecurity rules under the ever-growing scrutiny of regulators both in the United States and overseas.

I. Overview of the Proposed Framework

On October 19, 2016, three federal banking regulators – the Federal Reserve Bank (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) – issued an advance notice of proposed rulemaking for new cybersecurity regulations for large financial institutions (i.e., institutions with consolidated assets of $50 billion) and critical financial infrastructure.2  The framework was intended to result in rules to address the type of serious “cyber incident or failure” that could “impact the safety and soundness” of not just the financial institution that is the victim of a cyberattack, but the soundness of the financial system and markets overall. Accordingly, the framework envisioned “enhanced standards for the largest and most interconnected entities… as well as for services that these entities receive from third parties.”3

The proposed framework broadly addresses five cybersecurity categories:

  • Cyber Risk Governance. This would require that institutions covered by the new rules develop – and their boards and management approve – an enterprise-wide cyber risk management strategy that articulates how it intends to address its inherent cyber risk and maintain system resilience. Among other things, a cyber strategy must (i) identify cyber risk; (ii) address mitigation strategies; (iii) establish reporting structures for cyber incidents; and (iv) provide a means of testing the effectiveness of the cyber strategy.4

  • Cyber Risk Management. This would require institutions covered by the new rules to adopt a “three lines of defense” risk management model for cyber risk that is often used by large corporations to manage other forms of risk, including traditional financial crime risk. The lines of the “defense” include (i) the business units, which would be tasked, as a first line of defense, with adhering to and implementing the new cyber policies, assessing risk, and reporting incidents; (ii) an independent risk management function, as a second line of defense, that would identify, measure, and monitor the effectiveness of the cyber risk controls in place and to report exceptions and incidents to senior management; and (iii) an independent audit function that would, as a third line of defense, assess whether the cyber risk management framework complies with applicable laws and regulations and is appropriate for the financial institution.5

  • Internal Dependency Management. This category refers to standards that are intended to ensure that financial institutions can effectively identify and manage risk associated with “internal dependencies,” such as, for example, a financial institution’s own employees, technology, and facilities. Examples of risks related to internal dependencies include those from insiders, data system failures, and problems arising from old legacy systems that were acquired through mergers. Among other things, the rules in this category would require financial institutions to maintain a current and complete list of all internal assets and business functions, including mapping the connections and information flows between those assets and functions.6

  • External Dependency Management. “External dependencies” refer to an entity’s relationship with “outside vendors, customers, utilities, and other external organizations and service providers that the entity depends on to deliver services, as well as the information flows and interconnections between the entity and those external parties.” Rules in this category would require financial institutions to maintain complete lists of all external dependencies, to analyze the risks associated with external relationships, and to identify and test alternative solutions in the event an external partner is compromised or otherwise fails to perform as expected. Further, the agencies propose that the standards apply directly to third-party vendors who provide financial services to banks (such as payment processors), including those vendors that provide services unrelated to banking or finance if those vendors nonetheless have trusted access to the bank’s computer systems.7

  • Incident Response, Cyber Resilience, and Situational Awareness. The final category is intended to ensure that financial institutions effectively plan for, respond to, and quickly recover from disruptions caused by cyber incidents – including incidents targeting their external service providers. These rules would require that institutions (i) provide for backup storage of critical records; (ii) establish contingency plans if the institution is unable to perform a service due to a cyber incident; (iii) test for cyber incidents; and (iv) identify and gather intelligence on potential threats.8

The proposed framework provides for additional, even more stringent, standards for anything deemed to be a “sector critical system,” which includes (i) systems that support the clearing or settlement of at least 5 percent of the value of transactions in certain financial markets; (ii) depository institutions that hold a “significant share” (approximately 5 percent) of the total deposits in the United States; and (iii) any system that serves as a “key node” to the financial sector.9 For “sector critical systems,” it proposes that financial institutions adopt additional rules and safeguards, including:

  • requiring that financial institutions minimize the cyber risk posed to “sector critical systems” by implementing the most effective, commercially-available means of protection;10 and

  • requiring that financial institutions establish a recovery time, validated by testing, for “sector critical systems” of 2 hours after a harmful cyber attack.11

Finally, in terms of implementing the standards proposed in the framework, the proponent agencies propose three alternatives: (i) a general regulatory requirement for covered entities to maintain an appropriate cybersecurity risk management program supplemented by policy statements that set forth minimum expectations and standards; (ii) comprehensive regulations that propose specific cyber risk management standards; or (iii) comprehensive regulations that propose specific cyber risk management standards and which contain detailed objectives and practices that firms would be required to adopt.12

II. Potential Hurdles

Recent developments call into question whether the rules prepared as a result of the proposed framework will be as strict as originally envisioned, or whether any new rules will be adopted at all.

First, although some of the comments received during the comment period welcomed the interest in this area, many were critical of the new standards. In general, the comments raised several common concerns, including the following:

  • New rules would, if implemented, join a host of other, already-existing mandatory state, federal, and foreign cybersecurity regulations, including those required under the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, and, most recently, the strict cybersecurity regime adopted by the New York State Department of Financial Services.13 In addition, there are a number of voluntary standards that many financial institutions already follow, such as the Cybersecurity Framework published by the National Institution of Standards and Technology (“NIST”), the Payment Card Industry Data Security Standard, and the Federal Financial Institutions Examination Council’s Cybersecurity Assessment Tool.14 Few, if any, of these competing regimes are harmonized with each other and, as a result, the adoption of yet another cybersecurity regulation would add to the already heavy regulatory burden facing financial institutions without, necessarily, resulting in improved cybersecurity.15

  • To the extent that the proposed framework contemplates applying new cybersecurity rules not just to financial institutions but also to their third-party service providers, there is a concern that rules tailored for large financial institutions would not easily down-scale to smaller companies in different industries and with different risk profiles.16 Further, the additional compliance costs imposed on third-party vendors could potentially drive them away from providing services to the financial sector or stifle innovation.17

  • As an alternative to binding, prescriptive rules, the agencies should consider adopting a set of flexible, risk-based guidelines, similar to the NIST Cybersecurity Framework, that would allow financial institutions to assess and mitigate their particular cybersecurity risks. Specific, prescriptive rules are likely to become outdated by technological developments and, further, encourage regulated entities to focus on merely complying with the rules rather than seeking to comprehensively address their outstanding cybersecurity risks.18

Second, the Trump Administration itself has signaled that it has a limited appetite for major new regulations. Shortly after taking office, President Trump told a group of business leaders that he intends to cut federal regulations by 75 percent or “maybe more.”19 On January 30, 2017, the President signed an executive order which, among other things, required that federal agencies identify two existing regulations for elimination for each new regulation that is proposed.20 Although the “two-for-one” limitation does not apply to independent regulatory agencies such as the FRB, the OCC, and the FDIC,21 the White House nonetheless stated that it is encouraging independent regulatory agencies to “identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of new significant regulatory actions.”22

Finally, although the Trump Administration has not yet settled on a comprehensive cybersecurity policy, early indications show that it is likely to favor “public-private” partnerships and other incentives over new mandatory regulations. For example, President Trump’s pick to head the Securities and Exchange Commission, Jay Clayton, has said that he does not believe in regulations to impose cybersecurity mandates on businesses.23Further, an early draft of a proposed Executive Order on cybersecurity – which has not yet been signed – directed the federal government to study “economic or other incentives” to encourage the private sector to adopt effective cybersecurity measures.24 This suggests that the Trump Administration is considering a host of ways to promote cybersecurity risk management in the private sector beyond compulsory regulations.

III. Conclusion

Industry opposition, coupled with the stated reluctance of the Trump Administration to pursue broad new regulatory regimes, may result in the proposed cybersecurity framework being scaled back or even left to wither and die on the vine. However, even in their absence banks and other large financial institutions must continue to comply with the plethora of existing state, federal, international, and industry standards that already apply. Whether and how the proposed framework – and any new rules that emerge therefrom – fits into the existing regulatory scheme so far remains to be seen.

ARTICLE BY Joseph Facciponti,  Ruth Merisier & Joseph V. Moreno of Cadwalader, Wickersham & Taft LLP

© Copyright 2017 Cadwalader, Wickersham & Taft LLP

1 See Press Release, Agencies Issue Advanced Notice of Proposed Rulemaking on Enhanced Cyber Risk Management Standards (Oct. 19, 2016),available at https://www.federalreserve.gov/newsevents/press/bcreg/20161019a.htm.

2 Enhanced Cyber Risk Management Standards (Oct. 19, 2016), available athttps://www.federalreserve.gov/newsevents/press/bcreg/bcreg20161019a1.pdf.

3   Id. at 8.

4   Id. at 24-26.

5   Id. at 26-29.

6   Id. at 31-32.

7   Id. at 33-35.

8   Id. at 39.

9   Id. at 39.

10  Id. at 40.

11  Id.

12  Id. at 44-45.

13  See, e.g., Comments of Consumer Data Industry Association, at 2-6 (Jan. 12, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170206/R-1550/R-1550_011317_131681_551357712049_1.pdf. We note that any financial institution large enough to be covered by the proposed standards is likely to have operations outside of the U.S. and, thus, may be subject to cybersecurity or data protection regimes in other jurisdictions, such as the EU’s General Data Privacy Regulation (“GDPR”). We discussed the GDPR in a recent Clients & Friends Memorandum. See S. Baker, J. Facciponti, J. Rennie, and J. Tampi, The EU’s New Data Protection Regulation – Are Your Cybersecurity and Data Protection Measures up to Scratch? (Mar. 6, 2017). We further discussed the New York State cybersecurity rules in a separate client memorandum. See J. Facciponti, J. Moehringer, and H. Wizenfeld, New York State Revises “First-In-Nation” Cybersecurity Rules (Jan. 10, 2017).

14  See, e.g., Comments of SIFMA, ABA, and IIB, at 3 (Feb. 17, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170221/R-1550/R-1550_021717_131711_434399470067_1.pdf (“The Agencies’ [proposed rules] risks undermining the cybersecurity efforts of financial institutions by failing to fully recognize extensive efforts that firms have already made to implement risk-based approaches such as the NIST Cybersecurity Framework and existing federal requirements.”) (“SIFMA Comments”); Comments by the U.S. Chamber of Commerce, at 4-5 (Jan. 18, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170208/R-1550/R-1550_011817_131688_286658311250_1.pdf (“Chamber of Commerce Comments”).

15  See, e.g., Comments of Financial Services Sector Coordinating Council, at 5 (Feb. 17, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170221/R-1550/R-1550_021717_131709_429070260162_1.pdf; Comments of Financial Services Roundtable/BITS, at 3-4 (Feb. 16, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170221/R-1550/R-1550_021617_131723_560608420203_1.pdf; Comments of Electronic Transactions Association, at 1-4 (Feb. 13, 2017), available athttps://www.federalreserve.gov/SECRS/2017/March/20170307/R-1550/R-1550_030717_131766_542476603001_1.pdf (“ETA Comments”); Chamber of Commerce Comments, at 10-11.

16  See, e.g., ETA Comments, at 5; Comments of Mastercard Worldwide, at 3-4 (Jan. 17, 2017), available athttps://www.federalreserve.gov/SECRS/2017/February/20170203/R-1550/R-1550_011717_131679_551358024222_1.pdf; Comments by IHS Markit, at 4 (Feb. 17, 2017), available at https://www.federalreserve.gov/SECRS/2017/March/20170303/R-1550/R-1550_021717_131731_315895562414_1.pdf.

17  See, e.g., Comments of Amazon Web Services, at 5 (Feb. 17, 2017), available athttps://www.federalreserve.gov/SECRS/2017/March/20170307/R-1550/R-1550_030717_131764_542476134029_1.pdf; SIFMA Comments, at 5.

18  See, e.g., Comments by Information Technology Counsel, at 13 (Feb. 17, 2017), available athttps://www.federalreserve.gov/SECRS/2017/March/20170303/R-1550/R-1550_021717_131706_428178516928_1.pdf; Comments by Business Roundtable, at 2 (Feb. 13, 2017), available at https://www.federalreserve.gov/SECRS/2017/February/20170227/R-1550/R-1550_021417_131700_411451111014_1.pdf; Chamber of Commerce Comments, at 3, 6-10 (“There is no regulatory silver bullet for cybersecurity. The complex, dynamic nature of cyber risk makes pursuing flexible, tailored approaches critical.”); Comments of North American CRO Council, at 1 (Jan. 17, 2017), available at https://www.federalreserve.gov/SECRS/2017/February/20170203/R-1550/R-1550_011717_131686_503116251901_1.pdf.

19  See J. Pramuk, Trump tells business leaders he wants to cut regulations by 75% or ‘maybe more’, CNBC (Jan. 23, 2017), available athttp://www.cnbc.com/2017/01/23/trump-tells-business-leaders-he-wants-to-cut-regulations-by-75-percent-or-maybe-more.html.

20  See Executive Order, Reducing Regulation and Controlling Regulatory Costs (Jan. 30, 2017), available athttps://www.whitehouse.gov/the-press-office/2017/01/30/presidential-executive-order-reducing-regulation-and-controlling.

21  See 44 U.S.C. § 3502(5).

22  See Memorandum: Interim Guidance Implementing Section 2 of the Executive Order of January 30, 2017, Titled, “Reducing Regulation and Controlling Regulatory Costs” (Feb. 2, 2017), available at https://www.whitehouse.gov/the-press-office/2017/02/02/interim-guidance-implementing-section-2-executive-order-january-30-2017.

23  See Roger Yu, Honed by Wall Street: What Makes Trump SEC Chair Pick Jay Clayton Tick, USA Today (Jan. 4, 2017), available athttp://www.usatoday.com/story/money/2017/01/04/donald-trumps-sec-chair-nominee-comes-deep-wall-street-ties/96162306/.

24  See Draft Executive Order, Strengthening U.S. Cyber Security and Capabilities, at 4-5, available athttps://apps.washingtonpost.com/g/documents/world/read-the-trump-administrations-draft-of-the-executive-order-on-cybersecurity/2306/.

Cybersecurity: Yes, They Will Hack Your Car

Auto Traffic, NightimeAuto manufacturers are increasingly equipping vehicles with rapidly advancing technologies, raising concerns regarding how the public will be affected by these changes. Manufacturers are beginning to implement automated driving and vehicle-to-vehicle (V2V) communication capabilities into their cars, extending potential cybersecurity threats and associated safety issues to road users.

As consumers, we already see cybersecurity threats and breaches in many areas of our day-to-day lives. With the spike of auto-driven and connected cars across the auto industry, these same threats and breaches have a strong potential to sprout in our lives on the road as well.

NHTSA has outlined the factors it will consider in evaluating cybersecurity threats as potential safety-related defects. They are as follows:

  • The amount of time elapsed since the vulnerability was discovered (e.g., less than one day, three months, or more than six months)

  • The level of expertise needed to exploit the vulnerability (e.g., whether a layman can exploit the vulnerability or whether it takes an expert to do so)

  • The accessibility of knowledge of the underlying system (e.g., whether how the system works is public knowledge or whether it is sensitive and restricted)

  • The necessary window of opportunity to exploit the vulnerability (e.g., an unlimited window or a very narrow window)

  • The level of equipment needed to exploit the vulnerability (e.g., standard or highly specialized)

Additionally, NHTSA’s guidance suggests policies that manufacturers :

  • Participating in the Automotive Information Sharing and Analysis Center (Auto-ISAC), which became fully operational in January 2016

  • Developing policies around reporting and disclosure of vulnerabilities to external cybersecurity researchers

  • Instituting a documented process for responding to incidents, vulnerabilities, and exploits and running exercises to test the effectiveness of these processes

  • Developing a documentation process that will allow self-auditing, which may include risk assessments, penetration test results, and organizational decisions

  • For original equipment, developing processes to ensure vulnerabilities and incidents are shared with appropriate entities throughout the supply chain

  • As vehicle technologies continue to progress, we expect that NHTSA’s guidance will evolve to address future concerns

To continue reading through NHTSA’s enforcement plans on motor vehicle safety as it pertains to recent technological advances, be sure to check out Thursday’s post on automated vehicle regulations.

ARTICLE BY Christopher H. Grigorian & R. Nicholas Englund of Foley & Lardner LLP

© 2017 Foley & Lardner LLP

Data Breaches Will Cost Yahoo and Verizon Long After Sale

data breach Yahoo VerizonFive Things You (and Your M&A Diligence Team) Should Know

Recently it was announced that Verizon would pay $350 million less than it had been prepared to pay previously for Yahoo as a result of data breaches that affected over 1.5 billion users, pending Yahoo shareholder approval. Verizon Chief Executive Lowell McAdam led the negotiations for the price reduction. Yahoo took two years, until September of 2016, to disclose a 2014 data breach that Yahoo has said affected at least 500 million users, while Verizon Communications was in the process of acquiring Yahoo. In December of 2016, Yahoo further disclosed that it had recently discovered a breach of around 1 billion Yahoo user accounts that likely took place in 2013.

While some may be thinking that the $350 million price reduction has effectively settled the matter, unfortunately, this is far from the case. These data breaches will likely continue to cost both Verizon and Yahoo for years to come.  Merger and acquisition events that are complicated by pre-existing data breaches will likely face at least four categories of on-going liabilities.  The cost of each of these events will be difficult to estimate during the deal process, even if the breach event is disclosed during initial diligence. First, the breach event will probably render integration of the systems of the target and acquirer difficult, as the full extent of the security issues is often difficult to assess and may evolve through time. According to Verizon executives, Yahoo’s data breaches created integration issues that had not been previously understood.  The eventual monetary cost of this issue remains unknown.

Second, where the target is subject to the authority of the Security and Exchange Commission (SEC), an SEC investigation and penalties if applicable, is likely, along with related shareholder lawsuits. As we wrote previously, The SEC is currently investigating if Yahoo should have reported the two massive data breaches it experienced earlier to investors, according to individuals with knowledge. Under the current agreement, Yahoo will bear sole liability for shareholder lawsuits and any penalties that result from the SEC investigation.

Third, there will likely be additional private party actions due to the breach. Exactly what these liabilities will be will depend on the data subject to exfiltration as a result of the breach.  In Yahoo’s case, Verizon and Yahoo have agreed to equally share in costs and liabilities created by lawsuits from customers and partners.  Multiple private party lawsuits have already been filed against Yahoo alleging negligence.

Fourth, other government investigations, such as by the Federal Bureau of Investigation (FBI), could result in additional costs, both monetary and reputational. The FBI is currently investing the Yahoo breaches.  Verizon and Yahoo will share the costs of the FBI investigation and other potential third party investigations.

Fifth, depending on the scope of the breach, there would likely be on-going remediation costs after the deal closes. According to a knowledgeable source, as of February 2017, Yahoo had sent notifications to a “mostly final” list of users, indicating that some remaining remediation activities may yet occur.

As we have seen, merger and acquisition events involving a target with a pre-existing data breach issues create difficult to assess costs and liabilities that will survive the closing of the transaction.

ARTICLE BY Cynthia J. Larose & Brian H. Lam of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

In re: Target Corporation Customer Data Security Breach Litigation — instructive 8th Circuit case re class certification

target security breachJim Sciaroni  v.  Target Corporation Civil case – Class Action in Target Security Breach. The district court’s statement in the class certification order regarding Rule 23(a)(4)’s representation adequacy requirement are conclusions, not reasons, and on their own do not constitute the “rigorous analysis” of whether certification was proper in this case; the court has a continuous duty to reevaluate certification throughout the litigation and the court’s order rejecting an allegation of intraclass conflict made before final certification improperly refused to reconsider the issue solely because it had already certified the class; as a result the district court abused its discretion by failing to rigorously analyze the propriety of certification, especially once new arguments regarding the adequacy of representation were raised after preliminary certification, and the matter is remanded to the district court for it to conduct and articulate a rigorous analysis of Rule 23(a)’s certification prerequisites as applied to this case; “costs on appeal” for Rule 7 purposes include only those costs that a prevailing appellate litigant can recover under a specific rule or statute; as a result the bond set in this matter, which included delay-based administrative costs, is reversed and the matter remanded with directions to reduce the Rule 7 bond to reflect only those costs appellee will recover should they succeed in any issues remaining on appeal following the district court’s reconsideration of class certification. The panel retains jurisdiction over any remaining issues following the district court’s disposition on remand. The district court shall certify its findings and conclusions to this court within 120 days.

02/01/2017  Jim Sciaroni  v.  Target Corporation

   U.S. Court of Appeals Case No:  15-3909 and No:  15-3912 and No:  16-1203 and No:  16-1245 and No:  16-1408

   U.S. District Court for the District of Minnesota – Minneapolis

   [PUBLISHED] [Shepherd, Author, with Benton, Circuit Judge, and Strand, District Judge]

Download In re Target Corporation Customer Data Security Breach Litigation

ARTICLE BY Laura A. Bentele of Armstrong Teasdale

© Copyright 2017 Armstrong Teasdale LLP. All rights reserved