Luis Salazar, CIPP
It has been five years since California passed S.B. 1386, the nation's first data breach law. In the years since, most states have followed California's lead and passed data breach laws of their own. These laws sought to create incentives for businesses to maintain adequate security and protect consumers' personal data, and have succeeded in that respect.
But data breach laws have had an ironic and quite unintended consequence — an unprecedented public focus on data breaches. Where once such breaches were unreported, now they are regularly front-page news. Consumers, legislators and financial institutions can clearly see the magnitude of the problem — more than 215 million compromised records since January 2005, according to the Privacy Rights Clearinghouse. Not surprisingly, the the year-old TJX security breach seems to have been the last straw.
Given its magnitude and impact on some affected banks, the TJX intrusion made clear to financial institutions the expense associated with data breaches. During 2007, the financial institution industry groups engaged in a concerted effort to pass state legislation that would authorize banks to recover their breach-related costs.
In response to the public and industry concern data breaches have generated, legislators at the state level are rolling out "Data Breach Legislation 2.0," laws that deliver a "1-2 punch" to data breaches by authorizing third-party claims against breached parties and imposing specific data security standards on retailers and other businesses. Further, legislators often are turning to the Payment Card Industry Data Security Standards (the PCI DSS) as the benchmark cybersecurity standard for these new statutes. When combined with nascent regulator reliance on PCI DSS, the data breach landscape may be in for a radical reshaping in the future.
The PCI Standard
While the drumbeat of data breaches grew louder, the payment card industry moved to create specific data standards to protect the integrity of cardholder data. The PCI DSS were created by the PCI Security Standards Council, an independent body formed by American Express, Discover Financial Services, JCB, MasterCard Worldwide and Visa International to develop, enhance, disseminate and assist with information and security standards for payment accounts data security. The PCI DSS is a multi-faceted security standard that includes requirements for security management, policies, procedures, network architecture, software design and other clinical protective measures. The current iteration of the standard — Version 1.1 — has been effective since December 31, 2006.
Because it is a data security standard, the requirements are quite specific. For example, Requirement 1 is "Install and Maintain a Firewall Configuration to Protect Cardholder Data." This broad commandment is followed, in turn, by more than a dozen specific requirements for that firewall standard. Retailers that accept credit cards should have been compliant with the PCI DSS by September 30, 2007.
Perhaps because it is both detailed and comprehensive, legislators have looked to the PCI DSS as an easy method to address data security and breach issues. PCI allows legislators to side-step the need to become data security experts and, at the same time, adopt a standard that accounts for data security's constantly changing nature.
Adding fuel to the fire, financial institutions — which often bear the cost of breaches — have been pushing hard for legislation that incorporates PCI DSS as a means of establishing retailer liability for data breaches, with the expectation that it will open the doorway to damage recoveries for them.
Legislating the 2.0 Standard
Retailer liability and PCI-based laws have now been proposed in Minnesota, Massachusetts, Connecticut, New Jersey, California and Texas. In May 2007, Minnesota became the first state to pass such a law, known as The Plastic Card Security Act, Minn. Stat. 365E.64. Among other things, the act almost immediately barred retailers from maintaining credit or debit security code data, PIN verification codes, or the full content of any track of the credit card magnetic stripe data, for more than 48 hours after authorization. Effective August 1, 2008, the law also authorizes banks and other financial institutions to recover reasonable costs incurred to respond to the theft of cardholder data, including the costs of cancelling and reissuing cards, closing and reopening customer accounts, refunding or crediting affected customer accounts, and to notify customers of the breach.
About the same time, the Texas House of Representatives passed H.B. 3222, which goes one step further, by authorizing the recovery of those costs plus attorneys fees. The legislation also mandates PCI DSS compliance: "A business that, in the regular course of business and in connection with an access device, collects sensitive personal information or stores or maintains sensitive personal information in a structured database or unstructured files must comply with the payment card industry data security standards." A financial institution may bring an action individually, or on behalf of a class, under this proposed law against a business that is subject to a breach of system security if, at the time of the breach, the business is not in compliance with the PCI DSS. Of note, the Texas state statute provides a safe harbor, which allows a business to avoid a data breach lawsuit brought under the statute if the business was certified by a PCI-approved auditor that was in compliance with the PCI DSS at least 90 days before the date of a security breach. Although not fully enacted because of session time constraints, it appears that the legislation will be proposed successfully again this coming year.
In September, California's assembly passed A.B. 779, a law that would have incorporated standards based on — and similar in many ways to — the PCI. The proposed law prevents businesses accepting credit or debit cards in California from storing payment-related data, unless they have a data retention and disposal policy in place that limits the amount and the length of time data is stored. The law also flat-out bars the storage of confidential authentication data, such as card verification or PIN codes. It also prevents the retention of primary account numbers unless authorized as well as the use of open public networks to send data unless encrypted.
Gov. Arnold Schwarzenegger vetoed the A.B. 779 because he felt it would impose too great a burden on small business. Observers expect, however, that a modified version of this bill will pass during the next legislative session.
Illinois' SB 1675 (the TJ Maxx Accountability Bill) and Massachusetts' H.213 would empower financial institutions to seek damages for the same items specified under the Minnesota law if those result from unauthorized payment and damages that occur following "the breach of the security of system data" by a collector. Perhaps going a bit further, Connecticut substitute AB 1089, which became effective October 1, 2007, permits banks to also seek costs for "any assistance provided to customers to help mitigate loss or inconvenience or to prevent loss or further inconvenience." This would appear to open the door to seeking call center costs as well as any credit monitoring services banks may offer to breach victims.
Finally, in the area of specific standards, Nevada recently passed NRS 597.970, which requires that a business in Nevada "shall not transfer any personal information of a customer through an electronic transmission other than a facsimile to a person outside the secure system of the business unless the business uses encryption to ensure the security of electronic transmission."
At the same time that this legislative trend is emerging, regulators at various government levels also are turning to the PCI DSS as a verifiable standard they can employ.
New Jersey is perhaps the leading example of this trend. New Jersey's Identity Theft Protection Act, N.J.S.A. 56:11-44 et seq., directs the state's Division of Consumer Affairs and the Department of Banking and Insurance to develop regulations to implement the statute. The division's Proposal Number PRN-2007-116, which sought to implement the act's provisions, proposed a number of data security standards that appear to be based upon the PCI DSS and would be mandatory for business and government agencies in New Jersey. Section 13:45F-32 of the proposed rule contains very specific data security standards that clearly echo the PCI DSS. For instance, the proposed rule requires businesses with more than five computers to have a hardware firewall containing stateful packet inspection, restricted physical access to computerized records containing personal information, periodic review of audit trials, and encryption of all stored and transmitted files. A number of trade groups, including The Investment Company Institute and the Professional Insurance Agents of New Jersey, have objected to the rule and it has yet to be approved for final publication.
In a variation on this approach, Daniel Crane, the Director of Massachusetts Office of Consumer Affairs and Business Regulation, has called for all state retailers to disclose publicly whether they meet PCI DSS, as a means of giving consumers a choice when shopping.
Finally, another notable recent example comes from the Office of the Privacy Commissioner of Canada along with the Office of the Information and Privacy Commissioner of Alberta. Together they issued a report of a joint investigation into the T.J. Maxx data breach. That report cited the PCI DSS as "Relevant Standards of Practice" and specifically found that T.J. Maxx failed to meet the wireless encryption standards required by the PCI DSS.
Several factors, then, are converging to change the data breach legislative landscape. First, financial institutions are lobbying hard to impose liability for data breaches resulting from failure to meet PCI DSS. Second, legislators seeking a remedy for data breach ills are creating causes of action and turning to the PCI DSS as a comprehensive standard. Third, consumer concern about identity theft is at an all-time high, driving action by government at all levels. Finally, with so many businesses processing credit cards, a majority of businesses already must comply with the PCI DSS.
If Data Breach 2.0 legislation gets more broadly adopted, data breach victims will find that they not only face the embarrassment of notifying customers, but will also undeniably face liability unless they can demonstrate compliance with the PCI DSS or similar legislative data standards. Data Breach 2.0 could unleash another wave of data breach litigation.
Luis Salazar, CIPP, is a shareholder with the international law firm of Greenberg Traurig and a founding member of the firm's Data Privacy and Security Law Taskforce. He is based in the firm's Miami office and can be reached at +305.579.0751 or at firstname.lastname@example.org