Cybersecurity Rule Setting the Mark

Cybersecurity rule ideas, so far, have been piecemeal throughout the United States despite the numerous efforts.  Opposite to the European Union’s efforts through their General Data Protection Regulation (GDPR) initiative, in the U.S. we have no such thing.  We do have bolstering amendments to Gramm-Leach-Bliley Act, embodied in the Consumer Data Security and Notification Act of 2015 that seek to require financial institutions to notify of the data breach incident. While the term industries has expanded to encompass all entities that have handling operational responsibilities with consumer financial information, Congress responded to California’s promulgation of the California Notice of Security Breach Act, by itself proposing the Information Protection and Security Act.  The race is on to set provisions with teeth that cut through the obstacles in cybersecurity and data management and be responsive to consumer protection needs. 

Needless to say, companies have been required to address cybersecurity and the management of data, especially personal identifying information (PII).  There is also a growing concern with the occurrence of corporate spying and the impetus that led to the Spy Act, i.e., Securely Protect Yourself Against Cyber Trespass Act.  Though not a success, since 2011, initiatives have addressed legislative reforms to meet the concerns with information sharing, data management, cloud transfers, especially with the E.U. and the entities conducting business in the E.U.  But the matter of setting a cyber security regulation has now been placed center-stage by the State of New York. In a press release, New York’s Department of Financial Services (DFS), announced its Rule to “protect consumer data and financial systems from terrorist organizations and other criminal enterprises.” The rule took effect March 1, 2017.  The release noted that the provision “will require banks, insurance companies, and other financial services institutions regulated by DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.”   

The scope of its coverage hits all the points, including responsible connection along the lines of contracts by defining affiliates, penetration testing, persons, public available information, and as well the recurring monitoring obligation via risk assessments, authentications, and setting programs for advisory roles.  More so it provides for its scope over authorized users and covered entities. The "authorized user" is deemed to be an employee, contractors, or agent with authorized access to the information systems of the covered entity.  Its structure is labeled aptly with a girding focus on providing for a cybersecurity program, policy, chief information security officer, penetration testing, vulnerability assessments, results audits and screening, application security, personnel qualifications and clearances, vendor cybersecurity policies, and response plans. The requirements also delve into the encryption, multi-factor authentication, training, monitoring, notifications, post incident assessments, pre-incident security integrity audits and post-incident audits, and the expected implementation and enforcement.

While the rule takes effect, many entities will face compliance concerns with their policies and contracts.  The example being set by New York’s DFS will probably catch the eye of Washington and set an example for other states, especially as the EU gets closer to enforce its GDPR.  All concerns with cyber-attacks and cyber incidents are arising and it seems the lawmakers are seeing the need.  The general hope is that the initiative catches the  attention of managers and heads of covered entities and those in the fringes for the sake of cyber peace of mind and consumer protection at large. It may even wake up other states too.

Lorenzo Law Firm is “Working to Protect your Business, Ideas, and Property on the Web." Copyright 2018, all rights reserved Lorenzo Law Firm, P.A.  https://www.lorenzolawfirm.com 

Internet of Things Security Claims

Internet of Things security claims have caught the attention of lawmakers and regulators. The Internet has been interesting to follow and work with as a realm of process and information exchange.  As the devices used to transmit information increase in our lives and work, protecting what is transmitted from unwanted eyes is not necessarily going in the same direction as the advancement of innovation.  With that concern is the Federal Trade Commission determining that standards are needed to address foreseen vulnerabilities.  These vulnerabilities were of concern when the FTC’s study focused on devices transmitting amid networks through the concept of the Internet of Things (IoT).

Since 2014, efforts to standardize measures to enhance cyber security were taking shape with Executive Order and the Cybersecurity Enhancement Act of 2014.  The emphasis was to perpetuate the work of the National Institute of Standards and Technology (NIST).  The FTC acknowledges the urgency with in which Web applications are being deployed to achieve tangible communication features for daily used devices.

Along with these concerns, the FTC saw fit to file a complaint against a device manufacturer of devices commonly used for Internet access and transmission.  The angle taken by the FTC regarding D-Link was one based on weaknesses on cyber security.  The claims were not based on actual consumer harm experienced by consumers, but rather on the security of cyber itself.  This complaint was addressing IoT devices, such as routers, cameras and their Internet Protocol.  The FTC also discussed the software that is implemented to achieve the desired transmission for devices to work as desired.  This approach also peered into consumers use of mobile apps in the transmission and delivery of communications.

Under the authority to address misrepresentation in business practices, the FTC seeks to determine of an entity misguided consumers into believing and trusting its representation, especially if the claims were of the cyber security nature, touting that measures were implemented to a level of prevention when they were not.   Section 5(a) of the FTC Act, provides authority consistent with this role and pursuit in the D-Link matter.  Claiming to implement security measure when the very commonly accepted measure was not, the FTC deems deceptive under its Act.  To aggravate the matter, if the measures that were not taken are the ones that are reasonable to implement, and that they are known in the industry to prevent, if implemented, unauthorized access, then the entity is failing to take reasonable precautions.  D-Link was considered to have deceptively led consumers to believe that security features were in place with its claims.

It is noteworthy that the issue of actual harm was not at the gravamen of the filing but rather the deceptive aspect of cyber security claims by the devise manufacturer.  This matter is telling for business.  If they advertise claiming security features, such claims better be backed up with reasonable measures to meet the claims.  The FTC takes seriously claims without supporting measures.  If the practices to ensure that the claims are met are indeed industry reasonable measures, the business in question will face a hurdle of credibility and reputation in the industry, not to mention the scrutiny of the FTC.

Advertising is key to business growth and brand development. Advertising, on the other hand, done with over statements and exaggerations and non-carried-out claims, is only asking for trouble.  Business should take care to address their policies, manuals, promotions, packaging, advertisements, with an honest involvement with the technical stakeholders of the business and management before publishing any security claims to the consumer public.  If carelessly crafted and promoted, materials published by a business will be seen as deceptive and will run counter to FTC guidelines which are intended to establish standards of practice, addressing considerations for Internet of Things devices.

Lorenzo Law Firm is “Working to Protect your Business, Ideas, and Property on the Web." Copyright 2017, all rights reserved Lorenzo Law Firm, P.A.

Software Patent Filings Abstract Snags

Software patent filings have gone through snags during the approval process.  For many, not having a clearly stated specific enhancement to preexisting software was a liability to the filing's success.  Failing to satisfactorily describe a technical improvement on providing the innovation to the previous invents is another snag.  Not distinguishing the innovation from previous filings and from what appears to be a conventional purpose and function is as well critical to its success.  The struggle is with the abstraction of the descriptive process about the functionality of the intended software.  What gets lost is the detail necessary to demonstrate valued distinctions that set it apart as a new filing from preexisting related applications and functions in the field within which the software inventor seeks.

The Supreme Court in the Alice[1] case, iterated the standard for overcoming a Rule 12(b) failure to state a claim for patent eligibility.  As articulated. “a patent may be obtained for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” 35 U.S.C. § 101.”  Furthermore, the Court has held that “Laws of nature, natural phenomena, and abstract ideas are not patentable.” [2]  In Mayo, the Court stated that on the basis of patentability/validity determination that is determination that is independent of . . . any other statutory patentability provision.[3]  It is in Mayo, that the Court established its two-step process to assess patent filing that only provide for abstract ideas.

The first step was to determine if the filing’s claim point to a patent-ineligible concept. If that is established, then the next step would be to determine if the “the elements of each claim individually or in combination allows the filing to have the nature of the claim transform to a patent-eligible application.”[4]  As the Court filters through patent filings for software, the challenge is to discern what is truly novel and game changing on the software computing field and what is a routine process of imitation with different function, but still achieving the same without development and or improvement.

To this concern, the Court distills between software-related patent claiming an improvement to a process or system from those filings that are claiming language reciting an invention’s pinpoint discernable improvement to what has already been active in computing.  In its own discourse, the Court alludes to the close calls, i.e., “in other cases involving computer related claims, there may be close calls about how to characterize what the claims are directed to.”  That is, “some inventions’ basic thrust might more easily be understood as directed to an abstract idea, but under step two of the Alice analysis, it might become clear that the specific improvements in the recited computer technology go beyond “well-understood, routine, conventional activities” and render the invention patent-eligible.[5]

The Court in Bascom, stated that the patent filing claims to “filtering content is an abstract idea because it is a longstanding, well-known method of organizing human behavior, similar to concepts previously found to be abstract.”  But what was distinctive, was the order of description of the specific function for the individual claims apart from what was conventional among computers, Internet Service Providers, networks, and filtering. The analytical inquiry into a claim’s patent eligibility weighs on the specific description of the inventive concept claimed.

The Bascom Court further elaborated, “the claims do not merely recite the abstract idea of filtering content along with the requirement to perform it on the Internet, or to perform it on a set of generic computer components. Such claims would not contain an inventive concept.” “Filtering content on the Internet was already a known concept, and the patent describes how its particular arrangement of elements is a technical improvement over prior art ways of filtering such content.”   The specific location for the filtering system which was to be a remote ISP server, and allow the users to have the ability to adjust the filtering for their network accounts, distinguished it from the abstract concept of filtering in general.

Hence, a new way and an improvement was recognized as applicable to the claim being filed for a patent.  Description of steps of claims cannot solely be achieving a process by function but must key in on way is the distinguishing feature from the conventional understood prior existing application.  Or else, filing snags will continue for software patent filings seeking innovative ways to describe the same but with not so distinguishing improvements.

[1]Alice Corp. v. CLS Bank International, 134 S.Ct. 2347 (2014)

[2]Association for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2116 (2013) (quoting Mayo Collaborative Services. v. Prometheus Labs., Inc., 132 S. Ct. 1289, 1293 (2012).

[3] Mayo, 132, S. Ct. at 1303–04 (citing Bilski v. Kappos, 561 U.S. 593 (2010); Diamond v. Diehr, 450 U.S. 175 (1981), Parker v. Flook, 437 U.S. 584 (1978).

[4] Mayo, 132 S.Ct. at 1297.

[5] Bascom Global Internet Services v. AT&T Mobility, LLC, 827 F.3d 1341, 1350 (Fed. Cir. 2016).


Lorenzo Law Firm is “Working to Protect your Business, Ideas, and Property on the Web." Copyright 2017, all rights reserved Lorenzo Law Firm, P.A.

Data Security Negligence

Data security responsibilities are, at times, not met with the requisite level of diligence for compliance.  Standards for compliance, for many businesses, institutions, and service entities, are not as specified as one would be drawn to believe.  The disjuncture between responsibilities and efforts are becoming more evident with passing days as cyber incidents leave alarming concerns with consumers and business establishments.

Commonly prescribed is that personal data embedded in digital record transmissions must be transferred securely.  However, the level of confidence that a service consumer, medical patient, loan customer, or even a student at an ATM demonstrates daily with their every swipe and approval is in the unseen information processing that the venue operates with, in order to provide the desired service.  If that confidence is shaken with the notion that the private information is not being handled securely, the digital transactions will experience a hick-up and the public consumer will seek other means to transact, and back to cash and brick-n-mortar, we go.  The integrity of the secure appearance of the merchant is held questionable and tenable.

At the point of transaction, the consumer is left with the confidence that the banking information provided to the institution is securely being transmitted and that the data is accurately being recorded, especially as balances are verified.  But what if the measures are not followed by the merchant?  How should a cyber incident be considered when negligence is involved in the cyber mishap? Who is to be held accountable for needing to demonstrate meeting the duty of care?

Negligence was an issue in In re Hannaford Bros.[1]  This Maine District Court case involved the data security incident arising from a third party stealing the consumer data from grocery transactions.  The question raised in the case was whether a customer can recover from the grocer for loss resulting from the third party’s data theft? It is conceivable that from the consumer point of view there will be the tendency to enjoy the convenience of the digital transaction by use of credit card at a store.  Yet, with the convenience, there is also the risk of fraud and misuse of the account information, i.e., PII.[2]  The average consumer believes that the law should address and protect their PII in circumstances where confidential information is stolen and allow for redress against the merchants and financial institutions. But how negligence should be analyzed in cyber incidents is a bouncing question dealt with traditional tort concepts of duty, breach, and causation with the ultimate tangible injury.  Long have been the treatment of analysis under Article III to settle in each case the criteria of requisite case and controversy.

Negligence, however, seems to stand on an island in cyber incidents.  To the individuals who have been affected by a cyber incident, the risk of fraudulent use of their account information is very real.  So, the argument goes that the law should provide some form of protection. How that protection is conceived is still debatable.  The grocery establishment in Hannaford Bros, typically argued that the law already provides protection to consumers by agreement.  For instance, by the provision of the Electronic Fund Transfer Act, which limits a consumer's liability for fraudulent debit card transactions to no more than $50 (or, if the consumer fails to notify his bank "within two business days after the consumer learns of the loss or theft," no more than $500). 15 U.S.C § 1693g(a).  Defendants usually argue that as well, the industry provides similar limits through contractual agreements with credit vehicles and associations such as Visa, MasterCard, etc. The store merchants will always seek to have the courts impose responsibility on the banks that issue the cards in order to facilitate any recourse to the consumer. So the cyber incidents that pertain to the misappropriation of digital transaction data pivot the consumer against the financial institutions to the liking of merchants or against the merchants to the liking of the financial institutions.

In the Hannaford case, the plaintiffs found themselves pivoted as such towards the merchant to determine the level care that the merchant undertook to care for the digital data of the credit and debit card transactions. The Plaintiffs argued that “... [they] made use of debit cards and credit cards issued by financial institutions to access their bank accounts or create credit relationships." Furthermore, that the merchant “provided electronic payment services," but failed "to maintain the security of private and confidential financial and personal information of ... credit and debit card customers" at supermarkets in . . .” in several states, including Florida.  Hannaford did not argue that it was not subject to a reasonable duty of care consideration, but what was pointed out was that it believed that it was not subject to an economic loss consideration arising out of the traditional personal injury and property damage considerations.  The court stated that “in a grocery transaction where a customer uses a debit or credit card, a jury could find that there is an implied contractual term that Hannaford will use reasonable care in its custody of the consumers' card data, the same level of care as the negligence tort . .”  Hence, the conclusion was that consumers can recover when payment data are stolen, against a merchant, if the merchant's negligence is the direct cause of the loss in the customer’s account.  In this case, the negligence analysis was drawn to delineate breach of a duty of care and causation of the loss of data security.

[1]In re Hannaford Bros. Co. MDL Docket No. 2:08-MD-1954. United States District Court, D. Maine. May 12, 2009.

[2] Personal Identifying Information

Lorenzo Law Firm is “Working to Protect your Business, Ideas, and Property on the Web." Copyright 2017, all rights reserved Lorenzo Law Firm, P.A.

 

Internet Mugshot Publishing Curtailed

Internet mugshots published online haunt many for years with embarrassment.  For many, as well, the mugshots do not bear a meaningful purpose for others throughout the Internet to know.  What remains is the ill circumstance of having future employment out of reach or present employment terminated, for the inadvertent past event. The harm lingers for years.  For years’ individuals who have had a mugshot taken for a past event, have been solicited by mugshot publishers to offer their removal or correction for a fee and have been pressured into having to pay a mugshot publisher for its removal or correction.  The concern is over this business practice by Internet mugshot publishers of seeking payment for removal or correction, essentially extorting individuals.

Now Florida is joining California, Colorado, Oregon, Georgia, and several others seeking to regulate the mugshot publishing business.  The Florida legislature is considering a provision to amend Sec. 943.0585 Florida Statutes.   This amendment provides restrictions on businesses that publish on the Internet booking photographs.  They are not to solicit or receive a fee for removal.  This fee prohibition also applies for correction requests or modifications of such photographs. During the 2017 legislative session, the Florida Senate in SB 118, will place a provision long awaited by individuals who have had the grief of their photo being propagated on the Internet for a fee.

The amended provision by the Senate states as follows: “(1) Any person or entity engaged in the business of publishing or otherwise disseminating arrest booking photographs of persons who have previously been arrested through a publicly accessible print or electronic medium may not solicit or accept a fee or other form of payment to remove, correct, or modify such photographs.  The provision also states that there is a time limit by which requests are to be responded and handled by the mugshot publisher.  The provision states “Upon receipt of a written request from a person whose booking photograph is published or otherwise disseminated, or his or her legal representative, the person or entity who published or otherwise disseminated the photograph shall remove the photograph without charge within calendar days after receiving the request for removal.”

The legislative effort is not without teeth in that it provides for enforcement.  Such enforcement allows for civil remedy.  The provision states “The person whose arrest booking photograph was published or otherwise disseminated in the publication or electronic medium may bring a civil action to enjoin the continued publication or dissemination of the photograph if the photograph is not removed within 10 calendar days after receipt of the written request for removal.”  If the mugshot publisher does not timely comply with the request to remove or correct the publication from a person whose arrest booking photograph was published or otherwise disseminated in the publication or electronic medium, a civil remedy of $1,000 for each day of noncompliance will be imposed along with an injunction.  Attorney fees are as well provided along with court costs related to the issuance of the injunction.

Compounding the strength of the provision is the allowance for the consideration that if the request for removal by a person whose arrest booking photograph was published or otherwise disseminated in the publication or electronic medium is refused after there has been a written request, such refusal will be deemed as an unfair or deceptive trade practice in accordance with part II of Chapter 501, Florida Statutes. The caveat to note is that this provision does not apply does not apply to any person or entity that publishes or disseminates information relating to arrests unless the person or entity solicits or accepts payment to remove the information.  Nevertheless, the concerns shared by many about their past and having the need to correct a record or to remove a digital online publication of a mugshot, are being now addressed in Florida.

Lorenzo Law Firm is “Working to Protect your Business, Ideas, and Property on the Web." Copyright 2017, all rights reserved Lorenzo Law Firm, P.A.
  

Internet and Deceptive Advertising Vindicates the FTC

Internet advertising has become intricate and keen.  Internet advertising may involve multiple participants.  The purpose is essentially to sway readers to purchase products by making representations that at times appear too good to be true.  That is what the Federal Trade Commission and the State of Connecticut determined prior to suing  LeanSpa.  The claims embraced issues of false information to convince consumers on the legitimacy of the product.  Consumers were drawn to LeanSpa’s online sales site using story lines about users who did not actually use the product.  Shipping and handling costs were passed down to the consumer while representing the that the consumer was receiving free trial.  This story is all too common on television infomercials.

What was critical to the analysis undertaken by the court was that the charges assailed against LeanSpa and its principals involved the violations of several regulatory provisions, i.e. as for Connecticut, the Connecticut Unfair Trade Act and federally, the Electronic Funds Transfer Act (EFTA) and Sections 5 and 12 of the FTC Act.  The findings revealed that there were misleading claims made about the weight-loss potential of the product being advertised.  There was also the enticing method of stating ot the public that they can received free trials of the product but that they had to pay a shipping and handling.  This sales method had a reoccurring function that was difficult to cancel.  The consumers were trapped with monthly shipments.  That triggered the EFTA which states conditions for transfers and consumer right to notifications and process.

The FTC, LeanSpa and principals entered a settlement that set requirements for disclosure about terms of refunds, endorsements, and of the trial promotion itself, involving the charges and the ability of cancelling.  The defendants had to provide disclosure that the endorsements were actors and not actual users.  They also had to engage in clinical trials that would substantiate their claims for the effects of the product being sold and to also substantiate that their product had undergone clinical trials.  The FTC was imposing the requirement of having competent and reliable scientific evidence.  

Subsequently, the FTC amended its complaint  asserting claims on an affiliate marketing network operator LeadClick that allegedly swayed shoppers to LeanSpa’s web store.  The news appearing presentations appeared realistic to consumers about the weight loss benefits and experiences.  The news appearing statements were never clarified to consumers for them to learn that they were actors and not independent news outlets.

The function and roles between product company and marketers distinguished, revealed elements of liability that the FTC could not ignore and that the court noted.  A program called HitPath was used by LeadClick. This program would register the clicks and would recognize to which account it would be attributed. The system would recognize the affiliate that was responsible for the lead in by the consumer to the product.  This information allows the marketers to allocate appropriate compensation to the affiliate, i.e., commission.  The marketing campaign was deemed suspect by the FTC and essentially the court in its decision.[1]

The Second Circuit determined that LeadClick’s marketing campaign was liable for systematically conducting a program that deceived consumers noted levels of transactions.  While defenses were raised, the discussion dealt with the depiction of the defendant’s role on the marketing process with affiliates, placements of ads and sales, creation of ads, and potential immunities under Section 230 of the Communications Decency Act.  The court looked into the revenue stream between the merchant clients, the affiliates, LeadClick, and LeanSpa.  The court also determined the creation of the ads via false news representations.

What the court determined demonstrated that while creation of the news sites did not originate with the defendant, there were other pertinent aspects that drew liability to the defendant.  The court found that the defendant knew that affiliates were using fake news to sell the LeanSpa product.  The court also became aware that the defendant approved the ads, as well, the defendant provided content for the ads. These three aspects drew direct liability to defendant and demonstrated direct involvement on the marketing plan toward consumers.  The defendant, per the court, was aware of the deception and did not curtail it nor stop it.  Hence, the defendant was deemed directly liable under the FTC Act.  The defendant in response claimed that its actions were so similar to aiding and abetting liability. Yet the court determined that the defendant’s actions contributed to the deception on consumers and it was not tantamount to eh exception under the FTC Act.   By the defendant purchasing ads and providing content it is liable.   Having knowledge that the third-party marketers were using false information,[2] attributed liability to the defendants.  The Second Circuit noted that the Eleventh Circuit, previously found the FTC to have provided the requisite evidence to demonstrate liability by virtue of the defendant’s knowledge of third-parties’ false statements to consumers. It as well found that the Ninth Circuit, in FTC v. Neovi, Inc.[3] had determined liability of the defendant by it having caused the harm not just aiding.

While defendant defended by claiming to be immune under Section 230 of the Communications Decency Act (CDA), the court artfully informed that defendant that “grant of immunity applies only if the interactive service provider is not also an ‘information content provider’ of the content which gives rise to the underlying claim.”    The court also stated that an information content provider within the CDA is “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.”  Since the defendant was the content provider and writer exerting discretion, it was not immune from liability. The court deemed the defendant as participating in the placement and publishing of the content. LeadClick’s participation was ‘material’ to the deceptive content.

The decision out of the Second Circuit sends signal to marketers to beware of the its content and affiliates representation.  The effort to be at arm’s length may not be enough to shield it from liability under the FTC Act or to claim immunity under the CDA.  Disclosures are becoming more of the norm in consumer protection regimes with endorsements clarified as to their identity to avoid misrepresentations.

---

[1] Federal Trade Commission v. LeadClick Media, LLC, (2nd Cir. 2016).

[2] See FTC v. IAB Mktg. Associates, L.P., (11th Cir. 2014).

[3] See FTC v. Neovi, Inc., (9th Cir. 2010).

Cyber Security Claims

Cyber security claims are seldom tempered with an entities acknowledgement of its insecurity of electronically stored information (ESI) and handling of consumer personal identifying information (PII).  The efforts and planning executed, though they may be diligent, they cannot anticipate cyber incidents and breach incidents nor should their efforts to prevent them be overstated.  All attention by entities appears to be dedicated on external caused anticipated incidents and little is focused on the internally sourced events.  Seldom do entities envision the internally sourced incident, such as human error, theft, or neglect.  Balance is required and much care is needed before publicly claiming the quality of its data security.  For instance, the risk from internal unauthorized access to trade secrets leading to misappropriation is realistic, yet under appreciated.  This is not to spawn an environment of distrust in the workplace.   Of course, it is difficult to swallow that employees would pilfer company knowledge, designs, formulas, or even the companies R&D new software specs for self-gain.  Word to the wise if you are a business, swallow it fast and be ready.  Since the vulnerability can arise from external as well as from internal actors any claims to the public of the quality of handling data securely is being assessed as a possible business representation.  Such cyber security claims should consider internal vulnerabilities to data handling and as well as the externally sourced causes that we read too much in the news.

From an internal point of view, a business’s or agency’s imminent vulnerability is through personnel and their mishaps, forgetfulness, or deliberate sabotage.  This of course is in addition to external concerns.  Always the employee with the increasing frequent absences draws a cause for concern and some form of a query, especially an employee who has access to critical company information.  This concern is so realistic that it has motivated states to promulgate their own version of a uniform rendition on trade secrets and provisions addressing computer crimes.  Some promulgation allows for civil and monetary remedies when business data is compromised because of someone exerting unauthorized access either internally or externally sourced.

With the ease of ESI transmission, unauthorized access becomes all too prevalent for the business insurance companies to fathom the risk.   This reality is augmented by the anonymous activity through shadow bots, exchanges and other means that leave the business owner holding client data, innovative plans, beta testing new processes, without protective leverage.  Backdoor access is always a possibility especially among those of trust who have a mutual gain in the prosperity of the enterprise.  Worst case events are what gave rise to FUTSA and CADRA in Florida[1]  and many other states that appreciated the seriousness.

The insecurity of data security in the cyber world, unfortunately, is by the nature of storing ESI and transmitting ESI in our day-to-day business endeavors.  Customer information, as well as business assets, are at play in the realm of cyber insecurity.  Security is only as secure as the weakest link in the chain of transmission.  As vulnerability is realized in its present state, the urgency then is to focus not only on firewalls and other aspects but on internal employee training, policies, non-disclosure agreements, vendor contracts, vendor’s due diligence to cyber security, cyber insurance policies (vendors cyber insurance) and their coverage reviews, and vetting vendors’ cyber liability coverage before inking a deal.

Can a business claim safeguarding its data assets to engender public confidence in the security of ongoing credit card transactions, storage of its personal account information, the transfer of its customers’ medical records, or the updating of financial records, if it has not properly vetted its vendors' cyber security practices?  The qualified claim itself draws also the risk of misrepresentation before the regulatory eyes of the Federal Trade Commission.  ESI is business as usual and the role of risk management is to realize not only the external aspect of cyber intrusion but to also balance that attention with internal constructs to anticipate the unpredictable.

It is obvious that consumer data security claims by many businesses seek to settle the fears and doubts of many consumers engaging in electronic payments.  however, those representations should be tempered with an accurate description of its practices to keep consumer information and transaction data secure.  Such claims if proven to lack implementation, the claimed training, diligent assessment and evaluation, investment in reasonable resources, or even testing, will be scrutinized.   Several agencies have been tasked with a different scope of authority to do that.  It is important to note that data security has been allocated to be under the auspices of the Dodd-Frank Act.[2]  Information protection regarding consumer confidential information has been the responsibility of the Federal Trade Commission under Gramm-Leach-Bliley Act. Deceptive business practices of covered financial institutions fall under the Consumer Financial Protection Bureau (CFPB), section 1031(a) and 1036(a)(1) of the Consumer Financial Protection Act of 2010, for the purposes of enforcing federal consumer financial laws.

The veracity of business claims of protecting consumer data and payment processing is a candidate for scrutiny.   Failure to meet the security claims will be deemed as a deceptive business practice.  The CFPB has stressed the importance of attending to the integrity of digital payment system security.  It has as well emphasized the growing reliance and trust that consumers are displaying entrusting their private information and financial information as they execute electronic transactions. In a recent press release, it has stated: “It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”

While the FTC, Office of the Comptroller of Currencies (OCC) and other federal banking agencies are authorized to police the handling of data security, the CFPB which is tasked to review consumer information of financial institutions, reviews the processes of online payment platforms.  One incident worth noting in this post, is the CFPB's review of the claims made by Dwolla, Inc.  Dwolla is an online payment transaction platform that had provided payment processing services through the Department of the Treasury’s payment portal.  In an Order issued in CFPB's administrative proceeding, Dwolla  was determined to have committed deceptive data security representations to the public.  The consent order states that Dwolla’s communications made false statements about its data safety processes, e.g., of its use of encryption, that its practice surpassed the Payment Card Industry (PCI) standards.  Conversely, the CFPB asserts that Dwolla did not do several of the following, though Dwolla claimed to do so: provide acceptable data security training to its employees, establish acceptable and appropriate date security policies and practices, timely and regular risk assessments, and use encryption. These aspects are considered crucial in the pursuit of providing data security and claiming a level of quality to the cyber security in place.

The order also outlined a list of actions required to address the findings with a five-year horizon within which Dwolla is ordered to comply with the stipulated items, report the actions taken to remedy the findings, and to record all implementations and findings, and continuously submit as scheduled monitoring compliance reports.  From this case financial technology businesses involved in payment processing should carefully screen their representations on their communications, websites, advertisements, and press releases, related to their practices and standards.  Failure to apply what is claimed to be in practice and failure to not exercise due diligence in safeguarding confidential financial consumer information will be punishable devoid of there ever being consumer harm.  Advertisements and marketing efforts in this competitive and growing payment processing industry should be tempered with a sober realization of what is implemented in the daily cycle of transactions and in the keeping of records.   Thus, a fine was imposed on Dwolla, that had to be paid within ten days of the order and they will be monitored for the next five years.

The lessons about handling data security are hard to learn when an entity becomes subject to a cyber incident or a regulator seeks to audit processes.  What can be said about cyber security and any claims about how it is employed, is that upon a cyber incident hitting one's business or entity, all will be scrutinized by outside individuals claiming damages and by the regulators asserting that reasonable diligence was not employed to secure ESI and secure consumer personal identifying information (PII).  Transparency will soon be forced upon to the chagrin of the business or entity that experiences a cyber incident whether internally or externally sourced, or is found after an audit that it is out of compliance. Hence, cyber security efforts need to be assessed before there are any claims and such efforts must be evaluated, tested, and improved upon.

 

[1] Florida Uniform Trade Secrets Act (FUTSA), Chapter 688, Florida Statutes; Sec. 812.081, Florida Statutes; Computer Abuse and Data Recovery Act, Sec. 668.801, Florida Statutes (“CADRA”).

 

[2] The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173; commonly referred to as Dodd-Frank) was signed into federal law July 21, 2010.