Target Settlement a First Step for Companies Looking to Avoid Data Breach Litigation

Target ends its multi-state data breach litigation over its 2013 data breach with an $18.5 million settlement to 47 states. While the settlement outlines the type of security measures companies should employ in order to not be found negligent with customer data, it doesn’t go far enough to improve organizational security. The bulk of the settlement terms are still defensive in nature when it comes to data breaches. As such, companies looking to follow the terms of Target’s settlement should be cautioned to use offensive tactics to prevent such attacks if they want to avoid litigation.

In 2013, while Target’s security systems had detected the breach, no one understood the significance of, or acted upon, the alerts, resulting in the massive data breach given the delay in response time. Target has since toughened its security systems and made significant improvements. The terms of the settlement give Target 180 days to develop, implement, and maintain a comprehensive security program. However, this requirement refers to the changes the retailer has already implemented. While the settlement reiterates some of the basics, such as having a comprehensive security program, segmenting the network, and implementing stricter access control policies to sensitive networks and data, future data breach lawsuits may use the Target settlement to try to prove an organization did not go far enough in protecting personal information and other sensitive data. As such, abiding by the terms of the Target settlement is a first step for companies looking to avoid data breach litigation, but further tactics will be required for companies to go on the offensive to prevent breaches as the plaintiffs’ bar will try to use the Target settlement as a varying degree of negligence in pushing forward with future litigation.

Failure to Update Business Associate Agreement Leads to Health System’s Settlement with OCR

A hospital’s breach notification to the Department of Health and Human Services, Office of Civil Rights (“OCR”) led to a Resolution Agreement, payment of $400,000 and a Corrective Action Plan for an east coast health system. On September 23, 2016, OCR issued a press release advising that Woman & Infants Hospital of Rhode Island (“WIH”) a member of Care New England Health System (“CNE”) notified OCR of a reportable breach in November of 2012, stemming from its discovery that unencrypted backup tapes containing electronic Protected Health Information (“PHI”) were missing from two of its facilities. CNE provides centralized corporate support to the covered entities under its common ownership and control, including technical support and information security for WIH’s information systems, as its business associate. Although WIH had in place a business associate agreement (“BAA”) with CNE, it was dated from March of 2005 and had not been updated since implementation and enforcement of the HIPAA Omnibus Final Rule.

OCR’s investigation of WIH’s HIPAA Compliance program, triggered by the report of the missing tapes, uncovered the outdated BAAs. WIH updated their BAA on August 28, 2015, as a result of OCR’s investigation. OCR then determined that from September 23, 2014, the date enforcement of the Final Rule began, until August 28, 2015, WIH impermissibly disclosed the PHI of at least 14,004 individuals to its business associate when WIH provided CNE with access to PHI without obtaining satisfactory assurances, in the form of a written business associate agreement, that CNE would appropriately safeguard the PHI. The settlement was reached without any admission of liability by CNE or WIH.

The settlement is a jolt to many covered entities and their business associates for a number of reasons. The key take-aways are: (1) There is an inference in the OCR’s actions that a well worded BAA, wherein the business associates agrees to abide by the specifications required by the Privacy and Security Rules, is sufficient to satisfy the covered entity’s obligation to obtain “satisfactory assurances” the business associate will appropriately safeguard the PHI (meaning those often lengthy and burdensome security questionnaires or audits business associates are being asked to complete may be unnecessary and not required); (2) documentation of intent and action, including policies, procedures and BAAs, is extremely important in establishing HIPAA Compliance (i.e., the fact that the mistake occurred—tapes went missing—is being treated as the result of the absence of a written agreement, justifying the enforcement action, when in reality it is likely, or at least conceivable, that human error, inadvertence or lack of attention is the root cause and this could have occurred even if an updated BAA was in place and being followed); and (3) policies, procedures and continuous training and retraining of the workforce handling PHI is imperative to a successful HIPAA compliance program, and remains on the radar of any OCR investigation.

A copy of the Resolution Agreement and Corrective Action Plan may be found on the OCR website at http://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/agreements/wih.
OCR’s sample BAA may be found at http://www.hhs.gov/hipaa/for-professionals/covered-entities/sample-business-associate-agreement-provisions/index.html.

Arizona Anesthesia Group Notifies 882,590 Patients of Data Breach

Valley Anesthesiology and Pain Consultants (“VAPC”), a physician group of more than 200 anesthesiologists and pain management specialists with several locations near Phoenix, Arizona, began notifying patients on August 11, 2016, of a potential data breach involving protected health information (“PHI”), despite the fact their retained forensic consultant found no evidence that the information on the computer system was accessed. However, the consultant was unable to definitively rule that out after investigation, and it did confirm that an individual gained access to a system containing PHI. The physician group elected to take the proactive route of notifying affected individuals. The forensic firm was apparently called in shortly after VAPC learned on June 13, 2016, that a third party may have gained unauthorized access to VAPC’s computer system on March 30, 2016, including records of 882,590 current and former patients, employees and providers.

On its website, VAPC says they value their relationship with patients and so decided to mail the notification letters. Law enforcement was also advised, and a dedicated call center has been set up to answer patients’ questions. Patients have been advised to review the statements they receive from their health insurer and to advise the insurer of any unusual activity. The computer system accessed is believed to have contained patient names, limited clinical information, name of health insurer, insurance identification numbers, and in some instances, social security numbers (“SSN”). No patient financial information was included in the computer systems. For providers, the information included credentialing information such as names, dates of birth, SSN, professional license numbers, DEA (Drug Enforcement Agency) and NPI (National Provider Identifier) numbers, as well as bank account information and potentially other financial information. The employee records on the system included names, dates of birth, addresses, SSNs, bank account information and financial information. Individuals that had their SSN or Medicare number exposed are being offered credit monitoring and identity theft protection services.

The circumstances of the incident illustrate the quandary regarding the presumption that it is a reportable breach if you can’t prove there was no access to the information, and the interplay between the HIPAA Security Rule and the Privacy Rule. Here, it was apparently established the system’s security was breached, but unclear whether personal health information was accessed once the unauthorized individual was in the system.

More information is available on VAPC’s website: https://valley.md/securityupdate.

Macaroni and Malware: Hundreds of Noodles & Company Locations Hacked, Exposing Consumer Financial Information

In the wake of Wendy’s announcement of a data breach in its point-of-sale system, Noodles & Company recently announced that it too was a victim of a cyber-attack, which may have resulted in access to thousands of customers’ debit and credit card data. Noodles & Company’s June 28, 2016 press release identifies restaurant locations in 27 states and Washington DC in which data security may have been breached.

In its press release, Noodles & Company states that it began investigating on May 17, 2016, after its credit card processor reported “unusual activity.” It immediately hired a third-party forensic expert to investigate, and on June 2, 2016, it discovered evidence of “suspicious activity on its computer system that indicated a potential compromise.”

Noodles & Company states that it is “moving forward on a number of fronts” in response to the data breach, including working with third-party forensic investigators, operating with the United States Secret Service, and providing guidance to guests who may have been affected. In a subsequent press release, Noodles & Company asserts that it “contained the incident once the malware was identified and credit and debit cards used at the affected locations identified are no longer at risk from the malware involved in [the] incident.” Nonetheless, it will not be a surprise if Noodles & Company suffers the same fate as Wendy’s: defending a federal consumer class-action lawsuit.

We will continue to monitor and report on this story as it develops.

Addressing the Wendy’s Data Breach Proves Difficult Due to Size of Breach and Company’s Structure

As discussed earlier, Wendy’s announced that it was investigating a possible breach of its point of sale systems (“POS”), after the company was alerted of “unusual activity” involving customers’ credit or debit cards at some of its locations. An earlier Wendy’s press release stated “[b]ased on the preliminary findings of the investigation and other information, the Company believes that malware, installed through the use of compromised third-party vendor credentials, affected one particular point of sale system at fewer than 300 of approximately 5,500 franchised North America Wendy’s restaurants, starting in the fall of 2015.”

It has been reported by Security expert Brian Krebs that “some breached Wendy’s locations were ‘still leaking’ customer card data at the end of March 2016 and into early April.” A statement by Wendy’s spokesman Bob Bertini said, in response to questions about the duration of the breach at some stores, “[a]s you are aware, our investigator is required to follow certain protocols in this type of comprehensive investigation and this takes time. Adding to the complexity is the fact that most Wendy’s restaurants are owned and operated by independent franchisees.”

It has been opined that the extent and duration of the breach was a result of its size. Specifically, Tod Beardsley, security research manager at cybersecurity specialist Rapid 7, stated that the “fact that the breach affected only 5 percent of Wendy’s locations was likely a contributing factor to its success. A small footprint is much more difficult to detect, since the patterns resulting from the fraud take longer to materialize.” Unfortunately, the detection time allows the individuals involved to go on spending sprees comprised of unauthorized purchases well after the breach took place.

At this time it seems investigators are still trying to wrap their arms around the problem so we may not know the extent and duration of this breach for some time.

Insurance Carrier Must Defend Its Insured Who Inadvertently Published Private Medical Records on the Internet

The Fourth Circuit Court of Appeals affirmed a Virginia Federal District court’s decision that examined the language of a commercial general liability (CGL) policy and held that an insurance carrier was required to defend its insured medical records company in a class-action lawsuit when its insured inadvertently published private patient medical records on the Internet. See Travelers Indem. Co. of Am. v. Portal Healthcare Sols., L.L.C., No. 14-1944 (4th Cir. Apr. 11, 2016).

Both the Virginia District Court and the Fourth Circuit rejected the insurance company’s argument that there cannot be a “publication” unless its insured intended to communicate information to others. In so doing, the courts reasoned that the insurance carrier had a duty to defend because its CGL policy did not provide clear enough language as to what conduct constituted a “publication.”

This decision shows that there may be coverage for data breaches outside of the policies written specifically for data breach scenarios, i.e., cyber liability insurance policies. To this extent, the Travelers opinion should be limited to inadvertent publications by an insured, rather than a hacker breaking into a network and then publishing information on the Internet.

Plaintiffs in P.F. Chang’s Data Breach Litigation Survive Standing Challenge

In response to an April 2014 data breach, P.F. Chang’s Bistro, Inc. effected a rapid response plan in an attempt to minimize potential injury to its consumers. The restaurant announced that its computer system had been hacked and card data had been stolen, conceding that it did not know how many consumers were affected, whether the breach was limited to certain locations, or how long the breach lasted. As an additional precautionary measure, P.F. Chang’s also switched to a manual card-processing system and encouraged all customers to monitor their credit reports for new activity.

Last week, in Lewert v. P.F. Chang’s China Bistro, Inc., No.14-3700, (7th Cir. Apr. 14, 2016), the Seventh Circuit Court of Appeals again held that two plaintiffs who filed a class action suit against it had the Article III standing required to survive dismissal. Citing to its July, 2015 decision in Remijas v. Neiman Marcus Group, LC, 794 F.3d 688 (7th Cir. 2015)), the Court concluded that the P.F. Chang’s plaintiffs’ alleged injuries were sufficient to support a lawsuit – the consumers were at an increased risk of fraudulent charges and identity theft.

In reaching its decision, the Seventh Circuit pointed to P.F. Chang’s remedial efforts to prevent consumers’ exposure to the breach. Specifically, P.F. Chang’s addressed customers who dined at all of its restaurants in its initial press release, and advised consumers to monitor their credit reports, “rather than simply the statements for existing affected cards.” The court explained that by doing so, the company implicitly acknowledged that there could be a substantial risk of harm from the data breach. P.F. Chang’s eventually determined that only thirty-three of its restaurant locations had been affected, an argument which the court stated could create a factual dispute on the merits, but that would not destroy standing.

The Seventh Circuit’s decision underscores that the initial Article III hurdle for data breach plaintiffs is not high, and should serve to mold a company’s public reaction to a potential breach.

EMV Chip Cards – Falling Behind the Curve Could Mean Liability for Merchants and Card Issuers Alike

During the holiday season, stores throughout the United States process millions of credit card transactions per day. Although this flurry of sales activity is good for business, it also comes with a potential risk of liability if the credit cards used in those transactions are equipped with the chip-card technology that the merchants’ payment processing machines are not capable of handling.

12-14During the past year, credit card issuers have been transitioning to the Europay, Mastercard, Visa (“EMV”) chip cards, which contain smart microprocessor chip technology. Using the chip reader in the credit card payment terminal, the chip serves as the communication conduit between the card issuer and the merchant’s bank to authenticate the card and complete the sales transaction. Unlike magnetic stripe credit cards, chip cards generate a unique transaction code that cannot be reused. This “dynamic” data technology helps to guard against credit card fraud arising out of data or security breaches where the credit card information is compromised. For some chip cards, the users may also be required to enter a PIN. This new chip card technology requires new payment processing terminals that many merchants have not yet implemented.

Although the card issuers themselves have not completed their issuance of EMV chip cards to replace existing magnetic stripe cards, the issuers imposed an October 2015 deadline on merchants and card payment processors to become EMV-ready. After October 2015, under the modified terms of their agreements with the credit card payment processors or networks (e.g., VISA, MasterCard, American Express, Discover), merchants who accept credit cards and who are not EMV-ready may be liable for any fraudulent transactions and possibly fined and/or sanctioned by the Payment Card Industry Security Standards Council, an industry organization that promulgates data and cybersecurity standards for the credit card sector. Liability will be shifted to the party who used the lower level of security and compliance with the EMV standards. This means that, for example, a merchant may be assigned liability for the fraudulent transaction if the purchase was made with a chip card but the merchant was not capable of processing the chip card payment, using instead the magnetic stripe method. Conversely, the card issuer may be assigned liability if the merchant was EMV-capable but the card issuer has not issued a chip card to the consumer.

Notably, the EMV standards do not apply to purchases where the cards are not physically presented, including online and telephone transactions.

Although they impose increased liability and breed disputes between potentially liable parties, EMV chip cards and their attendant standards and rules are intended to provide more consumer protection and create an incentive for merchants, card issuers, and payment processors alike to conform with best practices in an ever-evolving world of data and cybersecurity challenges.

Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance

Gordon & Rees Partner, Matthew Foy, recently co-authored an article published in DRI’s In-House Defense Quarterly, entitled “Sony’s Interview Quagmire: A Watershed Moment for Cyberinsurance.” The article addresses the implications of the November 2014 Sony data breach and discusses why companies of all sizes should be giving a hard look at the cyberinsurance market and not simply relying on their CGL policies. To learn more about this topic, please see the full article, which is available here.

Insurance industry takes protective stance against constant threat of data breaches

Over 1,000 Medicaid identification numbers may have been compromised in a recent breach of security protocol in North Carolina. An employee of the North Carolina Department of Health and Human Services inadvertently sent an email without first encrypting it, which contained protected health information for Medicaid recipients, including the individual’s first and last name, Medicaid identification number, provider name, and provider identification number. While the Department has no reason to believe that any information was compromised, the Department advised affected patients to take steps to protect themselves, such as putting a fraud alert on their credit files and monitoring their financial statements for unauthorized activity.

Individual insurance companies have also fallen victim to cyberattacks. The National Association of Insurance Commissioners (NAIC) has made efforts to strengthen the insurance industry’s security position by launching the Cybersecurity Task Force, which is creating a framework for insurance companies to follow in the event of a security breach. The NAIC recently proposed a Cybersecurity Bill of Rights, which outlines the expectations of insurers when a data breach occurs and remedies for consumers who have suffered harm due to a breach. Consumer advocates, as well as insurance groups representing life, health, and property/casualty carriers, support the Cybersecurity Bill of Rights, but are pushing for changes, arguing that the document may create confusion for consumers because currently it implies that certain rights, which are not contained in all applicable state and federal laws, exist for all consumers. While the Cybersecurity Bill of Rights will not likely become a binding document, the Cybersecurity Task Force has been working alongside state insurance regulators, conducting examinations of insurance carrier’s protocols to determine whether sensitive data and confidential information are properly protected. One thing is for certain – the increase in data breaches nationwide will lead to more regulations affecting all areas of industry and eventually leading to additional lawsuits in compliance with said regulations.