Recent Suit Highlights the Importance of Data Security for Law Firms

In what undoubtedly portends things to come, recently unsealed court files reveal that the first data security class action complaint against a domestic law firm was formally filed. Chicago-based Johnson & Bell, a firm of more than 100 attorneys that recently celebrated its 40th anniversary, was recently named in a lawsuit that alleged it failed to appropriately protect confidential client information. That lawsuit was filed by Johnson & Bell’s former clients, bitcoin-to-gold exchange Coinabul LLC, and its Chief Operating Officer, Jason Shore.

Coinabul and Mr. Shore set forth a four-count Complaint alleging breach of contract, negligence, unjust enrichment, and breach of fiduciary duty. Underpinning all of theses claims were the following core allegations: the defendant law firm’s time-tracking system (“Webtime”) was built on a “JBoss Application Server” which was out-of-date and suffered from a critical vulnerability, leaving it susceptible to hacking; its virtual private network (“VPN”) supported insecure renegotiation, leaving it vulnerable to man-in-the-middle attacks; and, finally, the firm’s email system had broken security that left it susceptible to attack. In short, plaintiffs allege the firm failed to implement industry standard data security measures with respect to its Webtime, VPN, and email services, resulting in certain vulnerabilities that could expose confidential client information.

The hypothetical exposure of confidential client information makes this lawsuit all the more interesting – plaintiffs did not actually allege that Johnson & Bell’s Webtime, VPN, or email services were ever compromised, or that that confidential information was ever leaked. These points were all raised in Johnson & Bell’s subsequently-filed motion to dismiss. That motion was ultimately never ruled upon, as the parties are now engaged in a confidential arbitration.

While the outcome of this suit might never become public, the takeaway lesson is apparent – attorneys and law firms must remain diligent, and continue to take reasonable efforts to maintain client confidentiality and properly secure data.

Ransomware: Preparing for the Storm That’s A Brewin’

On July 11, 2016, the Office for Civil Rights (“OCR”) published guidelines for ransomware attack prevention and recovery, including the role HIPAA has in assisting covered entities and business associates prevent and recover from such attacks, and how HIPAA breach notification processes should be managed in response to a ransomware attack. According to the OCR report, there have been 4,000 daily ransomware attacks since early 2016, up 300% from 2015. Earlier this week a healthcare IT Security Consultant told me the chatter he hears is the hackers are working on stronger, more aggressive, more deadly hacks to unleash, and he fears a hacking storm a brewin’. Time to get serious and batten down the hatches, folks!

8-3The OCR report describes what a ransomware attack is, and explains that maintaining strict HIPAA Security Rule compliance can help prevent the introduction of malware, including ransomware. Some of the required security measures discussed include:

  • Implementing a security management process, which includes conducting a risk analysis and taking steps to mitigate or remediate identified threats and vulnerabilities;
  • Implementing processes to guard against and detect malicious software;
  • Training users on malicious software protection; and
  • Implementing access controls.

Ransomware gets into your system, denies you access to your data (usually through encryption), and then directs you to pay a ransom to the hacker in order to receive a decryption key. For this reason, maintaining frequent backups and ensuring the ability to recover data from backups is crucial to surviving a ransomware attack. HIPAA compliance helps protect entities because the Security Rule requires covered entities and business associates to implement a data backup plan as part of an overall contingency plan, which includes periodic testing of the plan to be sure it works.

The presence of ransomware – or any malware – is considered a security incident and triggers the need to initiate security incident response and reporting procedures. Based upon an analysis of the investigation results, breach notification may be required. Additionally, if there is an impermissible disclosure of protected health information (“PHI”) in violation of the privacy rule, there is a presumed breach which may trigger notification. Whether or not the presence of ransomware would be a breach under HIPAA Rules is thus fact specific. However, unless the entity demonstrates there is a “…low probability that the PHI has been compromised,” a breach of PHI is presumed to have occurred and the entity must comply with the applicable breach notification provisions.

Further information and a copy of the OCR report can be found here.

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.

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.

3rd Circuit Ruling in FTC v. Wyndham Affirms Broad Governmental Authority Under Section 5

In a much anticipated decision, the Third Circuit recently upheld the Federal Trade Commission’s exercise of authority to fine and take other measures against businesses that fail to abide by the “standard of care” for data security. Federal Trade Commission v. Wyndham Worldwide Corporation, No. 14-3514 (3d Cir. Aug. 24, 2015). Wyndham challenged the FTC’s actions arguing that negligent security practices were not an “unfair practice” and that the FTC failed to provide adequate notice of what constituted the standard of care in this context. The Third Circuit, like the trial court before it, disagreed. It held that Wyndham’s negligent data security practices were an “unfair” business practice under 15 U.S.C. § 45(a), otherwise known as § 5 of the FTC Act, because it “publishe[d] a privacy policy to attract customers who are concerned about data privacy, fail[ed] to make good on that promise by investing inadequate resources in cyber security, and thereby expose[d] its unsuspecting customers to substantial financial injury, and retains the profits of their business.”

The Third Circuit rejected Wyndham’s due process, lack of notice of standard of care argument, holding that Wyndham was not entitled to know with ascertainable certainty the FTC’s interpretation of what cyber security practices are required by § 45(a) – to know what practices are required by the standard of care. The Court explained that Wyndham had adequate notice of the standard of care because § 45(n) of the Act defines it using usual tort cost-benefit analysis. See United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir.1947). Nothing more is required to satisfy due process concerns in this context.

Prior to the Wyndham decision, courts generally held that the economic loss rule precludes a claim for negligent data security practices. E.g., Sony Gaming Networks & Customer Data Sec. Breach Litig., 996 F. Supp. 2d 942, 967-973 (S.D. Cal. 2014) (dismissing such claims under both Massachusetts and California law on the basis of lack of a “special relationship”). The question remains open whether Wyndham defines a special relationship and tort duty that would preclude application of the economic loss rule. Keep an eye on this space for further developments.