Mar 31, 2017

Cyber Security: A 5-Step Data Breach Risk Mitigation Plan for Boards & Directors

Zuckerman c. Target Corporation, 2017 QCCS 110 (CanLII)

By David Fraser and David Wallace

On January 19, 2017, the Canadian Securities Administrators (CSA) issued Multilateral Staff Notice 51-347 disclosure of cyber security risk and incidents. The Staff Notice only applies to reporting issuers, but it reflects a broader prevalence of, and heightened concern about, cyber security risks and the related liability exposure that all organizations, officers and directors face. Case in point: on February 3, 2017, the Québec Superior Court authorized a consumer privacy class action in Zuckerman v. Target Corporation seeking financial compensation for – you guessed it – a data / privacy breach.

Here’s a five-step cyber security mitigation plan that organizations and their directors can and should implement now to minimize the growing liability risks of suspected and actual cyber attacks.

  1. Make it a (priority) corporate governance matter.

The liability exposure for cyber security risks is high and getting higher. These risks warrant high-level attention: have a board member or committee take this on as an important and a priority project - and allocate the necessary resources to do the project well.

Quasi-criminal liability. Failure to follow the new Canadian data breach rules under the Digital Privacy Act (a.k.a. Bill S-4), once they take effect, can lead to quasi-criminal liability (it’s not a criminal offence but it’s subject to a penalty that’s similar to a criminal offence, although the court procedures are less complicated) for both organizations and for directors personally. The Digital Privacy Act amends the federal Personal Information and Protection of Electronic Documents Act (PIPEDA) to mandate a data breach response that includes reporting, notification and record-keeping requirements. While most of the Digital Privacy Act took effect in June 2015, the breach notification sections still aren’t in effect because they depend on regulations that the government hasn’t yet released.

Civil Liability. Then there are the potential lawsuits resulting from the breach: consumers suing the organization for losing their personal (often sensitive financial) information; banks suing the organization for the cost of compensating consumers for financial losses or replacement of financial information (e.g., credit card replacements); and shareholders/investors suing the corporation and the corporate directors personally (derivative actions) for decreased share values. These lawsuits are now par for the course in the U.S., and are migrating to Canada. There are over 30 pending data breach class actions in Canada; some are being certified (authorized by a court to proceed). On February 3, 2017, the Québec Superior Court authorized a privacy class action in Zuckerman v. Target Corporation. Consumers are suing Target for compensation resulting from a pre-2013 data breach that involved the personal information of potentially 70M customers and approximately 40M credit and debit cards. And though none of these cases have yet been decided by a court, it’s only a matter of time ... and win, lose or draw, the organizations will bear the hefty legal costs associated with defending the legal actions.

Negative Publicity. And don’t underestimate the impact of negative media scrutiny, above and beyond any direct financial liability exposure. With the pervasive and real-time power of the media, all eyes (actual and prospective customers, actual and prospective investors and privacy regulators) will be on the organization.

  1. Get a good handle on your legal notification obligations.

When a data breach is suspected or actually occurs, organizations need to know who they must – and who they should – tell. Understanding who to notify and when is a critical pre-cursor to creating a response plan that meets the organization’s legal obligations.

Privacy Laws. Only seven Canadian statutes currently specify data breach responses in the private sector. All require notification of the individual(s) whose data has been breached. Most deal specifically with health-related data; only one (Alberta) applies to all personal information held by private organizations:

More, however, are coming when the data notification sections of the Digital Privacy Act, mandating a data breach response including reporting, notification and record-keeping requirements, take effect. The government hasn’t given any indication when this will be, but it will take time for organizations to be ready to comply - so start now. The Digital Privacy Act mandates:

  • Commissioner Report. The organization must report to the Federal Privacy Commissioner any breach of security safeguards if it’s reasonable in the circumstances to believe the breach creates a real risk of significant harm to an individual. “Real risk” depends on the sensitivity of the personal information involved in the breach and the probability it has been, is being or will be misused; the final regulations could outline additional factors to consider. “Significant harm” includes bodily harm, humiliation, damage to reputation or relationships, loss of employment, business or professional opportunities, financial loss, identity theft, negative effects on the credit record and damage to or loss of property.
  • Individual Notification. The organization must notify the individual as well as the Commissioner; unlike Alberta, no Commissioner order is a pre-requisite to individual notice.

Negligence Laws. In addition to the notification requirements under privacy legislation, the organization could also have a broader legal duty under negligence law to notify an individual whose data has been breached if that breach could harm, or could materially increase the risk of harm to, that individual. This broader legal obligation to notify could exist even if there’s no such obligation under privacy legislation.

International Laws. Many organizations will need to also think beyond Canadian borders: the laws of other countries could apply, imposing different notification and disclosure obligations and carrying significant consequences for the organization. For example, in Zuckerman v. Target, it was Target’s actions in the U.S. that created significant liability exposure in Canada. Similarly, an organization’s actions in Canada could create significant liability exposure in another country. Many foreign breach notification laws depend on the place of ordinary residence of the individual the breach affects. For example, a Canadian company with information about a California resident who vacations in Canada might have obligations under California’s laws if there’s a breach of the California resident’s information. To complicate things, different jurisdictions have different definitions of “breach” and different notification requirements.

  1. And have a good handle on your risk and incident disclosure obligations too.

Reporting issuers (organizations subject to ongoing public disclosure obligations under securities laws and securities of which are generally traded on a public stock exchange) have additional obligations. Generally, securities laws require reporting issuers to publicly disclose all material changes, material facts and material risks to their business. The Staff Notice is one of a series of publications the CSA has issued noting the increased frequency, complexity and costs of cyber attacks on organizations, and highlighting the importance of understanding, mitigating and providing effective disclosure of such risks (see also the CSA’s 2016-2019 Business Plan and Staff Notice 11-332). The Staff Notice identifies cyber security as a priority area for issuers, reviews previous disclosure practices and offers assistance to issuers in discharging their cyber security-related disclosure obligations. Staff Notices aren’t “laws”, so they aren’t mandatory per se, but the fact the CSA issued this Staff Notice suggests it’s concerned that reporting issuers’ aren’t adequately disclosing cyber risks.

Risk Factor Disclosure. Sixty one percent of the 240 issuers the CSA reviewed mentioned cyber security as part of their risk factor disclosure, mainly as a result of their reliance on information technology systems and third party risk exposure. The potential impacts of data breaches that issuers identified included: operational delays (e.g. production downtimes or plant and utility outages); inability to manage the supply chain; inability to process customer transactions or otherwise service customers; inventory management disruptions; lost R&D data; and intellectual property devaluation. The CSA concluded the ubiquity of cyber security concerns led issuers to use generalized “boilerplate” language in their risk factor disclosure. It admonished issuers for doing so and suggested they instead pay attention to their specific circumstances, particularly in terms of exposure and preparedness. There’s an express expectation that the issuer will disclose specific risks rather than generic risks applicable to all issuers, and will tailor disclosure to their specific circumstances. But issuers shouldn’t confuse tailoring disclosure to their specific circumstances with disclosing cyber security strategies or vulnerabilities that could compromise it. When determining what information to disclose, issuers need to balance the probability of a breach taking place and the consequences of such breach.

Cyber Security Incidence Disclosure. The Staff Notice reminds issuers that they must disclose only those security breaches that constitute a material change (requiring immediate disclosure) or a material fact (requiring disclosure as part of its ongoing reporting obligations) to their business. For example, an issuer dealing with highly sensitive data could consider a minor breach to constitute a material change; an issuer dealing with the delivery of services might not. A non-exhaustive list of factors for issuers to consider in determining whether there’s been a material change includes the nature of the issuer and the frequency, scope and consequences of the breach. And since discovery of cyber security breaches tends to be after the breach has occurred, the issuer may have to disclose the incident before resolving the cause to comply with its reporting obligations.

  1. Assess your current situation.

Once you know what your obligations are, conduct a risk assessment: determine the assets that are most susceptible to a data breach, and determine the greatest cyber threats to which they are exposed. Using third party experts to validate the risk assessment usually results in more credibility, with the additional benefit of the ability to benchmark against others in your industry.

Carefully assess your situation with your insurance broker too, because specialized lines of cyber risk insurance are increasingly available – and advisable.

  1. Be well-prepared, well in advance.

A lack of planning will lead to a poor response, and a poor response will make the breach - and its fallout - much, much worse. Create a well-conceived data breach action plan to deal with and mitigate an actual or a suspected data breach. Then train all relevant staff on it and rehearse it periodically. The specifics of the plan will vary depending on the nature of the risk exposure uncovered in the assessment, but every plan should:

Act fast. The plan should mandate that the organization take immediate steps to contain the breach and to mitigate the harm that could result. The exact steps will depend on the nature of the breach, but should always include an attempt to retrieve the breached information and limit further circulation of it, and taking all systems offline.

Third parties. Involve major contractors and service providers in both creating the plan and incorporate them into the plan.
Insurance. Allow for immediate notification to the insurer.

Retain legal counsel. Provide for retention of legal counsel (ideally, counsel that will be as ready as the organization and is teed up in advance). Since litigation after a privacy breach is highly likely, it’s critical to take steps to establish and preserve privilege over the organization’s communications and information generated about the breach to prevent it from being used against the organization in litigation.

Law enforcement. Consider whether the response will include making a report to law enforcement. There’s sometimes little legal benefit to be gained from doing so, but there may be some public relations benefit.

Communications plan. Don’t let fumbles in the response become the story. Line up internal and/or external resources to create and implement a communications plan about the breach. And assume both that you don’t know the true extent of the breach, and that “outsiders” know more than you do. Provide sufficient detail, including who to call for assistance at the organization.

Legal notifications & disclosures. Know who the organization must notify and how – and plan to do it promptly. Delay in notification will be noticed and become the story and the complaint. So if there is any delay, be ready to explain it, although most breaches become smaller the more you investigate them. And since notification is likely to trigger complaints to relevant privacy regulators, provide copies of the mandatory breach report to other Privacy Commissioners who might have an interest in the incident.

Sweat the small stuff. It’s not a requirement, but consider whether the organization will offer credit monitoring and in what circumstances (i.e., depending on the nature of the information that’s breached). Anticipate complaints as a result of the disclosures, and have a plan to be able to handle the resulting volume of calls/emails. Plan to respond to complaints clearly and directly; advance scripting is beneficial. And apologies go a long way - but don’t accept liability.

Please contact your McInnes Cooper lawyer or any member of the Privacy Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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