[BreachExchange] Vendor Breaches And Their Implications For Employers

[Audrey McNeil]

https://www.lexology.com/library/detail.aspx?g=da7ecc76-bb96-493a-a2fc-
ff22248ffb56

The announcement by Equifax, Inc. that it had been victimized in a hacking
incident involving the personal information of 143 million Americans
generated headlines this past week.1 The sheer size of the hack means that
most employers likely have affected employees. As a practical matter, the
impact on employers may be a decrease in workforce productivity. At least
some employees will almost certainly take time during the workday to check
their credit reports, enroll in credit monitoring, or request a security
freeze. Moreover, if the hackers were to commit identity fraud using the
stolen personal information, many employees will have to engage in the
time-consuming and distracting effort of repairing their credit.

While it is not yet known what types of information were compromised in the
most recent hacking incident, employers should be aware of their
obligations in responding to security breach incidents.

Employer’s Responsibility for a Vendor’s Data Breach

Some employers may be surprised to learn that they could be responsible for
a vendor’s breach. A common misconception about data breaches is that only
the breached organization has legal obligations with respect to the breach.
To the contrary, when a business vendor suffers a data breach involving
data that the vendor has created or received on the employer’s behalf, data
breach notification laws impose ultimate responsibility for breach response
on the employer.2 The vendor’s statutory responsibility is generally
limited to informing the employer of the breach.

For example, Anthem, Inc., a large health insurance company, announced a
breach of health information in 2015 that affected approximately 79 million
individuals.3 As a third-party administrator for employer-sponsored group
health plans, Anthem handled at least some of this health information on
behalf of employers.4 Consequently, the obligations imposed by data breach
notification laws fell on those employers. Fortunately for the employers,
Anthem itself took most, if not all, the steps that the notification laws
required of its employer-customers. Nevertheless, the employer-customers
had to closely review Anthem’s breach response efforts to make sure that
Anthem adequately satisfied their responsibilities.

Data Breach Laws

1. State Data Breach Laws

Data breach laws impose substantial obligations on entities that own,
license, or maintain “personal information,” also known as “trigger data.”
Forty-eight states, the District of Columbia, and certain U.S. territories
require notification as a result of a data breach subject to certain
exceptions.

State data breach notification laws generally require notice to affected
individuals as a result of the unauthorized acquisition of unencrypted
personal information. Personal information typically is defined to include
first name or initial and last name plus (i) Social Security number, (ii)
driver’s license number and/or state identification number, or (iii) credit
or debit card number or financial account number in combination with any
required password.5 Some states include additional information in the
definition of personal information. Information such as account passwords,6
health information,7 and health insurance information8 may constitute
“trigger data” in certain jurisdictions.

These laws require breach notifications to the affected individuals.9
Depending on the state, the breached entity may also have an obligation to
notify state attorneys general, state consumer protection authorities10
and/or the national credit bureaus.11 Moreover, California,12
Connecticut,13 and Delaware14 require the responsible entity to provide
identity-theft prevention services to affected individuals. Even when these
services are not legally required, most companies offer identity-theft
prevention services to affected individuals in an effort to help mitigate
damages and reduce the risk of lawsuits, and, in many cases, out of a sense
of moral responsibility.

2. Federal Data Breach Laws

Federal law imposes data breach notification obligations on two industries
that handle particularly sensitive information – the financial services and
healthcare industries. For the healthcare industry, the predominant legal
structure is the Health Insurance Portability and Accountability Act of
1996 (HIPAA), which requires covered entities, i.e., healthcare providers,
self-insured health plans, etc., to notify affected individuals and the
U.S. Department of Health and Human Services of data breaches involving
protected health information.15 In the financial services industry, the
Gramm-Leach-Bliley Act (GLBA) and its attendant guidance from regulators16
require financial institutions to establish a security breach response
program and, in general, to notify affected customers when a breach
occurs.17

3. International Data Breach Laws

Multinational employers must report data breaches in an increasing number
of countries. The most significant recent development in this regard is the
new data protection framework in the European Union (EU) – the General Data
Protection Regulation (GDPR), which becomes effective on May 25, 2018.18
While only a few EU member states currently require breach notification,
the GDPR imposes that requirement on all 28 member states.19 Under the
GDPR, breached companies must notify the relevant, national data protection
authority (DPA), and must also notify affected individuals if the breach is
“likely to result in a high risk to the rights and freedoms of natural
persons.”20

Two aspects of the GDPR will make compliance with its breach notification
requirements more challenging than compliance with U.S. data breach laws.
First, under the GDPR, a personal data breach can involve any individually
identifying information, not just the limited categories of sensitive
information protected by U.S. laws. Second, the GDPR requires that
compromised entities report a personal data breach to the DPA within 72
hours of discovery. Meeting this deadline will likely prove difficult in
many circumstances. In the hectic period immediately after discovering a
breach, companies are usually consumed with determining the extent of the
breach and containing it.

Vendor Data Breaches

Breach notification laws generally impose few obligations on vendors. Most
laws require only that the vendor promptly report the fact of the breach to
the employer-customer that is responsible for the breached data. This puts
the customer in a difficult position. The customer has the legal obligation
to provide breach notifications, but may not have the information that
applicable breach notification laws require the customer to include in the
notifications. Moreover, the vendor might not adequately investigate or
contain the breach, leaving the information vulnerable to further breaches.

The cost of responding to a breach can be massive. According to the Ponemon
Institute, the average U.S. company incurs a cost of $225 per breached
record.21 In even a small breach, the cost of a response could quickly
multiply into tens of thousands of dollars. If the vendor is uncooperative,
not only would the full cost of the breach fall on the customer’s
shoulders, but the customer also may fail to meet its legal obligations.

In practice, however, vendors often voluntarily assume most breach response
burdens in order to maintain their customer relationships. After the Anthem
breach, for example, Anthem notified affected individuals and regulators
and provided identity-theft monitoring.

Reducing the Risks of a Vendor Data Breach

Employers should consider the following steps to help reduce the risks of a
security incident involving the employer’s data while in the possession of
vendors. First, employers should carefully vet the data security policies
and procedures of any vendors that will handle data subject to data breach
notification laws. Second, employers should consider adding provisions to
vendor contracts that pass down the employer’s breach response obligations
to the vendor.

Vetting Vendors

With regard to vetting, employers should consider requesting and reviewing
the following documents before engaging a vendor that will handle sensitive
personal data:

The vendor’s data security policies and incident response plan;
Any reports from third-party data security auditors or inspections;
The vendor’s employee confidentiality and/or non-disclosure agreements;
The vendor’s data security training program; and
Template subcontractor agreements to check for data security provisions.

Depending on the sensitivity and amount of data involved, the employer
might also request interviews with key data security personnel at the
vendor and an inspection of the vendor’s facilities. In addition, employers
with personnel in the EU should know that the GDPR requires companies to
conduct due diligence on any vendor that will handle the employer’s
personal data about those personnel. These employers should start this
vetting of vendors now to prepare for the May 25, 2018 deadline, if they
have not already.

Key Contract Provisions in Vendor Agreements

Before entrusting the vendor with personal information, the employer should
execute a contract with the vendor that addresses the parties’ obligations
and rights regarding personally identifiable information. At minimum, the
vendor contract should stipulate that the vendor:

promptly notify the employer of a data breach and provide all the
information necessary for the employer to provide notifications satisfying
applicable law;
notify affected individuals under the direction of the employer;
mitigate the harmful effects of a data breach, including reimbursing the
employer for all the employer’s reasonable costs that result from the
vendor’s data breach;
indemnify the employer for all third-party claims arising out of the
vendor’s data breach;
maintain insurance that covers data breach response costs and liability for
data breaches; and
return or destroy an employer’s data at the end of the engagement.

A contract covering data security is not only a recommended practice; some
laws require companies to obtain a written agreement regarding data
security from vendors. For example, HIPAA requires that covered entities
sign a contract with any “business associate” that handles protected health
information on behalf of the covered entity.22 The HIPAA regulations
explicitly require that the contract include a long list of data security
provisions.23 The GDPR includes a similarly detailed list of provisions
that EU employers must include in the contracts with vendors that process
EU personal data on their behalf.

Responding to the Recent Breach

Despite the fact that employers do not appear to have any legal
responsibility to respond to the Equifax breach, employers should consider
encouraging their employees to take steps to protect themselves. Employees
who act quickly in response to the breach can reduce the risk of identity
theft and potentially avoid the time-consuming and frustrating process of
resolving such theft. Not only may employees appreciate their employer’s
concern, encouraging employees to protect themselves also may boost the
employer’s bottom line. Employees distracted by identity theft may be less
productive, especially if they have to take time off work to file police
reports regarding identity theft, call merchants to close fraudulent
accounts, and dispute information on their credit report.

Employers should ask their employees to review information provided by
Equifax concerning the breach at https://www.equifaxsecurity2017.com/.
While on the website, employees can check whether the breach implicated
their personal information. Furthermore, employers may want to encourage
affected employees to enroll in the identity theft monitoring product,
TrustedID Premier, offered by Equifax. Through Equifax’s offer, TrustedID
Premier is free for individuals for 12 months and includes credit-file
monitoring at all three credit bureaus and identity-theft protection.
Additionally, employers should consider encouraging their employees to
place a fraud alert or even a security freeze on their credit files.
Employees, however, should be mindful that placing a fraud alert or
security freeze on their credit file may delay their ability to obtain
credit. Additionally, employees may consider filing their taxes early to
minimize the risks of fraudulently filed tax returns which could delay the
payment of tax refunds to the rightful individual.

Conclusion

As the Equifax breach demonstrates, even large, sophisticated companies can
fall victim to data breaches. Employers should assume that the same thing
could happen to any vendor. Although employers can never entirely protect
their employees from data breaches, they can at least reduce the risk that
employee data will be breached while under their control or the control of
a vendor and mitigate the risk to the employer when a vendor breach does
occur.
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