On April 12, 2010, Brokerage firm D.A. Davidson & Co. was hit by The Financial Industry Regulatory Authority (FINRA) with a $375,000 fine due to a 2007 data breach. The breach potentially impacted 192,000 customers and involved social security numbers, dates of birth and other confidential information. In what has been for years now a fairly common occurrence, the firm was exploited by a SQL injection vulnerability that allowed hackers to break into a database server holding the data.
Davidson learned of the breach after it received an extortion note from one of the hackers seeking money to keep silent. According to FINRA, the breach was caused by Davidson’s failure to implement “well-known and recommended security measures for protecting customer data.” It said that Davidson had failed to encrypt sensitive customer data, and had kept its customer database on a Web server with a default vendor password and a “constant open Internet connection.”
This case should not be looked upon in isolation. A failure to implement reasonable security is giving rise to a growing regulatory risk. For example, on March 25, 2010, the FTC settled a case claiming that the Dave & Busters restaurant and arcade chain failed to inadequately protect consumer information. The FTC alleged in its complaint that a hacker exploited vulnerabilities in Dave & Buster’s systems to install unauthorized software and access approximately 130,000 credit and debit cards.
Negligence claims based on the lack of “reasonble security” has also been gaining ground in the courts. For example, last year the U.S. District Court for the Northern District of Illinois allowed suit to proceed against Citizens Financial Bank given that plaintiffs’ home equity loan was depleted to the tune of $26,500 by an online thief who transferred the money to a bank in Austria. The negligence claim against Citizens Financial Bank was allowed to proceed given there was a factual issue as to whether the bank utilized adequate security controls. There are other pending cases where the court has reasoned that the lack of reasonable security can be the underpining of a negligence claim. The moving target in all of these cases is determining what exactly constitutes “reasonable security”.
UPDATE: February 22, 2021
The Sedona Conference (TSC) – a nonpartisan, nonprofit charitable research and educational institute “dedicated to the advanced study of law and policy in the areas of antitrust law, complex litigation and intellectual property rights”, released in February 2022 what it perceived to be the proper definition of “reasonable security”. As a reminder, TSC famously previously helped Courts determine the proper contours of e-discovery.
Recognizing that cybersecurity reasonableness crosses both legal and technology issues, the Technology Resource Panel of TSC recognized that a reasonableness test would help to bridge that divide. The Sedona Conference, Commentary on a Reasonable Security Test, 22 SEDONA CONF. J. 345, 355 (forthcoming 2021). Accordingly, the proposed test for reasonable security was designed to be consistent with “models for determining reasonableness that have been used in various other contexts by courts, in legislative and regulatory oversight, and in information security control frameworks.” Id. at 358.
The Sedona Conference Commentary on a Reasonable Security Test consists of the following formula: “B2 – B1 < (P x H)1 – (P x H)2” where B represents the burden, P represents the probability of harm, H represents the magnitude of harm, subscript 1 represents the controls (or lack thereof) at the time the information steward allegedly had unreasonable security in place, and subscript 2 represents the alternative or supplementary control. Id. at 360. This test is ultimately based on the landmark Learned Hand negligence test in United States v. Carroll Towing Co., 159 F.2d 169, 173 (2nd Cir. 1947).
TSC’s Commentary should be studied for numerous reasons, including the fact it is applied to actual recent enforcement actions and provides solid arguments for its judicial application. No different than the highly cited TSC e-discovery initiatives, this new TSC reasonable security test may very well be relied on by future courts tackling this important question.