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Privacy and Information Security: What Every New Business Needs to Know

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Reports of data security breaches conjure up images of anonymous computer hackers sitting in a darkened room, fingers flying over a key board in an effort to hack into a computer system to find valuable information to exploit. Not long ago, most of us considered these breaches to be infrequent and likely targeted at information much more commercially unique than the average consumer data stored by most businesses.

Data breaches have become much more commonplace over the last decade and the information being sought by the intruders is often as mundane as personal identifying information, commonly kept in many corporate databases and paper records that can be easily used for lucrative identity theft. Perhaps even more disturbing, many, if not most, data security breach incidents result not from deliberate intrusion but from carelessness, such as lost or stolen laptops and portable drives, files sent to the wrong e-mail address or mistakenly exposed to public access on the internet, or paper records simply dumped in the garbage where any passer-by can pluck them out. In response, state and federal lawmakers and various government regulatory agencies have woven an evolving, and sometimes contradictory web of laws, rules and regulations meant to protect the privacy and security of many types of personal information, from consumer financial and medical data to student records.

For an early-stage company, the liability or reputation damage that arises from a data security breach could be catastrophic. It is critical that new businesses understand the regulatory compliance landscape applicable to the information they maintain, take measures to secure nonpublic personal information, and be prepared to efficiently and effectively deal with any breaches or compromises that occur.

Minimum Information Security Standards

Banks, financial advisors and healthcare providers, among others, are subject to relatively uniform regulatory standards that require certain minimum security measures be taken to protect non-public personal financial and medical information. Typically, businesses in the financial services and healthcare industries, and their service providers, must develop written policies and procedures and implement administrative, technical and physical safeguards designed to protect the security and integrity of non-public personal information. Similarly, federal law requires educational institutions to protect personally identifiable education information about students from improper disclosure.

In addition, Massachusetts and other states have adopted minimum information security standards that apply to non-public personal information. State information security standards can be stricter than federal requirements, and can apply more broadly. The Massachusetts information security standards apply to every business or other person in possession of non-public personal information of a Massachusetts resident, regardless of the industry, size or location of the business. Even businesses that do not collect personal information about their customers are subject to rules that apply to their employees.

Privacy Requirements

The area of privacy law was once primarily concerned with restrictions on the ability of the government to gather and use information about its citizens. The dawn of the information age has given rise to new concerns about how businesses gather and use information about consumers, and lawmakers have responded with various regulatory regimes meant to protect the privacy of consumers. Federal law restricts how businesses may share financial and medical information about consumers with third parties for various purposes. In addition, the Federal Trade Commission has, on more than one occasion, held businesses accountable for alleged violations of their own voluntarily adopted privacy policies. Consumers often expect businesses that interact with customers on the internet to post privacy policies on their websites. A business that does not adhere to its own privacy policy, whether deliberately or inadvertently, exposes itself to liability even if that business is not otherwise subject to legal privacy requirements.

Data Security Breach Preparedness

To date, 47 states and the District of Columbia have enacted laws that impose a duty to report known security breaches involving non-public personal information. Similar federal data security breach notice requirements apply to financial, medical and student records, among other personal information.

The reporting obligations are far from uniform. Notification requirements in some states, such as Florida and Arizona, apply only to the loss of electronic data. In Massachusetts and other states, notice requirements apply to electronic and paper records containing personal information. There are also variations related to the timing of any required notice, which government authorities must be notified, and the content of the notices.

What Every Business Should Do

Regardless of the nature or size of the business, every company should consider developing and implementing a comprehensive written information security program. Each company’s record retention and disposal policy and privacy policy should be integrated with its information security program. The company’s board of directors or highest governing body should review and approve each policy and designate a senior management official to be responsible for supervising the policy. Finally, each policy should be reviewed for compliance with applicable law and adequacy of security measures no less than annually, whenever there is a material change in the company’s business practices or IT infrastructure, and in all cases after any data security breach.

Responding to a Data Security Breach

  • Avoid Panic. Whether you are CEO, CIO, general counsel or any other corporate officer, a data security breach is alarming, but there is no reason to panic. Assess the situation and formulate a reasoned plan of action, as you would approach any other corporate problem.
  • Secure the System. Take appropriate steps to contain and control the incident, to prevent further unauthorized access to or use of personal information, and to preserve records and other evidence. If the incident involves a lost or stolen computer or other portable media, secure any back-up files that show the information contained in the compromised system. Make a mirror image of relevant components of your computer system or perform a comprehensive backup to ensure the preservation of information.
  • Organize a Response Group. Notify other key officers and board members as quickly as possible. Establish a response group to make key decisions. The team should be comprised of individuals who have the technical expertise to understand the nature of the incident and are familiar with the information that may have been compromised.
  • Retain Outside Counsel. Retain outside counsel with relevant expertise to help formulate a strategy, manage an internal investigation, interact with government attorneys and law enforcement, and comply with any notice requirements. Few in-house lawyers have sufficient expertise with data security breaches, and even those who do should not be the sole legal voice of the company. Outside counsel can increase the chances of preserving attorney-client privilege and can help to more objectively assess potential sources of liability and mitigation strategies.
  • Engage a Computer Forensic Investigator. Enlist the services of a firm specializing in computer forensics, cyber-crime response, internal investigations, and the preservation, analysis and production of electronic data in the context of civil litigation, criminal and regulatory matters. Ideally, the forensic investigator should be retained through outside counsel to increase the chances of preserving attorney-client privilege for the results of the investigation.
  • Notify Law Enforcement. Notify the appropriate federal or state law enforcement authority if there is reasonable concern that the data security breach may have involved a criminal act. Outside counsel can provide you with advice about who to notify and how to cooperate with any criminal investigation.
  • Plan External Notifications and Media Response. State or federal law may require you to notify government agencies, affected individuals or the general public about the incident. Beyond any legal requirements, however, a company that has suffered a data security breach needs to consider that it might be in its best interests to get ahead of the story by issuing a clear, concise, professionally-crafted statement. It is imperative that all public statements be accurate while reassuring customers, prospects and employees.
  • Review Your Company’s Privacy and Data Security Policies. If your company has adopted written privacy or data security policies, review them with counsel to assess the company’s compliance with those policies in the context of the incident. Any response to the incident should be consistent with your internal policies as well as applicable state and federal laws and regulations – keeping in mind that state law in multiple states might be applicable.
  • Consider Engaging an Identity Theft Protection Provider. Identity theft protection firms that can help mitigate the effects of a future data security breach by providing a package of identity theft protection services, such as credit monitoring, identity theft insurance and identity recovery assistance, to affected individuals. An identity theft protection firm may also help you to manage your public response by coordinating the mailing of notices, and providing a telephone call center or web site to handle inquiries from affected individuals.
  • Check Your Insurance. Check your Errors & Omissions and General Liability insurance policies and other policies for potential coverage. Take steps necessary to ensure that you do not lose coverage by failing to give the required notice to the insurer or to meet any other procedural requirements. Make sure that you understand the company’s indemnification obligations under contracts with any third party involved in the incident, such as a client or vendor.

This article was prepared by Matthew Hanaghan, a member of the Emerging Companies Group at Nutter McClennen & Fish, LLP. For more information, please contact Matt or your Nutter attorney at 617.439.2000.

This article is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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