Win for Insurance Industry in Computer Fraud Coverage Ruling

Computers are involved at some point in almost every business transaction—that is the reality of life in the digital age. The implications of that fact are still being worked out with respect to the interpretation of insurance contract computer fraud provisions. This month, a judge in the Northern District of Georgia issued a narrow reading, handing the insurance company an important victory.

InComm is a debit card processing company that allows consumers to purchase credits, referred to as “chits,” which can be loaded onto a debit card. From November 2013 through May 2014, a system vulnerability allowed consumers to redeem a single chit multiple times, thereby receiving more than the value they had purchased. In total, InComm processed more than 25,000 unauthorized redemptions, mistakenly transmitting more than $11 million to various debit card issuers.

Once InComm discovered the losses, it sought coverage from its insurer, Great American Insurance Company (“GAIC”). Citing to the policy’s computer fraud provision, GAIC denied and InComm responded by filing suit for breach of contract and bad faith and seeking a declaration of coverage.

The relevant computer fraud provision stated: “[GAIC] will pay for loss of, and loss from damage to, money, securities, and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises: (a) to a person (other than a messenger) outside those premises; or (b) to a place outside those premises.”

In the case of InComm, the company’s redemption program allowed cardholders to conduct debit card activity by dialing in by phone and using either voice or touchtone commands to claim chits. Therefore, the unauthorized transactions at issue (conducted by sophisticated identity theft perpetrators) were accomplished using a phone, not a computer.

In granting summary judgment to GAIC, the court found that the computer fraud provision did not apply because the actual fraud was committed using a phone. The court explained that simply because “a computer was somehow involved in a loss does not establish that the wrongdoer ‘used’ a computer to cause the loss.” Finding to the contrary would “unreasonably expand the scope” of the computer fraud provision, which was intended to limit coverage to computer fraud. Finally, the judge concluded, to accept “lawyerly arguments” that coverage should be expanded to include losses “involving a computer engaged at any point in the causal chain” would “strain the ordinary understanding of computer fraud.”

The case is InComm Holdings Inc. v. Great American Insurance Co., No. 1:15-cv-2671 (N.D. Ga. Mar. 16, 2017).

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Posted in Legislation, Litigation

Fourth Circuit To Plaintiffs: “Could” Isn’t Enough For Standing

A split continued to develop in the federal courts last month as the Fourth Circuit denied Article III standing to the plaintiffs in a data breach case whose alleged injuries were limited to the increased risk of future identity theft and the cost of measures to protect against it. The Fourth Circuit joins the First and Third Circuits in rejecting this theory as grounds for standing, finding it too great of a stretch. In contrast, the Sixth, Seventh and Ninth Circuits have all recognized in certain circumstances that, at the pleading stage, plaintiffs can establish an injury-in-fact based on possible future injury.

In the Fourth Circuit case, Beck v. McDonald, No. 15-1395 (4th Cir. Feb. 6, 2017), veterans in two consolidated cases alleged that the William Jennings Bryan Dorn Veterans Affairs Medical Center (Dorn VAMC), had violated the Privacy Act of 1974 and the Administrative Procedure Act (APA) after a laptop containing their unencrypted personal information, such as names, birthdates, and the last four digits of their social security numbers was stolen; and, in another case, four boxes of pathology reports containing confidential patient information went missing. The plaintiffs sought declaratory relief and monetary damages under the Privacy Act, and broad injunctive relief under the APA, potentially placing the entire VA’s privacy program under judicial oversight.

Upholding the districts court’s dismissal for lack of subject-matter jurisdiction, the Fourth Circuit found the plaintiffs’ grounds for standing did not satisfy the Supreme Court’s Article III standard that qualifies the threat of injury as an injury-in-fact: harm that is particular, concrete and imminent. The court found the increased risk of future identity theft to be speculative because, unlike the Sixth, Seventh and Ninth Circuit cases cited by plaintiffs, there was no evidence that any of the personal information had actually been accessed or misused. In those cases, the breaches at issue had been carried out by malicious hackers who intended to use the information they had culled for fraudulent purposes. In the absence of such facts, the Fourth Circuit reasoned, it must “engage with the same attenuated chain of possibilities” rejected by the Supreme Court in Clapper v. Amnesty International. It would have to assume not only that that the thieves targeted the stolen items for a pernicious purpose, but chose from thousands of people to use the personal information of the named plaintiffs to steal their identities.

In an attempt to establish that they faced a substantial risk of future harm, the plaintiffs argued that 33% of health-related data breaches result in identity theft. The court was not swayed, reasoning that, even if the figure were true, it would mean that over 66% of those affected would suffer no harm. The plaintiffs even took a stab at irony, deriding the VA’s offer to provide free credit monitoring services to affected individuals as a tacit admission that the plaintiffs faced a substantial risk of future harm. The court rejected this argument as well, though it acknowledged that other circuits have shown some tolerance on the issue. In response to the plaintiffs’ allegations that they had suffered an injury-in-fact because of expenses they have or will in the future incur to shield themselves against identity theft, the court characterized these mitigation efforts, like Clapper, as “self-imposed harms” because, again, there was no evidence that the threat of harm went beyond speculation. Finally, the court found that the allegations of “substantial harm,” “embarrassment,” “inconvenience” and “unfairness” under the Privacy Act and APA would not relieve them of the burden to prove Article III standing. Both statutes were interpreted as requiring evidence of actual harm.

One final note: the Fourth Circuit leaned on the procedural posture of Beck in making its decision. Since the plaintiffs’ standing was challenged not during the pleadings, but on summary judgment, which occurs after the discovery of evidence phase in litigation, the court held them to a higher threshold, demanding that allegations must be backed by specific facts to meet the burden of Article III standing.

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Posted in Data Breach, Litigation

Plaintiffs in Horizon Breach Win Key Article III Ruling at 3rd Circuit

hacker's hands on laptop keyboardRecently, the Third Circuit Court of Appeals overturned a United States District Court for the District of New Jersey dismissal of a class action filed in the aftermath of a data breach at Horizon Healthcare Services Inc., (“Horizon”). The appellate decision in In Re: Horizon Healthcare Services Inc. Data Breach Litigation may expand the conditions under which a plaintiff can file suit against a company for loss of digitalized personal information. According to the Third Circuit, it appears that violations of federal privacy law are considered de facto injuries, providing plaintiffs with standing regardless of whether they suffer an economic loss.

In November 2013, two laptops containing the unencrypted information of 839,000 Horizon customers were stolen from the company’s New Jersey headquarters. A class of Horizon members quickly filed a class action lawsuit that included claims of willful and negligent violations of the Fair Credit Reporting Act (“FCRA”), among other state-based claims.

At the core of the plaintiffs’ claim was the assertion that Horizon is a consumer reporting agency that had violated the FCRA by allowing their private information to fall into the hands of thieves and failing to adopt procedures that would keep sensitive information confidential. The plaintiffs sought statutory, actual and punitive damages, and an injunction to prevent Horizon from continuing to store personal information in an unencrypted manner. The plaintiffs claimed that the violation of their statutory right to have their information secured against unauthorized disclosure is in and of itself an injury. Read more ›

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Posted in Data Breach

Protect Against Cyber Attacks: A New Guide to Help Small Businesses

No business is too small to be the victim of a cyberattack. In fact, as larger companies invest more resources in cybersecurity, attackers are beginning to target smaller, less secure businesses. It is important for every small business to understand the risks and be prepared. To help, the National Institute of Standards and Technology (NIST) recently published Small Business Information Security: The Fundamentals. It provides a simple and actionable framework to help minimize security risks.

The NIST guide is divided into five basic categories (identify, protect, detect, respond, and recover) and provides useful worksheets to help identify important types of data. We have reviewed NIST’s guide and supplied an overview of the takeaways:

  1. Know the Risks

Hackers and cyber criminals pose one kind of threat to data security, but environmental incidents and equipment failure can be equally devastating to the security of business information. Security threats can come from personnel within a business as well, so vet employees and provide security training.

  1. Identify Data

The first step in any risk management plan is to identify what data needs to be protected and understand what vulnerabilities exist. Create a list of all the information a business uses (e.g. customer names, e-mail addresses, banking information, employee information, etc.) and know who has access to such information. Additionally, it is important to identify any vulnerabilities in a business’s systems. It is highly recommended that companies engage an outside consultant to conduct a mock attack to identify any system vulnerabilities.

  1. Protect

NIST’s guide provides excellent recommendations on the use of encryption, securing wireless access points and installing network firewalls. However, the easiest and most often overlooked recommendation is to train employees on security policies and establish clear guidelines on how they can best protect business information.

  1. Detect

While some security events are easily detectable, many are not. Businesses should consider implementing anti-virus software that is designed to detect intrusions. Additionally, it may be worthwhile to use a program that keeps a log of daily activity that occurs on the network. These logs may show trends that indicate an intrusion has occurred. An outside consultant can be a valuable tool in interpreting these trends as there may be a more serious problem that is not readily apparent.

  1. Respond

It is critical that every business develop a response plan to be followed after a security event has occurred. Appoint a person who will implement the plan, include the contact information of all internal personnel who should be notified, as well as directions on how to quarantine infected systems, if necessary. Furthermore, many states require customer notification after a security event. Thus, it is important to know state notification laws and how to properly comply.

  1. Recover

After a security event, it is important to evaluate the response procedures. Assess any weaknesses in the plan and make adjustments as needed. If possible, restore backed up data or implement a backup procedure for business data. Companies should also consider cyber insurance as part of any risk management plan.

The full guide can be found here: http://nvlpubs.nist.gov/nistpubs/ir/2016/NIST.IR.7621r1.pdf.

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Posted in Cyberattack, Data Breach, Data Security, Privacy, Standards

Commission on Enhancing Cybersecurity Report Calls for Greater Investment

computer with lockOn Friday December 2nd the President’s Commission on Enhancing Cybersecurity (“Commission”) released their long-awaited Report on Securing and Growing the Digital Economy. The nonpartisan Commission was created in April by President Obama with the objective of examining U.S. cybersecurity policy and the determining “actionable recommendations” to secure the increasingly interdependent cyber infrastructure.  Given the increasingly number of intrusions, disruptions, manipulations and thefts due to cyber vulnerabilities, the report is apt in its expression that technological advancement is outpacing U.S. cybersecurity practices and policies. President-elect Trump had pledged to adopt several cybersecurity policies, one being a commission, very much like the Commission on Enhancing Cybersecurity. Thus this report should be welcomed by President-elect Trump as a formative step in his cybersecurity reform.

The report offers 16 recommendations and 53 “associated actions.” The recommendations are broken down into six major categories, including, protecting and securing information infrastructure; building cybersecurity workforce capabilities; and ensuring an open, fair and secure global digital economy. Amongst the recommendations, two are notable for different reason: the creation and appointment of an Ambassador for Cybersecurity, “to lead U.S. engagement with the international community on cybersecurity strategies, standards and practices;” and a larger focus on training and hiring cybersecurity professionals. The recommendation for a cyber ambassador is a major acknowledgment that cyber issues know no boundaries and the interconnected nature of the global economy presents a serious and international threat to trade and businesses. Meanwhile, the Commission placed a premium on introducing new incentives and investments in innovation to attract new cyber security professionals, signifying its intention to increase U.S. capabilities. In specific numbers, the report recommended creating a national cybersecurity workforce program with the aim of training 100,000 new cybersecurity professionals by 2020.

These major recommendations are not specifically what the President-elect called for during the campaign, but the general tone regarding the importance of stepping up the United States’ cyber capabilities, is reflective of his proposals. Both the report and Trump have been clear that U.S. is not reaching its greatest cyber potential and needs to be if it seeks to maintain its position as a global leader. This report provides a comprehensive plan to increasing U.S. focus and capabilities on cybersecurity.

Overall the report calls for investment in cybersecurity mechanisms, greater attention to the foibles that plague current U.S. cybersecurity policy, and strengthening of public–private sector dialogues involving cybersecurity. The Commission, although an Obama administration installation, is geared towards gaining the attention of President-elect Trump. However, until his intentions are made clear, the report will remain simply recommendations.

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Posted in Standards

NIST Releases Comprehensive Cyber Security Guidelines for the Internet of Things

internet of thingsAs the Internet of Things continues to grow and expand, the fact that guidance on security measures and protections is a necessity has become increasingly evident. Recently, the National Institute of Standards and Technology (NIST) released a lengthy set of IoT guidelines, known as NIST Special Publication 800-160. NIST unveiled the nearly 260-page publication at the Splunk GovSummit 2016 conference. The announcement came on the heels of the Dyn attack in late October, which further highlighted the immediate need for standards and guidance.

The strictly voluntary guidelines work to address questions and concerns about protections for devices connected to the internet. It is estimated that there are currently approximately 7 billion things connected to the Internet, but experts expect that number to triple by 2020. NIST described IoT as a “powerful and complex” system which is “inexorably linked to [our] economic and national security interests.”

Given the enormous nature of this ever-growing sector of the digital world, it must be in the forefront of cyber-security discussions. IoT not only must be actually secure, but users must have a sense of trustworthiness in the security and protections. One drafter said that users must have the same confidence in the security of IoT as they do the safety of a bridge they cross or an airplane they board. However, not only do policies and protections need to build up users’ confidences, but they need to simultaneously degrade the confidence that cyber-criminals have in their own abilities and operations.

NIST expressly stated in Special Publication 800-160 that its objective is to “address security issues” and “to use established engineering processes to ensure that needs, concerns, and requirements are addressed with appropriate fidelity and rigor, early and in a sustainable manner.”

As is the case behind most cyber-security policies, NIST is striving to limit the damage of inevitable, successful breaches. It recognizes that preventing breaches or attacks is not a realistic goal. Therefore, the drafters focused on emphasizing that necessary protections must be incorporated at the design stage and built into devices rather than being an afterthought, analogous to an airbag being built into the dashboard of a car. The protections also must be capable of keeping the device secure throughout its life-cycle.

Although the guidelines are voluntary, they should spawn valuable conversation and discussion. In order for the guidelines to have the desired effect, industry, government, and academia must all join forces to promote their benefits and vouch for their necessity.

Lawyers can use the guidelines to facilitate conversations with clients about cybersecurity measures. The guidelines can be presented to boards of directors and executives and positioned as a detailed overview of what must be done to implement security measures. Because the guidelines are government-backed and have been approved by the federal government, they can also be a tool used to get the support, including the financial support, necessary to implement security measures. They can also be used as a reference point when evaluating cyber insurance policies, as underwriters can refer to them during the underwriting process.

Lawyers should also caution clients that there will likely be regulators and litigants who point to the guidelines when attempting to impose liability on device manufacturers following a breach. Failure to follow the standards, it will be argued, is evidence of negligence or lackadaisical security. Whether the guidelines will create a standard of care remains to be seen, but they should certainly become part of the conversation as the IoT – with all of its inherent risks – continues to expand.

For a copy of the guidelines, follow this link: NIST Guidelines

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Posted in Standards

Commercial Trucking Goes Green for Safer Streets

A new federal mandate requires most commercial truck drivers to “go green” by trading in their old paper logs for electronic logging devices (ELDs) by December 18, 2017. Thought to affect roughly 3.5 million truck drivers, the new mandate is intended to increase driver compliance with federal drive-time regulations and decrease burdensome paperwork.

Commercial truck drivers are legally required to take a lengthy break after 11 hours of consecutive driving, but drivers have admitted to driving longer hours and falsifying their logs. The ELD mandate is expected to improve compliance with the federally required hours of service because the logs will be electronically linked to vehicle engines. Reports have shown that on average each year, there are 1,800 crashes (resulting in 60 injuries and 25 deaths) from driving while tired, and the hope is that new ELD requirements will decrease the number of fatigue-related accidents.

When the engine is on, the ELD records the date, time and location of the truck within a one-mile radius. It also records the drivers’ identification and motor carrier information. It does not record continuously, but automatically logs this information once per hour. The ELD is also intended to document when a driver changes status from “driving,” “on duty but not driving,” “moving to the sleeper berth,” and “off duty.” The driver is responsible for inputting the status information, since an entirely automatic option was considered too invasive. Recorded ELD data is stored and subject to access by authorized safety vehicles during inspections or audits.

Driver monitoring, of course, is nothing new. Truckers are already required to manually log most of this information and make it available upon request. Nonetheless, the ELD mandate was not warmly received by many in the commercial trucking community. A contentious relationship has existed between the commercial trucking industry and the Department of Transportation (DOT) since 1995, when Congress directed the DOT to revise the hours of service requirements. From 1995 to 2012, the DOT proposed many rules changes, all of which were challenged and struck down—three times in federal court, once in the Seventh Circuit.

In 2012, Congress stepped in again and passed the Motor Vehicle Enhancement Act, explicitly directing the DOT to come up with an ELD rule. In December 2015, when the new ELD rule was first released, it was promptly challenged by two professional truck drivers and the Owner-Operator Independent Drivers Association (OOIDA). This time, however, on October 31, 2016, the Seventh Circuit upheld the ELD mandate.

Petitioners argued the ELD mandate should be struck down for numerous reasons, including their contention that it constitutes an unreasonable search and/or seizure and thereby violates the Fourth Amendment. The Seventh Circuit responded to the Fourth Amendment challenge by noting that it “need not resolve whether the ELD mandate constitutes a search or seizure. Even if it did, it would be reasonable under the Fourth Amendment exception for pervasively regulated industries.”

The Court used a three-part analysis to conclude that the commercial trucking industry is pervasively regulated: (1) the history of the regulation in commercial trucking; (2) the comprehensiveness of commercial trucking regulations; and (3) the inherent dangers in the commercial trucking industry.

To each of these points, respectively, the Court noted that the industry has been government regulated since 1935. It said that commercial trucking regulations are comprehensive and extensive, governing everything from driver qualifications to vehicle inspections. And, lastly, the Court cited its own opinion from 2007 upholding random drug testing for truck drivers to show that commercial trucking is inherently dangerous activity. In 2007, it stated that trucking is “fraught with such risks of injury to others that even a momentary lapse of attention could have disastrous consequences.”

The Seventh Circuit also established that the ELD mandate is a reasonable way to regulate the commercial trucking industry. It found that the government has a substantial interest in the commercial trucking industry and that ELDs are a necessary advance because paper logs are subject to falsification, forgery, and human error—not to mention motor carrier pressure on drivers to drive for longer hours than legally allowed. It also considered the ELD mandate a constitutionally adequate substitute for a warrant largely because it is not any different than the current search of paper logs.

In response to the petitioner’s other arguments, the Seventh Circuit ruled that (1) ELDs do not need to be entirely automatic because, if they were, they would be “breathtakingly invasive;” (2) the ELD mandate sufficiently protects drivers from ELD-related harassment by motor carriers; (3) no cost-benefit analysis was necessary for implementing the ELD mandate because it was done at Congress’s direction; and (4) ELD information will be kept sufficiently confidential as per the statutory requirement.

The OOIDA has not said whether it will appeal the Seventh Circuit’s decision, but the organization has made clear its disappointment with the ruling. Its displeasure notwithstanding, it appears that the commercial trucking industry will be going green. The hope is that ELDs will collect information more efficiently and accurately, while creating safer roads, but without introducing new or unforeseen privacy concerns for drivers.

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Posted in Privacy, Regulations

Understanding the Role of Connected Devices in Recent Cyber Attacks

Connected Devices On November 16, 2016 the House Committee on Energy and Commerce’s Subcommittee on Commerce, Manufacturing, and Trade and the Subcommittee on Communications and Technology held a hearing on “Understanding the Role of Connected Devices in Recent Cyber Attacks.” The hearing was in response to the unprecedented distribution denial of service (DDos) on October 21, 2016 which saw consumer websites such as Netflix, Twitter and CNN as well as others go down following a botnet attack directed from malware in millions of American devices. The hacked devices used maliciously, (known as bots or collectively as botnets) flooded these websites with junk traffic, overwhelming the sites and preventing them from being able to distinguish from legitimate traffic. The hearing focused on what vulnerabilities are present, possible solutions, possible ramifications of attacks on consumer devices, critical infrastructure and public safety mechanisms from a wide array of malicious actors.

The witnesses were industry experts, Dale Drew, of  Level 3 Communications; Kevin Fu, of  Virta Labs, and the University of Michigan; and Bruce Schneier, from the Berkman Klein Center, at Harvard University.

Chairman Greg Walden began the hearing highlighting the increasing use of technology in Americans daily lives, the dependence of Americans on the internet of things, devices that allow them to control elements of their lives, such as applications and devices that remotely unlock doors, baby monitors, and smart appliances. Many members of the subcommittee remarked how the DDoS attack stressed the importance to secure these devices without losing the benefits, the balance between functionality, innovation and security. Representative Marsha Blackburn made the important point that the internet of things is growing extremely quickly, the average American has more than three devices. This illustrates the widening gap of insecurity.

The expert witnesses were firm in their recommendations that while the DDoS attack in October 2016 was just on popular websites and not critical elements, that attacks towards critical apparatuses such as public safety mechanisms, hospital systems, and critical infrastructure points are highly likely. The internet of things devices have major security flaws that do not have built in security updates or patch mechanisms and consumers are greatly unaware of the threat posed by their devices. Mr. Schneier pointed out that many of these devices are the same, having the same basic configuration which, limits consumer control. He also pointed out the various elements that need to be secure, from software to hardware to internet communications. All three panelists discussed the lack of incentives for manufacturers to secure the devices or integrate security mechanism into the production. The panelist urged action for oversight due to the growth of the issue and inevitable nature of growth in vulnerabilities.

Mr. Fu added that regulations, standards and liabilities for security need to be “built in, not bolted on.” All panelists stressed the importance of addressing the vulnerabilities posed by the internet of things and the unprecedented threat that the United States faces. As in almost every cybersecurity field the government is clearly very far behind. As experts point out vulnerabilities in basic systems have and will only grow exponentially fast. The government is behind addressing these issues, these vulnerabilities. Greater oversight is called for because of the critical consequences attacks can and will have on both the public and private sectors.

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Posted in Cyberattack

Trump’s New Cyber Security Plan?

With the recent news regarding Yahoo’s massive data breach and the continuing posting of Clinton Foundation emails by Wikileaks, cybersecurity policy is beginning to get the discourse it is due. Secretary Clinton’s campaign was swift to publish a lengthy briefing on her cybersecurity policy agenda when she declared her candidacy. Much of it focuses on investment and development in science and technology. In a speech in August Clinton called for cyber-attacks to be treated as an assault on the country and should require “a serious political, economic and military response.” However, the plurality of Secretary Clinton cyber proposals would likely continue much of the Obama Administration’s own cybersecurity policy.

Mr. Trump had no cybersecurity platform available or had even discussed a policy platform until a recent speech to the Retired American Warriors PAC in Virginia in early October. Prior to the speech Trump had said little other than to admonish the failure of U.S. cybersecurity policy. In his speech, Mr. Trump outlined cybersecurity as “an immediate and top priority” for his administration and put forward his plan for strengthening American cybersecurity. At the core of Mr. Trump’s policy suggestions was a panel of “our best military, civilian and private sector cybersecurity experts.” This Cyber Review Team would undertake a “comprehensive review” of U.S. cybersecurity systems and technologies. Among its responsibilities would be to “establish detailed protocols” and “remaining current on evolving methods of cyber-attack.”

What’s the issue with this seemingly harmless and possibly efficient idea?

President Obama had the idea first and it’s already underway. In February of this year the White House issued the Cybersecurity National Action Plan. The first order of business was the creation of a “Commission on Enhancing National Cybersecurity.” Like Trump’s, this commission would also be formed of public and private sector thinkers and a bipartisan congressional delegation. The commission’s mandate is to “make recommendations on actions that can be taken over the next decade to strengthen cybersecurity in both the public and private sectors.” The commission members who were announced in April 2016 include: Tom Donilon, former National Security advisor, General Keith Alexander, former Director of the NSA and former Director of U.S. Cyber Command, Joe Sullivan, Chief Security Officer of Uber and former Security Officer of Facebook, Annie Antón, Professor and Chair of the School of Interactive Computing at Georgia Tech, and Ajay Banga, President and CEO of Mastercard. These are only a selected few examples of the twelve member commission but the commission clearly represent military, civilian and private sector experts in cybersecurity.

Other than his Cyber Review Team, Mr. Trump hasn’t offered any other solid cybersecurity recommendations. Neither major party candidate is offering real solutions to a critical crisis that is unfolding. Hackings and intrusions will not dissipate but will only grow in size and aggression barring any serious attention by the federal government. At least in this element Secretary Clinton and Mr. Trump agree: cyber is of increasing importance for U.S. national security, infrastructure and business and should be taken much more seriously. This understanding is not enough to prevent potentially debilitating attacks in the future.

Cybersecurity is a dynamic and fast-paced policy realm. Technology is ever-changing and requires almost constant attention and modernization. The federal government’s bureaucratic nature prevents any meaningful progress, both in establishing policy and enacting it. Because of this much of federal level policy making is playing catch-up. Cybersecurity needs greater attention at the executive level. The federal government needs a greater understanding of cybersecurity’s ever evolving nature and a determination to lead the field. These principles apply to whomever becomes the next President.

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Posted in Data Security

Sixth Circuit Eases Plaintiffs’ Burden for Standing in Data Breach Claims

Insurance companies are susceptible to the same sort of data breaches as suffered by many other businesses, such as the recently reported theft from Yahoo of the personal data in half a billion accounts. In a major decision that may have widespread consequences, the Sixth Circuit Court of Appeals in Hancox v. Nationwide Ins. Cos.­, 2016 WL 4728027 (6th Cir. Sep. 12, 2016) recently held that plaintiffs do not have to allege actual identity theft in order to meet Article III’s standing requirements of injury in fact.

In Hancox v. Nationwide, the Court of Appeals reversed the Southern District of Ohio’s dismissal of class claims of negligence, Fair Credit Reporting Act violations, and other torts. The district court had concluded that the increased risk of future harm did not constitute injury in fact. The court followed the majority view, as exemplified in the U.S. Supreme Court’s statement in Clapper v. Amnesty International, 133 S.Ct. 1138, 1146 (2013) that plaintiffs cannot “manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending.”

In reversing the district court, the Sixth Circuit found that plaintiffs sufficiently pled cognizable injury in the possible mitigation costs that the plaintiffs might incur in the future, such as purchasing credit report and monitoring services, instituting and/or removing credit freezes, and/or closing or modifying financial accounts. The Sixth Circuit concluded that the plaintiffs’ allegations were sufficient because it would be unreasonable to expect plaintiffs to sit around and wait for the information to be misused in the future, and not to take proactive steps to ensure that their personal information and financial security would be protected. The court explained, “There is no need for speculation where plaintiffs allege their data has already been stolen and is now in the hands of ill-intentioned criminals.” That alone provides a basis for drawing a “reasonable inference…that the hackers will use the victims’ data for fraudulent purposes alleged in plaintiffs’ complaints.” Even though it cannot be “literally certain” that the data will in fact be misused in the future, there is nonetheless a “sufficiently substantial risk of harm that incurring mitigation costs is reasonable.”

The claims arose from a 2012 data breach whereby 1.1 million Nationwide consumers’ names, marital statuses, gender, social security numbers, driver licenses numbers, and other personal information was compromised. In response to the incident, Nationwide informed its customers of the breach in a letter that advised them to take steps to prevent or mitigate misuse of the stolen data. Nationwide also provided one year of free credit monitoring and further recommended that its consumers sign up for fraud alerts and set holds on their credit reports. In an example of “no good deed goes unpunished,” the Sixth Court highlighted Nationwide’s mitigation efforts and recommendations as justifying its finding that plaintiffs had adequately shown injury in fact.

The Hancox decision comes just a few months after the Supreme Court’s decision in Spokeo, Inc. v. Robins (May 16, 2016), in which the Supreme Court found that the Ninth Circuit failed to consider the fact that an injury in fact must be concrete as well as particularized. The Sixth Circuit found that plaintiffs met Spokeo’s two-part test: they alleged an injury that likely would be redressed by a favorable decision and their alleged injury was “fairly traceable” to Nationwide’s conduct. We hope that the court will take up this case to further elucidate the standing requirements. In the meantime, be aware that the Sixth Circuit is not a favorable jurisdiction for companies in data breach class action cases.

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Posted in Cyberattack, Data Breach, Insurance, Litigation
About Cyber Law Monitor
In the new digital world, individuals and businesses are almost entirely dependent on computer technology and electronic communications to function on a daily basis. Although the power of modern technology is a source of opportunity and inspiration—it also poses huge challenges, from protecting privacy and securing proprietary data to adhering to fast-changing statutory and regulatory requirements. The Cyber Law Monitor blog covers privacy, data security, technology, and cyber space. It tracks major legal and policy developments and provides analysis of current events.
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