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Financial Services Law Insights and Observations


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  • 6th Circuit: Merchant indemnified against card breach costs


    On June 7, the U.S. Court of Appeals for the 6th Circuit affirmed a lower court’s ruling that an agreement between a Texas-based merchant and a payment processor did not require the merchant to pay millions of dollars in damage-control costs related to two card system data breaches. After the data breaches, the payment processor withheld routine payment card transaction proceeds from the merchant, asserting that the merchant was responsible for reimbursing the amount that the issuing banks paid to cardholders affected by the breaches. However, the merchant refused to pay the payment processor, relying on a “consequential damages waiver” contained in the agreement.

    The payment processor argued that, under the agreement’s indemnification clause and provision covering third-party fees and charges, the merchant retained liability for assessments passed down from the card brands’ acquiring bank. The district court, however, granted summary judgment to the merchant, finding that the merchant was not liable for the card brands’ assessments. The court further ruled that the payment processor materially breached the agreement when it diverted funds to reimburse itself.

    On review, the 6th Circuit agreed with the lower court that the assessments “constituted consequential damages” and that the agreement exempted consequential damages from liability under a “conspicuous limitation” to the indemnification clause. According to the 6th Circuit, the “data breaches, resulting reimbursement to cardholders, and levying of assessments, though natural results” of the merchant’s failure to comply with the Payment Card Industry's Data Security Standards, “did not necessarily follow from it.” In addition, the appellate court agreed with the district court’s holding that third-party fees and charges in the contract refer to routine charges associated with card processing services rather than liability for a data breach. The appellate court also concurred that the payment processor’s decision to withhold routine payment card transactions, constituted a material breach of the agreement.

    Courts Sixth Circuit Appellate Payment Processors Credit Cards Data Breach Privacy/Cyber Risk & Data Security Indemnification

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  • FTC settles with software provider over data security failures

    Federal Issues

    On June 12, the FTC announced a settlement under which a software provider agreed to better protect the data it collects, resolving allegations that the company failed to implement reasonable data security measures and exposed personal consumer information obtained from its auto dealer clients in violation of the FTC Act and the Standards for Safeguarding Customer Information Rule, issued pursuant to the Gramm-Leach-Bliley Act.

    In its complaint, the FTC alleged the company’s failure to, among other things, (i) implement an organization information security policy; (ii) implement reasonable guidance or training for employees; (iii) use readily available security measures to monitor systems; and (iv) impose reasonable data access controls, resulted in a hacker gaining unauthorized access to the company’s database containing the personal information of approximately 12.5 million consumers. The proposed consent order requires the company to, among other things, implement and maintain a comprehensive information security program designed to protect the personal information it collects, including implementing specific safeguards related to the FTC’s allegations. Additionally, the proposed consent order requires the company to obtain third-party assessments of its information security program every two years and have a senior manager certify compliance with the order every year. 

    Federal Issues FTC Privacy/Cyber Risk & Data Security FTC Act Enforcement Settlement Consent Order

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  • New York settles with online retailer over data breach

    State Issues

    On June 6, the New York Attorney General announced a $65,000 settlement with an online retailer resolving allegations that the company failed to provide notice of an online data breach to over 39,000 customers, including nearly 3,000 New Yorkers, for over three years. According to the announcement, unauthorized parties placed malicious code designed to steal credit card information in the company’s software in September 2014. The company discovered the code in November 2014, but did not remediate it until January 2015 (or February 2015, after the code was mistakenly reintroduced and permanently deleted).  The Attorney General alleges that the company did not notify its affected customers until May 2018, and that, because the company did not notify New York authorities or its affected customers “in an expedient time-period, and without unreasonable delay,” it violated New York’s General Business Law § 899-aa.

    The company offered potentially affected customers two years of free credit monitoring, fraud consultation, and identity theft restoration services, which is not required by law. In addition to the penalty, the settlement requires the company to conduct trainings for appropriate employees and conduct thorough investigations of any future data security breaches involving private information to ensure compliance with state law.

    State Issues State Attorney General Privacy/Cyber Risk & Data Security Settlement Credit Cards

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  • Maine enacts consumer privacy law for internet service providers

    State Issues

    On June 6, the Maine governor signed S.P. 275/L.D. 946, which requires certain broadband Internet access services to receive express, affirmative consent from a customer before disclosing, selling, or permitting access to a customer’s personal information. Among other things, the provisions stipulate that a customer may revoke his or her consent at any time, and forbid providers from refusing service or charging a penalty or offering a discount based on the customer’s decision to provide or not provide consent. Furthermore, providers must include a “clear, conspicuous and nondeceptive notice at the point of sale,” as well as on the provider’s public website, concerning the provider’s obligations and the customer’s rights. Requirements for safeguarding customers’ personal information are also outlined. The Act applies only to providers operating in Maine that provide Internet access service to customers that are physically located and billed for services received in Maine.  The new law will take effect July 1, 2020.

    State Issues State Legislation Privacy/Cyber Risk & Data Security Consumer Protection

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  • Oregon enacts new vendor data breach notification requirements

    State Issues

    On May 24, the Oregon Governor signed SB 684, which amends the state’s data breach notification provisions related to third-party vendors. Among other provisions, the amendments require vendors that are contracted to maintain or access personal information on behalf of a covered entity to (i) notify the covered entity “as soon as is practicable but not later than 10 days” after discovering a security breach or believing a breach has occurred; and (ii) notify the state Attorney General if a security breach involves personal information of more than 250 consumers, or an undetermined amount of consumers, provided that the covered entity has not already done so. SB 684 also updates the definition of personal information to include usernames in combination with other authentication factors used to access a consumer’s account, and establishes that a covered entity or vendor may “affirmatively defend” against allegations it has not adequately safeguarded personal information by showing that it maintained reasonable security measures for protecting personal information in compliance with HIPAA or the Gramm-Leach-Bliley Act, as applicable. The amendments take effect January 1, 2020.

    State Issues State Legislation Data Breach Privacy/Cyber Risk & Data Security Third-Party

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  • 4th Circuit upholds certification of TCPA class action against satellite provider


    On May 30, the U.S. Court of Appeals for the 4th Circuit held that a lower court correctly certified a class of individuals who claimed a satellite provider (defendant) violated the TCPA when its authorized sales representative routinely placed telemarketing calls to numbers on the national Do-Not-Call registry. The plaintiff-appellee alleged that because his number was on the registry, the calls were not only annoying but illegal. He therefore filed a lawsuit against the defendant for violations of the TCPA, and in 2018, the court issued a final judgment upholding a jury’s verdict as to both liability and damages for a class of 18,066 members, tripling the damages to more than $61 million. The defendant appealed the verdict asserting that the class definition was too broad in that included uninjured consumers. Specifically, the defendant argued that the definition should be limited to telephone subscribers or the person who actually received the calls. The defendant further asserted on appeal that it was not responsible for the sales representative’s actions.

    On appeal, the 4th Circuit affirmed the lower court’s judgment, stating that it saw “no basis for imposing such a limit,” on the class definition given that “[t]he text of the TCPA notes that it was intended to protect ‘consumers,’ not simply ‘subscribers.’” Concerning the defendant’s argument that it was not responsible for the violations, the appellate court noted that the sales representative’s “entire business model was to make calls like these on behalf of television service providers,” like the defendant, which the defendant knew were being placed on its behalf.

    Courts Appellate Fourth Circuit Privacy/Cyber Risk & Data Security TCPA Robocalls

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  • NYDFS creates Cybersecurity Division

    Privacy, Cyber Risk & Data Security

    On May 22, NYDFS announced its newly created Cybersecurity Division, led by Justin Herring as Executive Deputy Superintendent, that is, according to NYDFS, “the first of its kind to be established at a banking or insurance regulator.” The new division will focus on enforcing and issuing guidance on NYDFS’ cybersecurity regulation 23 NYCRR Part 500, advising on cybersecurity examinations, conducting cyber-related investigations, and disseminating information related to cyber-attack trends and threats. NYDFS highlighted Herring’s experience in supervising cybercrime and digital currency cases as Chief of the U.S. Attorney’s Office for the District of New Jersey Cyber Crimes Unit and a member of the Economic Crimes Unit, including investigating money laundering using digital currency and prosecuting unlicensed digital currency exchanges.

    Privacy/Cyber Risk & Data Security NYDFS

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  • FTC Commissioners discuss state privacy preemption

    Federal Issues

    On May 8, the FTC Commissioners participated in a subcommittee hearing before the House Committee on Energy and Commerce entitled, “Oversight of the Federal Trade Commission: Strengthening Protections for Americans’ Privacy and Data Security.” During the hearing, the Commissioners were questioned about the agency’s privacy and data security enforcement and regulatory activities, including whether they would support preemption of state privacy laws by a federal privacy statute. Using the California Consumer Privacy Act (covered by InfoBytes here) as an example, some Congressmen worried about the prospect of conflicting privacy legislation in other states, creating “confusion and uncertainty in the business community.”

    Split along party lines, Democratic Commissioners expressed caution with federal preemption of state privacy laws; Commissioner Chopra, citing to federal preemption laws leading up to the mortgage crisis, warned of “unintended consequences.” Democratic Commissioner Slaughter recognized the “desire for uniformity, consistency, clarity, and predictability” that a federal law would provide, but noted that the appropriateness of preemption should be based on “whether a federal law meets or exceeds…the level of protections that states can provide and whether it allows them the opportunity to fill any gaps that may remain after a federal law is developed.” Republican Commissioners stressed the importance of having a federal law that would preempt the current “patchwork” of state laws, which Commissioner Phillips argued is “essential” in order to provide businesses clarity and reduced compliance costs, while also providing consumers with more power to understand expectations. FTC Chairman Simons noted that even if federal law preempts state privacy laws, Congress should grant concurrent enforcement authority to the states’ attorneys general.

    The hearing also discussed, among other things, (i) the need for additional resources to increase agency staff focused on privacy issues; (ii) giving the FTC authority to levy civil money penalties, as Section 5 of the FTC act does not allow the Commission to seek civil penalties for first-time privacy violations; and (iii) the need for targeted rule-making authority.

    Federal Issues FTC U.S. House Hearing Privacy/Cyber Risk & Data Security CCPA

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  • States enact data breach notification requirements

    State Issues

    On May 10, the New Jersey governor signed S 52, which amends the state’s data breach notification provisions. The amendments expand the definition of “personal information” to include “user name, email address, or any other account holder identifying information, in combination with any password or security question and answer that would permit access to an online account.” The amendment further permits breached entities to provide individuals, whose account access credentials have been compromised, with the opportunity to promptly change online account information, so long as the notification is not sent to an email account subject to the security breach. The amendments take effect on September 1.

    On May 7, the Washington governor signed HB 1071, which amends the state’s data breach notification law to, among other things, (i) narrow the window for post-breach notification to affected individuals and to the state Attorney General, if applicable, from 45 days to 30 days after discovery; (ii) require notifications to contain the date of the breach and the date of the discovery of the breach, if known; (iii) permit electronic notification to affected individuals, which must instruct them to promptly change passwords and security questions or answers, as applicable; and (iv) significantly expand the items included in the notice to the Attorney General, including a summary of steps taken to contain the breach. In addition, HB 1071 expands the definition of “personal information” to include, among other things, the full birth date; a private key unique to an individual that is used to authenticate or sign electronic records; student, military, or passport ID numbers; health insurance identification numbers; biometric data or medical history; and user names and email addresses combined with passwords or security questions. The amendments take effect March 1, 2020.

    State Issues State Legislation Privacy/Cyber Risk & Data Security Data Breach State Attorney General

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  • Indiana sues credit reporting agency over 2017 data breach

    State Issues

    On May 6, the Indiana Attorney General announced a lawsuit filed against a national credit reporting agency in response to its 2017 data breach, alleging the company “chose increasing revenue over protecting the safety of consumers’ sensitive personal information.” According to the complaint, the state alleges the company violated the Indiana Deceptive Consumer Sales Act by failing to secure 3.9 million residents’ personal data while representing to consumers that its payment systems were compliant with Payment Card Industry (PCI) standards. The complaint alleges among other things that the company “knew the system was storing payment card information in clear text, which was a known violation of the [PCI standard]” and “[d]espite its knowledge, … made a conscious choice to break the rules.” Indiana is seeking civil penalties, consumer restitution, costs and injunctive relief.

    State Issues Credit Report Privacy/Cyber Risk & Data Security Data Breach State Attorney General

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