In September of this year, with SB 327, California stepped into the vanguard of information age law by passing a cybersecurity regulation on the Internet of Things. SB 327 has added new sections to Cal. Civil Code §1798. Specifically, §1798.91 et seq. While this seems to be a good thing, the larger question is what does it do, and how far does it reach?

What does it Do?

In a nutshell, the law requires the manufacturer of a “connected device” to 1) equip it with reasonable security feature(s) appropriate to a) the nature and function of the device; b) the information it may collect, contain, or transmit; and 2) ensure those security features are designed to protect the device and any information within from unauthorized access, destruction, use, modification, or disclosure.

Recognizing the inherent ambiguity “reasonable security feature(s)” may cause, fortunately the drafters of the law provided some clarification:  If the device is subject to authentication outside a local area network, should it contain either a unique pre-programmed password; or the device requires a user to generate a new means of authentication prior to initial access being granted; then such security feature is reasonable.

Note that this is a “reasonableness test” just for the authentication aspect of the device. The rest of the requirements in Cal. Civil Code §1798.91.04(a) will still mandate reasonable security beyond just the authentication aspects of the device.

How Far does it Reach?

“Connected device” is defined quite broadly. Under the definition, all the IoT devices we have discussed in previous posts should be covered by the law. Additionally, the law makes it apparent that manufacturers are the primary party subject to the requirements. Additionally, it applies to manufacturers located anywhere, even outside of California, if they sell or offer devices for sale in California.

Why does this Matter?

This law will have far reaching effects because the world we live in is a connected world. The Internet of Things is technology that increasingly influences everyone’s life and any business that manufactures devices are increasingly making those devices “connected”.

Until now, no such cybersecurity law existed. The legal landscape for around when OEMs had to incorporate cybersecurity was a veritable wild west. Adoption of this measure now mandates security measures be “baked” into the device before human user intervention. “Reasonable security” is now “table stakes” for anyone selling a smart device in California – which is nearly everyone.

Of course, there is much debate about what “reasonable security” might be. Under SB 327 there is some guidance, but it is still limited. Section 1798.91.04 does provide a floor for authentication requirements with the mandate that either a unique preprogrammed password will be provided OR the user won’t be able to use the device until the password is changed. However, there is still some question as to what the rest of the requirements will need to be to “protect the device and any information within from unauthorized access, destruction, use, modification, or disclosure.” Still,  California has taken the vanguard position in regulating IoT devices specifically. The Federal government and other states have not looked at this question from a “connected device” perspective. Most other laws imposing cybersecurity requirements talk about a “system”, which can include devices, but can also include other controls (e.g. network security, physical security, etc.).

So is this a problem? 

Just a few observations to keep in mind:

  • First, this is a California state specific law. There is no federal law on this issue. This can create preemption and constitutionality questions – adding to the uncertainty of compliance.
  • Second, “reasonable security” outside the authentication protocols of the device are still ambiguous. This leaves businesses with looking at standards like NIST guidelines, which can be overwhelming, or taking the risk they their security is deemed inadequate “after the fact”.
  • Third, SB 327 expressly carves out third-party software from being subject to this title. However, the interconnectivity of such third-party software may well be the source of a security breach – the NIST guidelines recognize this. As such, is it reasonable security to not consider how a device interacts with third-party software? This approach seems to fail to consider how devices (and software) are built today.

Fortunately, SB 327 does not include a private right of action – so the plaintiff’s bar will be limited in what they can do. Unfortunately, city and county attorney’s do have authority to enforce the law. This means that an activist city attorney may well force a device manufacturer into court.

In any event, SB 327 can be seen as the beginning of a trend which sees OEMs responsibilities expand beyond merely making sure their devices are safe, but also making sure the software inside the device is safe.

At the end of June, the California legislature passed its Bill 375, the California Consumer Privacy Act of 2018.  The Act contains a number of concepts that would be familiar to those who are working to bring their companies and organizations into compliance with GDPR.  The new law defines a category of “Personal Information” that radically departs from a traditional definition of Personal Data commonly found in various State Data Privacy Laws, which usually ties an individual name to other identifiers like social security number, account number, or other factors.  Instead, the California Act defines “Personal Information” as information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.  It does not, mercifully, include publicly available information, but it still comes closer to a GDPR-like definition of “personal data” than any other US law.

The Act provides California residents some rights that also appear familiar.  For example:

  • Consumers can request a copy of all the Personal Information a business has collected;
  • Consumers have the right to request that the business delete their Personal Information (subject to some exceptions), and a right to direct a company to not share their Personal Information with third parties; and
  • Consumers can request that a business disclose the categories of information it has collected, the sources of information, the purpose for the collection and/or its sale of the information, and the third parties with whom the information is shared.

These certainly sound like concepts that could be referenced as The Right to Access; The Right to Be Forgotten; and Data Portability.

Business requirements include:

  • Meaningful notifications to consumers at the point of contact where Personal Information is collected;
  • Updated online privacy notices to include the types of Personal Information collected, the purpose of collection, and rights information;
  • Implementation of Data Security measures to protect Personal Information;
  • Providing training to employees handling Personal Information or involved in consumer inquiries;
  • The inclusion of provisions in contracts with third parties with whom Personal Information is shared to include data privacy protections and restrictions on disclosure; and
  • The inclusion of a “do not sell my personal information” option on public facing interfaces and websites that collect personal information. Companies must take measures to not discriminate against users who opt out, but at the same time they can offer price incentives to those who chose to opt in.

The Act takes effect on January 1, 2020.  It has the same approximate 2 year “runway” period that GDPR provided in 2016 (leading up to May 25, 2018) for companies to gear up their compliance.  This law has potentially widespread impact, but some of the mechanisms of its application remain unclear, due in some degree to some of its broadly worded language.  In this way, it is also similar to the GDPR.

The challenge with implementation for large companies is the same as every other State level data privacy law – it is often virtually impossible to reliably identify who the “California” consumers are.  Thereby making it by practical necessity a global requirement for all publicly facing systems and applications for all users.

We recommend that most companies prioritize and stage their compliance today, focusing on GDPR in the short term, but  a California (or potentially necessary practical nationwide) compliance strategy should be included in late 2018 and 2019 IT and Privacy compliance plans.

The clock is now ticking. On May 4th the European Parliament published the final text of the General Data Protection Regulation (“GDPR”), and the rules of the game have significantly changed – at least in the context of EU data protection law. First, the GDPR changes the underlying approach to data protection law, with a new emphasis placed on accountability and risk-based approaches. “Privacy by Design” and “Privacy by Default” have been included in the regulatory ecosystem. Second, significant changes have been made to the obligations of “controllers” and “processors”. These include specific criteria for having compliant privacy notices and vendor management contracts. Third, enforcement is now a very real, and potentially risky, thing. With the possibility of administrative fines being up to 4% of a business’ global gross revenue, private rights of action by individuals, and non-profit privacy watchdog groups (also known as “Civil Society”) having the right to complain of a company’s privacy practices directly to the local Data Protection Authorities; compliance with the GDPR will now be one of those risks that any business who touches EU data will need to seriously consider. Fortunately, the GDPR won’t go into effect until May 25th 2018. However, businesses with significant data from the EU need to start considering how to comply now. Continue Reading Europe Is Shifting, And It’s a Big Deal – The New GDPR

It is the beginning of 2016, and American companies are anxiously awaiting news of whether or not a new “Safe Harbor 2.0” will emerge. In October of 2015, the European Court of Justice declared invalid Safe Harbor 1.0 in the Schrems decision. This had an immediate effect on any American company collecting personal data from the EU by removing the legal basis for this kind of data transfer. As of October 2015, consumer, client, and even employee data cannot be legally transferred to the US under the Safe Harbor Framework.

Fortunately, the data protection regulators (“DPAs”)recognized the turmoil this decision created within the business community on both sides of the Atlantic. As a result, the Article 29 Working Party (which is the convention of DPAs from each of the EU Member States) issued an enforcement moratorium on enforcement actions until the end of January 2016, so that they could assess the effectiveness of data transfer tools available. As part of this moratorium, the Working Party called on “…Member States and European institutions to open discussions with U.S. authorities in order to find legal and technical solutions”; and that the “current negotiations around a new Safe Harbor could be part of the solution.” Continue Reading Safe Harbor 2.0 – Is It Happening?

The annual conference of the world’s data protection regulators is a three day exercise, with half of the conference being “closed door” for the regulators only, and the other half being a series of side meetings and presentations, which report out to interested attendees the results of the closed door meetings. This is a good meeting to gain insight in the next year’s trends in data protection regulation and enforcement across the globe. While this conference happens every year, the events in the European Court of Justice and the impending completion of the new General Data Protection Regulation (“GDPR”) made this year’s conference particularly interesting. Here are some of the insights which were developed during the conference: Continue Reading The 37th International Conference of Data Protection & Privacy Commissioners – Some Observations

Today the European Court of Justice (“ECJ”) issued its Judgment in the Schrems case, and in doing so, added another tremor to the ongoing seismic shift related to cross-border privacy law. The two major elements of today’s Judgment are: 1) that Commission Decision 2000/520/EC  of 26 July 2000 of the adequacy of the protection provided by the US Safe Harbor Framework (the “Safe Harbor Decision”) is invalid, and 2) even if the Safe Harbor Decision were otherwise valid, no decision of the Commission can reduce the authority of a national data protection authority to enforce data protection rights as granted by Article 28 of Directive 95/46/EC (the “DP Directive”).

Clearly, the first element brings a more immediate concern for all the companies participating in the Safe Harbor framework. However, the second element will have much longer term consequences for the stability of US-EU commerce and privacy law. Continue Reading Safe Harbor – Not so Safe After Schrems

With the recent uptick in the U.S. of lawsuits filed as a result of a data breaches, state legislators in the U.S. have been busy updating the many different state laws that dictate how a company must respond if they have been hacked and personal information has been compromised. With no comprehensive federal law that sets forth a uniform compliance standard, companies operating in the U.S. must comply with a patchwork of 47 different states laws that set forth a company’s obligations in the event of a data breach.

Additionally, the trend is to have more than just notice requirements. Now companies have to develop proactive steps they must take to avoid a data breach in the first place. We first saw this with the Massachusetts law, and the model is expanding.

Continue Reading Information Security Policies and Data Breach Response Plans – If You Updated Yours In June, It’s Already Obsolete

In any case involving a data breach of customer or employee information, the first line of defense for the defendant is to assert that the plaintiff(s) lack standing to bring suit. In Remijas v. Neiman Marcus Group, the Seventh Circuit became the first United States Court of Appeals to tackle the issue of standing in the context of data breach litigation since the Supreme Court’s pronouncement on standing in Clapper. Continue Reading 7th Circuit – Alleged Injuries Can Confer Standing In Data Breach Suit

On July 21, 2014, Russia adopted Federal Law No. 242-FZ, “On Amendments to Certain Legislative Acts of the Russian Federation for Clarification of the Procedure of Personal Data Processing in Information and Telecommunication Networks” (“Federal Law No. 242-FZ”), which introduces a number of changes to existing Russian data protection laws. Specifically, it amends Federal Law No. 152-FZ, “On personal data,” by establishing a localization requirement for personal data processing.

Effective Date

What makes Federal Law No. 242-FZ important is its effective date. It was initially scheduled to come into force on September 1, 2016. However, on December 31, 2014, Federal Law No. 526-FZ was enacted, which changed the effective date of Russia’s Data Localization Law to September 1, 2015. Continue Reading Fortress Russia – The Russian Data Localization Law

The plethora of security incidents in the news have once again put security front and center of the international agenda. Predictably, this has triggered a number of responses from governments around the world. Some of these responses seem to have been ill-considered. However, one of the more comprehensive responses came out of the US President’s address to the Federal Trade Commission last week. A series of laws were proposed to address the increasing risks which are confronting individual security and privacy rights.

The President’s remarks at the FTC gives some valuable insight into where the US regulatory environment may end up in the next year or so. As a part of this analysis, one should focus on two very different agendas: Privacy and Security. These issues, while similar, are very different. Case in point, the UK PM’s comment around banning encryption could well result in increased security. However, it will absolutely damage individual privacy (and arguably also damage commercial security). Continue Reading Privacy & Security Are Back on the Agenda in DC