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Current Trends in Data Security Litigation
Pressed by new security breach disclosure laws, companies and universities have been compelled to disclose quite a number of security breaches in recent years. One of the first highly publicized data security breaches involved the consumer information broker, ChoicePoint Inc., which announced in 2005 that criminals posing as legitimate businesses accessed the personal information of more than 145,000 individuals. Following the ChoicePoint incident, a cascade of personal data security breaches became public, involving companies such as BJ's Wholesale Club, LexisNexis, and MasterCard International, which suffered a security breach affecting more than 40 million credit cards stemming from unauthorized access to the computer network of CardSystems Solutions, an Arizona-based company that processes credit card payments. Subsequently, both CardSystems and ChoicePoint settled their data breach charges with the FTC, agreeing, among other things, to implement new data security procedures, obtain independent data security audits bi-annually for 20 years, and, in the case of ChoicePoint, pay millions of dollars in civil penalties. See, FTC press releases, available at http://ftc.gov/opa/2006/02/cardsystems_r.htm and www.ftc.gov/opa/2006/01/choicepoint.htm.
Both companies continue to face civil lawsuits filed in the California courts, with plaintiffs seeking injunctive relief and damages stemming from the data security breaches. In the ChoicePoint consolidated class action litigation, the California district court dismissed two claims, but ChoicePoint still faces claims under the federal Fair Credit Reporting Act ('FCRA') and the California Credit Reporting Agencies Act ('CCRAA'), among others. See, Harrington v. ChoicePoint Inc., No. 05-cv-1294 MRP (JWJx) (C.D. Cal., Sept. 15, 2005). CardSystems faces a similar suit in California Superior Court, with plaintiffs alleging that the defendants violated certain provisions of the state's data protection statute, namely Cal. Civ. Code '1798.81. See, Parke et al. v. CardSystems Solutions, Inc., No. CGC-05-44264 (S.F. Cty. Super. Ct., First Am. Comp., filed July 6, 2005).
More recently, in May of this year, a laptop belonging to an analyst at the U.S. Department of Veterans Affairs ('VA') was stolen, resulting in the potential loss of 26.5 million Social Security Numbers of veterans. A month later, it was reported that an AIG company computer containing Social Security Numbers and personal information of potentially 970,000 customers was also stolen. In fact, as catalogued by the Privacy Rights Clearinghouse (a consumer privacy interest group), there were at least 40 reported data security breaches involving sensitive personal information in June 2006 alone. See, Chronology of Data Breaches, available at: www.privacyrights.org/ar/ChronDataBreaches.htm. In the end, the FBI eventually recovered the VA laptop, with no apparent evidence of access to the personal information. Interestingly, however, in early August, a second unrelated VA security breach was reported, involving a desktop computer containing personal information of approximately 38,000 veterans that was missing from the office of a VA subcontractor responsible for insurance collection in certain Pennsylvania VA medical centers. As a result of the VA laptop theft, a class action suit was filed by several veterans groups, seeking, among other things, monetary damages for each veteran harmed by the privacy breach, a declaratory judgment that the VA's loss of these records violated federal privacy and administrative laws, and an injunction prohibiting the VA from altering any data storage system until a court-appointed panel of experts examines the best methods to implement proper data security safeguards. See, Press Release, 'VVA, Veterans' Coalition File Class Action Suit Seeking Redress, Safeguards to VA's Files on 26.5 Million Veterans' (June 6, 2006), available at: www.vva.org/ClassAction/index.htm. (A copy of the Complaint is also available on the VVA Web site.) On the legislative front, in response to the VA breach, a number of data security bills were introduced in Congress, with one notable bill, the Veterans Identity and Credit Security Act (which would require all federal agencies to notify victims of data security breaches), currently working its way through the House of Representatives.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
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