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Vendor Limitations of Liability for Security Breaches

By Bryan G. Handlos and L. Elise Dieterich
August 02, 2015

Counsel advising companies on vendor contracts are in a tough spot. Cybersecurity risks presented by data outsourcing demand increasing attention and resources. At the same time, outsourcing of data to third-party vendors has become, in many instances, a business necessity. The biggest companies may be able to afford the costs to address these risks. One of the biggest banks, for instance, has reportedly established a 1,000-person digital security team (larger than Google's) near NSA headquarters ' staffed with ex-military talent and a $250 million budget. Most companies, however, have to face cybersecurity risks with something less, and many are relying on vendors whose resources and cybersecurity sophistication may (or may not) outstrip that of the company.

But, when a security breach at the vendor occurs, will those resources and sophistication really mean anything? A vendor's contractual limitation of liability provisions can easily deprive a company of any meaningful recovery. A famous politician once criticized something he didn't much like (government, not vendors) as “a big baby ' an alimentary canal with a big appetite at one end and no responsibility at the other.” What should a vendor's back-end responsibility be?

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