Outsourcing business and IT functions often means outsourcing compliance and liability risks as well. When a service contract involves protected categories of personal information, both parties need to understand the security requirements and risks. The contract should allocate responsibilities to prevent and respond to security breaches. The contract may also set expectations more precisely by incorporating a written security policy or referring to a widely accepted information security standard, sometimes accompanied by a requirement for a third-party security audit or assessment.

What contractual information security provisions should you consider, as a customer or as a vendor or business partner, when the contract contemplates the exchange of protected information? What do security standards and audits entail for a vendor, and what do they offer for a customer?

With heightened liability and compliance risks associated with handling protected categories of data, it is becoming more common to see contractual requirements holding vendors accountable for information security or requiring them to conform to a specified information security standard. Formerly, certification requirements were largely confined to contracts procuring data processing services for government agencies, financial services firms, and healthcare providers. Now, such provisions are appearing in a wide variety of outsourcing, cloud computing, software as a service (SaaS), infrastructure as a service (IaaS), and consulting contracts where the vendor will be processing or storing Social Security Numbers (SSNs), payment card or bank account details, medical information, or virtually any personal data from Europe, Canada, or other jurisdictions with more comprehensive data protection laws.

Often, the contract requires a self-certification of conformance with a particular set of information security safeguards and control procedures, such as the Payment Card Industry Digital Security Standard (PCI DSS) for credit and debit card data, ISO 27001/27002 (formerly ISO 17799), or the US government’s NIST 800 series of Federal Information Processing Standards (FIPS). But many contracts go beyond representations, warranties, or conditions concerning information security and require the vendor to submit a third-party expert assessment or audit of the vendor’s security practices.

Security audits can be costly and time-consuming, and an audit requirement may or may not be reasonable given the type and amount of data at issue. On the other hand, a neglected or casually performed self-assessment can result in contract termination, denial of insurance claims, or the shifting of liability following a security breach incident.

How well do lawyers drafting or vetting contracts know what their clients need, or what they are committing to, when it comes to the clauses or annexes detailing the parties’ information security obligations? Despite the sometimes mind-numbing acronyms and technical content, lawyers and business managers need to have a basic understanding of what is entailed with the more common forms of information security clauses and certifications. This will also help them determine which are the most useful and appropriate standards, representations, and certifications for a particular services contract.

Common Information Security Clauses

Confidentiality and nondisclosure provisions typically include a definition of “Confidential Information” accompanied by nondisclosure obligations. The definition usually amounts to “proprietary,” nonpublic information that could be legally protected as trade secrets or confidential commercial information. Sometimes the definition specifically includes “personal information” shared between the parties, such as customer and employee data or marketing lists, which may be both proprietary and protected by privacy laws. Typically, the clause obliges the parties to protect each other’s Confidential Information in the same manner that they customarily protect their own Confidential Information (“the same care and discretion” is a common formulation).

A simple, reciprocal confidentiality obligation works well where the parties have similar interests and capabilities in information protection. However, if one of the parties is relatively inexperienced or lacks sufficient resources or motivation, it may not be satisfactory to rely on such a provision without naming (or attaching) any special security requirements that apply to some of the data, or referring contractually to a widely accepted security standard.

Personal Information Security Clauses

Many contracts involving the sharing of protected categories of nonpublic personal information now also include a Personal Information or Personal Data provision. This is typically designed to help ensure compliance with any applicable privacy laws or standards, such as the federal HIPAA and HITECH acts governing medical data in the US, state personal information security and breach notice laws, and data protection legislation outside the US. The clause will often require the parties to implement “reasonable and appropriate” security measures to protect either defined categories of personal data or, more broadly, any personally identified or identifiable information (“PII”) furnished in connection with contract fulfillment.

The clause may refer generally to compliance with “any applicable laws and standards,” but it is prudent to add a specific reference to any particular information security regimes that are known to apply, such as PCI DSS (payment cards), HIPAA and HITECH (medical records), GLBA (financial accounts), FCRA (consumer reports), national laws based on the EU Data Protection Directive, or the Massachusetts personal information security requirements contained in Massachusetts M.G.L. c. 93H and 201 CMR §§ 17.00-17.05. This helps ensure that the parties understand the operational security requirements and avoids disputes about precisely what was required of the vendor.

Related provisions that may appear in this clause or separately include those relating to indemnification in the event of a security breach or abuse of personal information, insurance to cover such events, notice obligations in the event of a suspected breach of security, and a duty to cooperate in the investigation and resolution of security incidents involving protected personal information. Depending on the sensitivity of their consumer, employee, or government relations, some customers insist on a provision that allows them, or their designated experts, to control the investigation and any notifications to affected individuals or to law enforcement or regulatory bodies, even if the vendor is responsible for some or all of the related costs. Occasionally, the personal information clause will expressly deny any intent to create third-party beneficiary rights for the individuals who are the subjects of the data. This is not possible, however, in the case of European personal data transferred abroad under EU-approved standard contract clauses, as mentioned below.

The personal information clause may also include reference to a specified information security standard and possibly to a required third-party certification. The more common forms of these will be discussed in the next posts in this series.

Clearly, the personal information provisions of the contract can involve substantial risks and costs. The vendor should be careful to understand the requirements and not commit to more than it can perform (or afford). The Customer needs to exercise due diligence in ascertaining that the vendor has the technical and financial capability to perform as required, since the customer may be held accountable in any event by courts, regulators, and the public.

Transborder Personal Data Transfer Agreements

Personal data from the European Union, European Economic Area (the EU plus Norway, Iceland, and Liechtenstein), and other jurisdictions (such as Switzerland and Russia) with laws based on the EU Data Protection Directive are usually covered as well by a transborder data transfer clause. This may refer to the receiving party’s obligations as a data “controller” under laws based on the EU Directive, including obligations to provide notice and access and to secure the data with appropriate “technical and organizational” measures proportionate to the privacy risks inherent in handling the data at issue. If the receiving party is a mere “processor” under EU law, it is mandatory for the contract to include an “Article 17” clause (usually under the heading “Personal Data” or “Data Protection”) to the effect that (a) the processor will handle the data only according to instructions from the data controller and (b) the processor will employ “technical and organizational” security measures equivalent to those required of controllers. (Note that Article 17 clauses are required in contracts between controllers and processors even if the personal data remain in the EU / EEA.)

Whether a party receiving European personal data outside the EU / EEA is a controller or a processor, it must have a legal basis for receiving the data. The data may be received in any of the handful of countries deemed by the EU to afford an “adequate” level of protection, such as Switzerland and Canada (to the extent that the data are protected by the Canadian federal PIPEDA act). Data from EU / EEA countries, Switzerland, and Israel may also be received lawfully in the United States by a company that participates in the International Safe Harbor program. Otherwise, the transfer of such data must be covered by informed consent or another of the accepted “derogations” under Article 26 of the EU Directive. The most common of these are EU-approved standard contract clauses (or “model contracts”) and, more recently, nationally approved binding corporate rules (BCRs).

The EU standard contract clauses typically appear in a separate document or annex, with mandatory terms and a description of the data transfers according to EU requirements. There are only a few approved options in the terms themselves, but the descriptive annex must be carefully drafted to cover all of the contemplated data categories, uses, and recipients. The current sets of EU-approved standard contract clauses do not require a detailed description of security measures, but they do require reference to any special measures that must be taken to safeguard “sensitive” data. (In the EU context, sensitive data refers to information concerning race or ethnicity, health or sex life, religious beliefs, political or trade union activity, and, depending on the country, criminal history, national ID numbers, civil judgments, and any other categories of data deemed especially risky under national law or regulations). In some countries, such as France and the Netherlands, the data transfer agreement and descriptive annex must be submitted for review by a national data protection authority (DPA). DPAs have been known in some instances to request more information about the security measures to be employed (such as encryption), particularly where sensitive data are involved, and they may require that these be included in the data transfer agreement. This information is not made public, however, lest it compromise the security measures.

Several other jurisdictions with comprehensive data protection laws (such as Argentina, Australia, Canada, Dubai, Israel, and Japan) require “reasonable” or “appropriate” security measures proportionate to the risks; they also require or recommend contractual safeguards when transferring personal data to the US, India, and other jurisdictions lacking similar data privacy laws. So far, these countries have not specified security standards or detailed requirements that must be reflected in the data transfer agreement.

***

In the following posts in this series, we will look at the more common information security standards and certifications that may be included in service contracts.