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Why Blockchain Matters to In-House Lawyers

Today, news reports, academic articles, and corporate reports are flush with mentions of “blockchain,” “Bitcoin,” and “distributed ledger technology.” At first glance, many readers see the discussion as hype, generating a great deal of actionless attention, curiosity, and investment opportunities. However, on another level, some of the conversation regards developments in technology that may specifically shape or impact a company’s contract or legal risk profile – even for those companies that don’t have or deal in Bitcoin.

Blockchain technology is expected to have a broad and sweeping impact across industries worldwide, with one commentator identifying a financial impact of over $176 billion in the next several years. It is envisioned that countless companies (whether suspecting or unsuspecting) will deploy or utilize the technology in their businesses. This may happen in the form of an internally developed or deployed technology or system, through dealings with governments or government agencies, or by way of transactions with technology vendors or service providers, among others.

At a very high and general level, blockchain is a recently developed distributed ledger (or database) technology that facilitates secure records of transactions over time by electronically distributing and maintaining tens, hundreds, or thousands of identical, immutable, highly secure digital copies of the transaction record. Each of these copies is distributed to and held by a different computer node or site participating in the ledger. Blockchain is one kind of distributed ledger technology, and there are many different platforms for blockchain. Bitcoin is a form of cryptocurrency whose foundation is based on one of the blockchain platforms. (Numerous detailed explanations of blockchain and distributed ledger technology are available online, including the video, Ever wonder how Bitcoin (and other cryptocurrencies) actually work?, and a UK Government report on distributed ledger technology.)

Many sets of records that are maintained in an Excel spreadsheet, a company or vendor database, or government files, whether or not currently stored or maintained in the cloud, may be suitable for blockchain. A few examples include real estate purchase and sale transactions, shipping records, banking and financial transactions, inventory management, consumer auto-pay and auto-withdrawal transactions, product manufacturing, and customer subscription transactions.

Attorneys and contract professionals supporting companies’ encounters with blockchain technology should consider the following, among others:

  • Open Source Software. Currently, numerous distributed ledger technologies (including blockchain) are built using open source software. The Bitcoin program is distributed under the MIT License, aspects of Ethereum (another blockchain-based cryptocurrency) use the GNU General Public License, and OpenChain (another distributed ledger technology) is based on the Apache 2.0 license. Open source software licenses include many unique terms (and omit many standard commercial software licensing terms), and may, for example, dictate subsequent use and distribution of the software, as well as of company proprietary code related to the open source software.
  • New Software. Because distributed ledger technology like blockchain is new, in many cases the software underpinning the technology is not as well-tested and presents a notable possibility of serious errors and glitches. Consequently, traditional contractual recourses and remedies for software errors and bugs may not be wholly meaningful, when applied to blockchain, and typical software project deployment schedules and timelines may be difficult to adhere to.
  • Privacy. While one of the potential benefits of blockchain is stronger data security safeguards against loss, destruction, and unauthorized alteration of data and records, the nature of a distributed ledger is that the tens, hundreds, or thousands of ledger participants will have exact duplicates of the digital data and records. Even if the parties to a particular transaction do not consider the transaction record in the ledger to be confidential, it is possible that the underlying record data (especially if health, medical, or financial data) may be a material concern.
  • Technology Contracting. Blockchain is a technology, with its own open (as noted above) or proprietary platforms, software, and systems. Contracts for, or to use, blockchain technology, just as other company contracts for technology, are key vehicles to establish critical rights and obligations regarding representations and warranties, indemnities, limitations of liability, and intellectual property.
  • Bitcoin. Many companies will not typically have or deal in Bitcoin or other cryptocurrencies. The legal and regulatory landscape applicable to cryptocurrency is nascent and exceptionally dynamic and varies across U.S. and non-U.S. jurisdictions (and is beyond the scope of this post). Even for companies that merely or only occasionally transact business in cryptocurrency (and don’t issue, exchange, or administer cryptocurrency), potential issues can include how cryptocurrencies are treated and taxed (different legal authorities consider them to be “currencies,” “commodities,” or “property”), whether corporate insurance provides coverage or protection for cryptocurrency transactions, and whether the use of cryptocurrency is even legal.

Blockchain is an algorithm-intensive, complex technology that may provide great benefits, efficiencies, and cost savings to its users. While this post does not speak to many of its features, including smart contracts, permissioned versus unpermissioned ledgers, and cryptocurrency mining, hopefully it provides a “bit” of useful information.

 

RETURN TO SENDER: Aetna to Pay $17M to Settle Claims Related to Vendor Mailer Data Breach

Aetna has agreed to pay $17.2 million and to implement a “best practices” policy regarding sensitive policyholder data, in order to settle class action litigation brought against it arising from a mass mailing sent by one of its mailing vendors. As discussed in a blog post last year, federal class action litigation was brought against Aetna and its mailing vendor in 2017 based on the vendor’s use of glassine envelopes to communicate HIV medication information to Aetna insureds. The envelopes revealed that the named addressee was contacted about options for filling HIV medication prescriptions. The litigation alleged violations by Aetna and its vendor of several laws and legal duties related to security and privacy.

The contract lessons for customers and vendors that arise from the events in question, which were identified in the earlier post, remain the same. Do your contracts for non-IT and non-healthcare services fully consider the risk of privacy and security litigation? Do your contract’s indemnification and limitation of liability clauses contemplate the possibility of class action litigation? Before entering into a contract, have you considered whether the specific vendor services being provided to the particular customer in question implicate laws you hadn’t considered? And, Have you considered which specific aspects of vendor services may directly impact potential legal liability, and have you adequately identified and addressed them in the contract?

Importantly, the newly announced settlement, itself, provides three bonus lessons.

Published data breach cost statistics are helpful, to a point. 

In its 2017 Cost of Data Breach Study, Ponemon Institute reports that the average per capita cost of data breach in the U.S. for the period of the study was $225. It also reports that, for the same period, the average total organizational cost in the U.S. for a data breach was $7.35 million. Somewhat remarkable, as part of its settlement Aetna agreed to pay $17.2 million in connection with the breach in question – a figure that is about $10 million over the average reported by Ponemon Institute. But, Aetna’s payment is not out of the ballpark, as averages are averages, after all. Much more remarkable, however, is the per capita settlement amount. Aetna’s settlement figure represents a per capita amount of $1,272 – that number is more than five times the reported average. (For reference, that per capita cost would put Equifax’s settlement number for its recent breach at $185 billion dollars.) Bottom line, when considering or counseling clients as to the financial impacts of data breaches, the average cost figures for data breaches are as important as the qualification of the figures, themselves, as only averages (with any number of data security breaches costing more, or less, than the averages).

Data breach cost statistics often do not compare well with litigation settlement amounts. 

Yes, Aetna agreed to pay $17.2 million as part of the settlement, as compared to Ponemon Institute’s reported $7.35 million average U.S. data breach cost. While the $7.35 million figure includes forensics costs, customer churn, post data breach costs, and other direct and indirect expenses, the $17.2 million figure is not as comprehensive. It does not include, for example, Aetna’s legal fees incurred to defend and settle the class action litigation, nor does it include other pre-settlement costs and expenses incurred by Aetna. As efficient or helpful as it may be to compare published per capita or per breach data statistics with litigation settlement amounts, it’s also important to identify the full scope of costs and expenses that the published statistics include, as well as what costs and expenses are not included in the settlement amounts.

Data breach cost statistics and litigation settlement amounts don’t include non-monetary settlement obligations. 

Cost-per-record, cost-per-breach, and litigation settlement figures can be particularly meaningful and relatable, especially when considering or counseling clients as to the potential financial impacts of data security breaches. Notably, however, the material obligations of defendants settling data breach litigation matters typically are not limited to monetary payments. Aetna, for example, as part of its settlement, also agreed to develop and implement a “best practices” policy for use of certain personally identifiable information, to provide policy updates for five years, to provide policy training for certain Aetna personnel for five years, and to require outside litigation counsel to sign business associate agreements, among other commitments. These activities will require Aetna to incur additional costs and expenses, including costs and expenses for internal and, possibly, external resources in connection with the performance of these activities.

Supplementing the earlier post on this Aetna class action litigation and lessons learned, the recent Aetna settlement and the new lessons cited above provide an even fuller picture of data and security breach and related contract considerations. Not only is it invaluable to consider data privacy and security issues in contracts and the roles of vendors and service providers, it also is important to consider and counsel clients as to the full potential impacts of data breaches, including potential litigation settlement amounts, costs and expenses in addition to settlement amounts, and non-monetary settlement-related obligations.

What Does Ransomware Cost Companies?

In its 10-Q filing for the quarter ended September 30, 2017, Merck & Co., Inc. stated the following:

On June 27, 2017, the Company experienced a network cyber-attack that led to a disruption of its worldwide operations, including manufacturing, research and sales operations. … [T]he Company was unable to fulfill orders for certain other products in certain markets, which had an unfavorable effect on sales for the third quarter and first nine months of 2017 of approximately $135 million. … In addition, the Company recorded manufacturing-related expenses, … as well as expenses related to remediation efforts … , which aggregated $175 million for the third quarter and first nine months of 2017.

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The Future of Data Privacy: You Can Run but You Can’t Hide (or Can You?)

In Ernest Cline’s dystopian novel Ready Player One, the world’s population is addicted to a virtual reality game called the OASIS. The villain in the book is a large communications company named IOI that will stop at nothing to rule the world—the OASIS virtual world, that is. IOI’s motivation is, simply put, profit, profit, and more profit as it peddles its goods and services in the digital reality. Through subterfuge, spying, rewards, and an assortment of other tactics, IOI gathers intelligence on its users, competitors, and enemies, and then uses that information to its advantage.

But even in a fully-connected, always-on digital world such as the OASIS, people have effective tools against IOI’s tracking. They lie. They throw up roadblocks. They create alternate selves. They create private rooms to hold clandestine chats. They go underground. They disconnect.

In a 2013 survey by Pew Research Center, 86 percent of Internet users stated that they had attempted to minimize their digital footprints by taking affirmative steps such as deleting cookies, using a false name or email address, or using a public computer to mask their identities.1 A 2015 survey by TRUSTe/National CyberSecurity Alliance found that 89 percent of consumers refuse to do business with a company that does not protect their privacy.2 Those are just two of dozens of surveys showing similar metrics.3

In response to users’ privacy concerns over the past decade, consumer-friendly privacy protection tools continue to make their way into the marketplace. For example, VPN privacy protection add-ons are now readily available for web browsers, and some browsers, such as Opera, come with a free VPN built directly into the browser.4 Ad blockers have become so popular that some websites are restricting access if a browser blocks ads on the site.5 And privacy-conscious search engines like DuckDuckGo continue to gain loyal users.6

So what does this have to do with the legal intricacies of data privacy? A lot, actually. As demand increases for privacy tools, more companies are meeting that demand in new and innovative ways. Although the privacy risks inherent in artificial intelligence (AI) are well-documented, we are also seeing companies develop AI applications designed to help protect consumer privacy by creating digital noise, or obfuscation, around a person’s online activities. These tools essentially create new layers of false interests and pretend preferences tied to an individual’s online persona, which makes it more difficult for marketers to know which preferences and opinions are true and which are false.7  Expect to see a variety of AI-powered obfuscation and other related tools and services arriving over the next few years as consumers attempt to distract data collectors from real data.

Whether or not these new tools and services are legal will be the subject of much debate, especially by any company being thwarted in its efforts to collect reliable information about a user. Some of these tools will also present novel legal issues related to AI, such as whether an unmonitored chatbot can create a legal contract on behalf of its owner (probably) or whether the owner of an AI tool is always responsible for its activities, even if the AI tool acts contrary to its owner’s instructions (maybe). Then there are the questions of who’s guarding the guards and whether these new privacy tools will eventually be used to collect even more information from consumers.8

In the future, we will certainly see new legislation, regulations, and court holdings affecting how companies and third parties may use personal information of individuals. But technical innovation is much faster and more responsive to consumer demand. As consumers desire better protection for their information, expect to see more privacy tools emerge to help control the types and amounts of data shared with companies and marketers. And as this develops further, these new tools will undoubtedly bring new legal questions and challenges.

This article was originally published in Best Lawyers Business Edition, Summer 2017, p.23.

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1http://www.pewinternet.org/2013/09/05/anonymity-privacy-and-security-online/
2 https://www.truste.com/resources/privacy-research/ncsa-consumer-privacy-index-us/
3http://www.pewinternet.org/search/?query=privacyhttps://epic.org/privacy/survey/;https://www.law.berkeley.edu/research/bclt/research/privacy-at-bclt/berkeley-consumer-privacy-survey/
4http://www.opera.com/computer/features/free-vpn
5https://www.pubnation.com/blog/publishers-fight-back-how-the-top-50-websites-combat-adblock
6http://www.digitaltrends.com/web/duckduckgo-14-million-searches/
7https://www.wired.com/2017/03/wanna-protect-online-privacy-open-tab-make-noise/https://www.nyu.edu/projects/nissenbaum/papers/Politicalandethicalperspectivesondataobfuscation.pdf
8In 2016, a popular browser add-on ironically named “Web of Trust” was discovered to be collecting and selling information about its users (see http://www.pcmag.com/news/349328/web-of-trust-browser-extension-cannot-betrusted). In 2017, an inbox management service called Unroll.me was sued for selling user data gleaned from users’ inboxes (see https://www.cnet.com/news/unroll-me-hit-with-privacy-suit-over-alleged-sale-of-user-data/).