Alston & Bird Consumer Finance Blog
On February 7, 2020, the California Office of the Attorney General released Modified Regulations to the California Consumer Privacy Act (“CCPA”). The Modified Regulations update the Initial Proposed Regulations, which were previously published on October 11, 2019. The deadline to submit written comments is February 24, 2020 at 5:00 pm PST.
Alston & Bird’s Privacy & Data Security team will be publishing a blog post with a more detailed discussion of the Modified Regulations.
By Dan Felz
Late last week, the California Attorney General published much-anticipated proposed Regulations under the California Consumer Privacy Act (“CCPA”). The Regulations are extensive and contain a number of potentially material business impacts.
To help companies work through the Regulations, Alston & Bird’s Privacy & Data Security team published a client advisory outlining “21 Potentially Significant Business Impacts” from the proposed CCPA Regulations. View the full advisory here.
This advisory tackles a number of issues likely of interest to companies attempting to get ready for CCPA, including:
Alston & Bird is closely following the development of the CCPA and its Regulations. For more information, contact Jim Harvey, David Keating, Amy Mushahwar, Karen Sanzaro, or Daniel Felz.
California Attorney General Xavier Becerra released yesterday a Notice of Proposed Rulemaking Action and Proposed Regulations for the California Consumer Privacy Act. The Attorney General will hold four public hearings to address these regulations on December 2, 3, 4, and 5, 2019. The written comment period will then end on December 6, 2019. These regulations are intended to operationalize the CCPA and provide clarity to assist in the implementation of the law. The CCPA requires the Attorney General to adopt initial regulations on or before July 1, 2020.
The proposed regulations provide specific guidance regarding various CCPA provisions, including: (1) notices businesses must provide to consumers under the CCPA; (2) practices for handling consumer requests made pursuant to the CCPA; (3) practices for verifying the identity of the consumer making those requests; (4) practices regarding the personal information of minors; and (5) practices for the offering of financial incentives.
We will follow up with a more detailed discussion of the draft regulations in a separate blog post.
The California legislature passed several amendments to the California Consumer Privacy Act of 2018 (Cal. Civ. Code §§ 1798.100 to 1798.190) (the “CCPA”) on September 13, 2019. (For additional background, see Which CCPA Amendments Made the Cut? and Potential Changes to the CCPA; California Senate Considers Amendments). These amendments will soon head to Governor Newsom’s desk for signature. Among other things, the amendments:
Below is a description of the amendments:
The California Senate and Assembly approved AB 874, which cabins the definition of “personal information” to that which is “reasonably capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” Personal information includes information that is “reasonably” capable of being associated with identifiers listed in the CCPA, including, but not limited to, real name, alias, postal address, internet protocol address, and social security number. AB 874 further amends the CCPA to exclude from personal information deidentified or aggregate consumer information.
Additionally, AB 874 simplifies the definition of publicly available information, which is excluded from personal information. The bill removes the conditions required for information to qualify as public information. Instead the term is amended to mean “information that is lawfully made available from federal, state, or local government records.” However, publicly available information still excludes biometric information collected without the consumer’s knowledge.
The original version of AB 25 approved by the State Assembly broadly excluded personal information of employees, contractors, and job applicants from the CCPA. The Assembly and Senate approved a modified version which provides a more limited exemption. AB 25 now provides that the statute does not apply to the personal information of job applicants, employees, and contractors that a business collects in the course of employment or the application process, but only to the extent solely used in the context of the job application or the employment relationship. In addition, businesses must inform employees, contractors, and applicants, at or before the point of collection, of the categories of personal information to be collected and the purposes for which such information will be used. This information also remains subject to the private right of action established in the law for certain security incidents.
The amendment adds an additional exemption for consumer personal information involved in business to business communications or transactions. The exemption does not apply to the right to opt out of data sales, and the information remains subject to a private right of action for certain security incidents. The non-discrimination provisions of the statute also continue to apply.
AB 25 will become inoperative on January 1, 2021. Employment-related information will become subject to the full set of requirements of the CCPA on and after that date unless California first enacts an employee privacy law.
AB 1146 creates exemptions to the CCPA’s right to delete and right to opt out for certain categories of information. Businesses are no longer required to comply with a consumer’s request to delete personal information if the request pertains to information the business needs to “fulfill the terms of a written warranty or product recall conducted in accordance with federal law.” Businesses are also not required to comply with requests to opt out of sales relating to vehicle ownership information shared between a “new motor vehicle dealer” and the manufacturer regarding vehicle repairs relating to warranty work or recalls provided that the dealer or manufacturer does not sell, share, or use the information for any other purpose.
The California legislature amended and passed AB 1355, which clarifies the existing exemption for personal information related to the Fair Credit Reporting Act (15 U.S.C. § 1681) (the “FCRA”). The CCPA currently does not apply to personal information sold to or from a consumer reporting agency if such information is reported or used in a consumer report and covered by the FRCA. AB 1355 clarifies the exemption to apply to activity by consumer reporting agencies, furnishers of information, or users of consumer reports concerning personal information related to a consumer report. Such information includes that “bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living….” The FCRA exemption applies to activity that is regulated under the act and is not “used, communicated, disclosed, or sold except as authorized by the [FCRA].” Information covered by this exemption is subject to the CCPA’s private right of action provision.
AB 1355 also modifies the “value test” in the CCPA’s non-discrimination provisions. Prior to this amendment, the CCPA prohibited discrimination against consumers exercising CCPA rights unless the difference in prices or rates charged or the level or quality of goods or services provided to these consumers was “reasonably related to the value provided to the consumer by the consumer’s data.” This “value test” has been criticized for requiring businesses to complete an impossible task – determining the value of a consumer’s data to each individual consumer. AB 1355 alleviates this situation by clarifying that a business may require consumers who exercise their CCPA rights to pay a different price or rate or provide a different level or quality of goods or services if the difference is “reasonably related to the value provided to the business by the consumer’s data.”
The CCPA requires businesses that collect personal information about consumers to disclose in their privacy policy the specific pieces of personal information collected about consumers. AB 1355 revises the CCPA to require businesses to disclose that a consumer has the right to request the specific pieces of personal information collected about that consumer. This also makes clear that the obligation in Section 1798.110(a) to disclose the “specific pieces of information” requires the business to disclose a copy of the information, not a description.
The CCPA requires businesses to make two or more methods available for a consumer to submit requests pursuant to Cal. Civ. Code §§ 1798.110 and 1798.115. Now, pursuant to AB 1564, businesses that operate exclusively online and have a “direct relationship with a consumer from whom” the business collects personal information may provide an email address to support the submission of requests under section 110 and 115 in lieu of a toll-free telephone number. (Note that the underlying requirements to have two channels for requests and the amendments via AB 1564 do not apply to requests submitted pursuant to Cal. Civ. Code §§ 1798.100 or 1798.105.) Businesses that maintain a website must still make a website available for requests. The amendment also provides that businesses may choose, but are not obligated, to require consumers that have business accounts to submit requests through the accounts.
In addition, AB 1564 clarifies that businesses may verify the identity of consumers who make requests in a reasonable manner considering the nature of the information requested. Businesses may impose more comprehensive or strenuous identity verification processes for consumer requests concerning sensitive personal information.
The CCPA’s current language of “nonencrypted or nonredacted” would allow for a private right of action if the personal information involved was either nonencrypted or nonredacted. In other words, businesses would have to both encrypt and redact personal information to avoid liability. AB 1355 amends the CCPA’s private right of action provision for certain security incidents to apply to personal information that is “nonencrypted and nonredacted.” The amendment allows businesses to defend against a civil action by either encrypting or redacting personal information.
The California legislature also recently passed a bill that impacts the CCPA’s private right of action provision by amending California’s data security law. The CCPA’s private right of action applies to personal information as defined in California’s data security law (Cal Civ. Code § 1798.81.5). California passed Assembly Bill 1130 expanding the categories of personal information covered by the data security law and thereby expanding the data elements covered by CCPA’s private right of action.
Although all amendments discussed above have been passed by the California legislature, the format of the final amendments’ text is undecided. Before the amendments were passed, each bill was revised to incorporate changes proposed by other amendments upon enactment (e.g., AB 1355 incorporates amendments proposed in ABs 25, 874, 1146, and 1564). The final text of the amendments depends on the order in which the bills are enacted. We will provide a link to the final text once the order of enactment has been determined.
A&B Abstract:
While much has been written about the California Consumer Privacy Act (CCPA), the focus has primarily been on the new rights it affords California consumers to have access to and control use of their data and opt out of many transfers to third parties. While this is a sea change in data privacy legislation in the United States, perhaps the greatest risk to businesses covered by the CCPA is that the CCPA creates a private right of action – with substantial statutory damages – for data breaches. This change will likely reset litigation risks in California in the post-data-breach context and may have significant implications for data breach litigation across the country.
Overview of the CCPA Breach Provisions
The CCPA will do two significant things for the first time in the world of data breach litigation. First, it will give consumers the ability to sue businesses when their “nonencrypted or nonredacted personal information … is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information.” This private right of action comes into play when the statutory trigger has been met and the incident is a result of the business’s failure to implement and maintain “reasonable security procedures and practices.” This reasonable security requirement essentially codifies negligence claims found in much of today’s post-breach litigation. Second, the CCPA is the first U.S. law to provide for statutory damages in connection with data security incidents, including penalties of $100 to $750 per incident, actual damages, and injunctive relief.
There are two aspects of this portion of the CCPA that provide some hope to breached entities. The definition of personal information used for the private right of action provision of the CCPA is the narrower definition of personal information set forth in the current California data breach notification law, Section 1798.81.5, rather than the now famously broad definition of personal information under the CCPA (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.”) The statute also requires both access and exfiltration, theft, or disclosure, which is a more exacting standard than those state breach notification laws that only require unauthorized access to personal data.
Damages: Amount & Factors for Consideration by a Court
The CCPA authorizes courts to award statutory damages in such action of between $100 and $750 “per consumer per incident” or to award actual damages, whichever is greater. Id. § 1798.150(a)(1)(A). The statute directs courts to consider a number of factors in assessing the amount of statutory damages to award, “including, but not limited to, the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of
the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.” Id. § 1798.150(a)(2).[1] These statutory damages are substantial. Moreover, the mere existence of statutory damages will provide data breach plaintiffs with a new argument for standing (which otherwise can be problematic).
First, the statute purports to allow consumers to sue even when they have not suffered any damages as a result of the breach. This is in stark contrast to the most common data breach claims that consumers bring against victims of data breaches today. Those suits are typically based on negligence and/or breach of implied contract theories, both of which require plaintiffs to prove actual damages as an element of their claims. This risk is particularly acute in litigation brought by consumers following the theft of payment card
data, where actual damages are often lacking and are difficult to quantify since payment cards are often canceled and reissued after a data breach and financial institutions are generally required to reimburse consumers for unauthorized charges.
Plaintiffs who attempt to allege a violation of the CCPA will still be constrained – at least in federal court – by the constitutional requirement that they suffer a legally cognizable injury-in-fact in order to have standing to sue. This requirement has been difficult to satisfy for plaintiffs in data breach class actions. Moreover, because the U.S. Supreme Court has held that the mere violation of a statute alone is insufficient to confer Article III standing when it is otherwise lacking, the existence of a private-right-of-action provision in the CCPA does not automatically grant plaintiffs the right to bring a claim in federal court. Courts will ultimately need to address the intersection between the CCPA’s private-right-of-action provision and Article III standing requirements, and this will be an evolving area of the law that companies should pay close attention to over the next several years.
Second, the amount of statutory damages under the CCPA increases the potential overall exposure companies could face in data breach litigation. The statutory damages, which range from $100 to $750 per incident, can add up very quickly, particularly if a large number of records are impacted by the breach.
Third, the prospect of an award of statutory damages has significant class certification implications if the plaintiffs bring a claim for a violation of the CCPA. Defendants have argued in past data breach cases that individualized damages issues are a significant hurdle to trying the plaintiffs’ claims classwide. While the existence of individualized damages issues alone is generally not sufficient to defeat a motion for class certification, it can be part of a powerful argument that predominance is lacking. Thus, in CCPA litigation, defendants will likely have to place a greater emphasis on other defenses to class certification, including case-specific issues that predominate over issues common to the putative class.
Reasonable Security Standard
The CCPA’s private right of action allows for damages when (1) a company experienced a security incident or data breach; and (2) the company failed to maintain reasonable security practices and procedures. This begs the question of what constitutes “reasonable security.” While a detailed discussion of this topic is beyond the scope of this article, potential defendants under the statute should address this issue in their CCPA implementation programs.
In considering this issue, note that California’s former attorney general, Senator Kamala Harris, provided quite clear guidance on what she considered reasonable security. In February 2016, the attorney general’s office released the California Data Breach Report, which analyzed breaches from 2012 to 2015 and provided guidance on what businesses could consider reasonable security. The guidance focuses on the 20 controls in the Center for Internet Security’s (CIS) Critical Security Controls (previously known as the SANS Top 20). According to Attorney General Harris, these controls “identify a minimum level of information security that all organizations that collect or maintain personal information should meet. The failure to implement all the Controls that apply to an organization’s environment constitutes a lack of reasonable security.” While Attorney General Harris’s guidance does not have the force of law, it is hard to ignore this guidance for purposes of analyzing these provisions of the CCPA.
Of course, there are a number of other third-party protocols similar to the CIS Controls that one might also assert constitute “reasonable security.” These include the National Institute of Standards and Technology Cybersecurity Framework (NIST), which is now well established and in its latest revision has over 900 individual security measures, the Control Objectives for Information and Related Technologies (COBIT) created by ISACA, and the International Organization for Standardization (ISO) ISO/IEC 27000:2018 standards, and many others.[2]
The FTC has also been active in establishing at least what does not constitute reasonable security in its eyes. There have been a number of FTC enforcement actions against companies involving security issues, including In the Matter of Accretive Health Inc., Docket No. C-4432; In the Matter of Uber Technologies Inc., Docket No. C-4662; In the Matter of DSW Inc., Docket No. C-4157; In the Matter of the TJX Companies Inc., Docket No. C-4227; In the Matter of Goal Financial LLC, Docket No. C-4216; and In the Matter of Twitter Inc., Docket No. C-4316. Of course, there has also been significant litigation in this area somewhat expanding (FTC v. Wyndham Worldwide Corporation, 799 F. 3d 236 (3d Cir. 2015)) and contracting (LABMD Inc. v. FTC, 894 F.3d 1221 (11th Cir. 2018)) the FTC’s oversight in this area.
Companies subject to existing regulatory regimes have for some time dealt with security standards such as the Health Insurance Portability and Accountability Act (HIPAA) Security Rule, 45 C.F.R. §§ 160, 164(a), 164(c), and the Gramm–Leach–Bliley (GLB) Safeguards Rule, 15 U.S.C. 6801(b), 6805(b)(2) (among others, although data subject to HIPAA and GLB is currently excepted from application of the CCPA). In the wake of the CCPA, however, companies that have not previously been subject to express regulation of their security practices should now affirmatively consider whether their security programs will allow them to comfortably assert that they have met their “reasonable security” obligation under the CCPA.
National Litigation Implications
Because it includes an express private right of action and authorizes courts to award statutory penalties, the CCPA will substantially increase litigation risk and exposure for companies that are subject to a data breach. The impact will be most strongly felt when claims are brought by (or on behalf of a class of) California residents or against a company that is organized or maintains its principal place of business in California, where the argument for the application of California law will be the strongest. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 821 (1985) (holding that due process is violated when a court attempts to apply the law of one state with “little or no relationship” to the transaction “in order to satisfy the procedural requirement that there be a ‘common question of law’”). Nevertheless, the CCPA could have broader implications for data breach litigation nationwide.
First, it could incentivize plaintiffs to file more data breach class actions in California, though plaintiffs will be constrained in their ability to do so by the Supreme Court’s decision in Bristol-Meyers Squibb Co. v. Superior Court, 137 S. Ct. 827 (2017), which holds that state courts generally cannot exercise personal jurisdiction over an out-of-state defendant for claims brought by nonresident plaintiffs.
Second, plaintiffs’ lawyers are also likely to try to effectively expand the scope of the CCPA’s private-right-of-action provision by attempting to bring suit or violations of the CCPA under California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200. That statute prohibits plaintiffs from engaging in “any unlawful, unfair or fraudulent business act or practice,” and allows plaintiffs to “borrow[] violations of other laws and treat[] them as unlawful practices that the unfair competition law makes independently actionable.” Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999). Plaintiffs are likely to try to argue that any violation of the CCPA, regardless of whether it falls within the private-right-of-action provision, is actionable under the Unfair Competition Law. While this has not yet been litigated, companies will have a strong argument that plaintiffs should not be able to evade the narrow scope of the private-right-of-action provision in this manner. The CCPA’s private-right-of-action
provision expressly states that nothing in the CCPA “shall be interpreted to serve as the basis for a private right of action under any other law.” Cal. Civ. Code § 1798.150(c). By including this provision in the law, it stands to reason that the legislature expressly intended to exempt the CCPA from the reach of the Unfair Competition Law. Nevertheless, companies should carefully monitor litigation in this area, as a court ruling to the contrary could dramatically increase the litigation risk posed by the CCPA. See also
Robert D. Phillips, Jr. & Gillian H. Clow, An Update on the California Consumer Privacy Act and Its Private Right of Action, available at https://www.alston.com/en/insights/publications/2018/09/california-consumerprivacy-act.
[1] In order to bring a private right of action under the CCPA, the consumer is required to first “provide[] a business 30 days’ written notice identifying the specific provisions of this title the consumer alleges have been or are being violated.” Cal. Civ. Code § 1798.150(b).
[2] A few other states have included similar reasonableness standards in their breach notification statutes (although these statutes do not include corresponding private rights of action). For example, Indiana, I.C. Sec. 24-4.9-3-3.5 (c) (states that “a data base owner shall implement and maintain reasonable procedures, including taking any appropriate corrective action, to protect and safeguard from unlawful use or disclosure any personal information of Indiana residents collected or maintained by the data base owner.”