New York Amends Its Data Security Breach Notification Law, Enhancing the State's Cybersecurity Framework

On July 25, 2019, New York Governor Andrew Cuomo signed into law the Stop Hacks and Improve Electronic Data Security Act (the SHIELD Act or the Act), which expands and updates New York's data security breach notification law.¹ In general, the amendments will take effect on October 23, 2019; however, the data security safeguards requirements of the Act will become effective on March 23, 2020.

The SHIELD Act represents the latest measure adopted by New York State officials to broaden the cybersecurity-related obligations of New York businesses.² In 2017, the New York State Department of Financial Services (the NYDFS) adopted cybersecurity regulations that apply to NYDFS-licensed banks, insurers and other financial services firms (Part 500).³ Part 500 has been dubbed by State officials as a "first-in-the-nation" regulation due to the novelty and significance of the regulation's requirements.⁴ In 2018, the NYDFS adopted regulations establishing registration requirements and prohibited practices for consumer reporting agencies (CRAs) that have reported on 1,000 or more New York consumers within the preceding year (Part 201).⁵ Part 201 was designed to mitigate the threat of cyberattacks and security incidents involving CRAs in the wake of recent incidents involving large, nationwide CRAs affecting millions of consumers. Among other things, Part 201 establishes that registered CRAs are deemed to be covered entities for purposes of Part 500 and therefore are subject to the cybersecurity program, cyber risk management, security incident response and reporting requirements of those regulations.

Overview of the SHIELD Act

The SHIELD Act will broaden both the scope and substance of New York's data breach notification law, including by adding new substantive cybersecurity requirements for breach prevention purposes.

The scope of protected information. A security breach involving "private information" triggers the notification obligations established under New York's data breach notification law. At present, "private information" includes the combination of any information that can be used to identify a consumer (such as a name) plus one or more sensitive data elements (such as a Social Security Number or driver's license number). The Act expands the "private information" definition to include additional data elements: (i) biometric information,⁶ (ii) account numbers where such numbers may be used to access a consumer's financial account without additional identifying information or access codes, and (iii) user names or email addresses, if accompanied by corresponding passwords or security questions and answers.

The scope of a security breach. The Act amends the existing definition of "breach of the security of the system" to include unauthorized access to computerized data that compromises the security, confidentiality or integrity of consumers' private information. Current law, which provides that security breach notification obligations arise upon the acquisition of computerized data that compromises the security, confidentiality, or integrity of consumers' private information, contemplates the need for certain unauthorized activity beyond mere access in order to trigger the obligations of the statute—such as downloading, copying or otherwise obtaining physical control of protected data. In determining whether information has been accessed, the Act provides that businesses should consider various factors, including whether there are indications that the information was viewed, communicated with, used or altered by an unauthorized person. In addition, the Act expands the territorial application of the law to any business that owns or licenses private information of New York residents, eliminating the requirement of current law that an organization must "conduct business" within New York State in order to be subject to the requirements of the statute. The combination of these two amendments has the potential to have a meaningful impact on the volume of reportable security incidents involving New York residents.

Carve-outs from consumer breach notification requirements. While broadening the scope of its breach notification requirements as described above, the Act adds some limited exemptions from the requirement to notify New York residents in some circumstances.

First, notification to New York residents is not required if a person with authority to access private information inadvertently exposes such information, and that person or the business that owns or licenses that information reasonably determines that the exposure will not likely result in misuse of the information, or financial harm, or emotional harm from exposure of email addresses or user names in combination with a password or code that would permit access to an online account. Such a determination must be documented in writing and retained for at least five years. Notwithstanding the above, if the exposure involved private information of more than 500 New York residents, the business will be required to notify the New York State Attorney General's Office within 10 days after making the determination.

Second, notification of a breach to New York residents is not required by the Act in cases where notice has or will be provided pursuant to notification requirements under Title V of the Gramm-Leach Bliley Act (the GLBA),⁷ the breach notification rules implementing the Health Insurance Portability and Accountability Act (HIPAA) and the Health Information Technology for Economic and Clinical Health (HITECH) Act,⁸ or Part 500. However, the Act nevertheless does require that notice of such breaches be provided to New York governmental and law enforcement authorities and, where there are more than 5,000 affected New York residents, to consumer reporting agencies as well. Moreover, in the case of a breach of personal health information that must be reported by a HIPAA covered entity to the US Secretary of Health and Human Services under the HIPAA/HITECH regulations, the Act requires the HIPAA covered entity, within five days of making such report, to notify the New York Attorney General of the breach—even if the health information involved was not "private information" under the New York law.

Data Security Safeguards. Perhaps the most transformative aspect of the SHIELD Act is its addition of the requirement for businesses to develop, implement and maintain reasonable data security safeguards to protect the security, confidentiality and integrity of the private information of New York residents. At present, no such requirements apply under New York's data breach notification law. The Act requires businesses to adopt data security programs that include certain risk-based administrative safeguards (e.g., employment of qualified personnel, adoption of data security policies and procedures, employee training programs, and third-party service provider cyber risk management controls), technical safeguards (e.g., network and software design controls, procedures for detecting, preventing and responding to system attacks and failures, and regular testing of system vulnerabilities and of the effectiveness of security controls), and physical safeguards (e.g., procedures for information storage and disposal and for physical equipment theft or facility intrusion). In general, this framework mirrors the data security requirements set forth under the Federal Trade Commission's Safeguards Rule.⁹

As with the law's security breach notification requirements, entities that are subject to the GLBA, HIPAA, Part 500 and other comparable data security laws or regulations, and which are in compliance with the data security program requirements that apply thereunder, will be deemed to have satisfied the above requirements. In addition, certain small businesses (i.e., persons or entities with less than (i) 50 employees, (ii) $3 million in gross annual revenue in each of the last 3 fiscal years, or (iii) $5 million in year-end total assets), will satisfy the above requirements if the safeguards that are implemented are appropriate for the size and complexity of the business, the nature and scope of its activities, and the sensitivity of the data that it collects from or about consumers. Any failure by a business to comply with the amended law's data security safeguards requirements will be subject to investigation, and the potential imposition of civil penalties (up to the greater of $5,000 or $20 per instance of failed notification, provided that the latter may not exceed $250,000), by the New York State Attorney General's Office.

Takeaways for Action

Any business that owns or licenses private information about a New York resident, including those that are not organized under New York law or which do not maintain a meaningful physical presence within or nexus to the State, should become familiar with the SHIELD Act's amendments to New York's data breach notification law. At a minimum, all subject businesses will need to review and update their security incident response plans and corresponding policies and procedures to account for the law's modified notification triggers and processes. Businesses that have not implemented sophisticated data security programs should assess their risk exposure in order to design programs that are reasonably tailored to address the security risks they face. This may require the addition of qualified personnel, perhaps including information security/technology and/or data privacy officers, as well as the engagement of external specialists and counsel to assist with design, implementation, monitoring and testing of such programs, training and management of employees, and program documentation needs.

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Arnold & Porter's Privacy and Data Security practice assists businesses in a wide range of industries with the increasingly challenging task of protecting data consistent with applicable law. We provide data protection counsel to technology and business leaders in connection with the development and use of emerging technology platforms; to clients in the financial services and health industries; and to others involved e-commerce, software development and deployment, telecommunications, government contracting, and a host of other activities. Our Data Breach Rapid Response Team is a proven, comprehensive service group that brings together our integrated white collar, privacy, cybersecurity, healthcare, financial services, corporate, intellectual property, employment, and litigation experience to help our clients develop properly tailored response plans, and to assist them, in the event of a breach, through each stage of crisis management. For further information about these services, please contact any of the authors listed below or your Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.