Be Prepared For Law Firm Data Breach Litigation

January 3, 2017Articles Law360

Mossack Fonseca. Before April 2016, most of us had never even heard of a Panamanian law firm by that name. But, after one of the largest and certainly most high-profile cyberattacks, the firm and its mountain of records evidencing shell companies, straw transactions and offshore accounts — documents that have come to be known as the “Panama Papers” — have become synonymous with one of the hottest topics in the legal industry: cybersecurity.

Since an anonymous source leaked over 11 million Mossack Fonseca files to a German newspaper that shared them with the International Consortium of Investigative Journalists, the news media has been running stories about how the rich and famous hide their money and avoid taxes.

The legal industry had already been focused on cybersecurity after PricewaterhouseCoopers warned in 2011 that “there is no question that law firms are among the companies being targeted by cyber-criminals.” But the Panama Papers removed any doubt about whether the threat was more than hypothetical.

Indeed, according to a recent survey published by the American Bar Association, 26 percent of firms with more than 500 attorneys have experienced a security breach. Firms have long been focused on protecting themselves against cyberattacks, working with their information technology teams and outside vendors to understand the risks and to shore up their defenses.

The focus has been not only on network integrity, firewalls, antivirus software and disaster recovery, but also on educating their attorneys and staff about data security. While some data breaches are the work of sophisticated cybercriminals, a lost laptop or a compromised password are enough to cause major damage.

But now, as is often the case with game-changing news stories about sensitive information or big money, the focus has shifted, at least in part, to the courts. Lawyers have a duty to protect the confidentiality of client information, so if that confidentiality is compromised, we can expect that litigation will follow.

Indeed, just recently, a court unsealed a complaint filed by well-known class action lawyer Jay Edelson in the first public data security class action against a U.S. law firm — Shore v. Johnson & Bell Ltd., No. 16-CV-4363 (N.D. Ill.). Shore has garnered media attention because it is the first public suit, but Edelson’s public comments make clear that Johnson & Bell is not his only target or only pending suit.

While the case law on law firm data breach litigation has largely yet to be written, there are certain fundamental tenets worth exploring as existing defenses are tailored to fit these new circumstances and technology.

Duty

The Rules of Professional Conduct in every state generally provide, consistent with Rule 1.6(c) of the Model Rules, that “[a] lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.” So, what are “reasonable efforts”?

Certainly, there must be some degree of proportionality: valuable trade secrets likely require more protection than random e-mails, and Mossack Fonseca likely owes a higher duty to protect the identities of its privacy-seeking clients than attorneys representing litigants in a public forum.

There must also be some recognition that the threat landscape changes almost daily, and so “reasonable efforts” should reflect industry “best practices” at a point in time, and some degree of proportionality, taking into account the value of the content being protected, cost of the protection and practical technical considerations.

Breach

Legal malpractice actions often turn on how the standard of care is defined. Without years of precedent to guide them, courts are likely to search for benchmarks in this evolving area of the law.

For example, since 2002, the office of the California Attorney General has taken a lead role in data security enforcement. Its 2016 Data Breach Report cites a list of 20 critical security controls published by the Center for Internet Security, and concludes that failure to implement applicable controls constitutes “a lack of reasonable security.”

While this area continues to develop, it is difficult to imagine a more definitive statement or a more reliable source and so we recommend that our law firm clients take note of the “CIS 20.”

Causation

Most malpractice plaintiffs can establish at least an argument on duty and breach, and so causation is often where actions against attorneys are decided. Although the list of hypothetical data breach plaintiffs is a long one, we think that causation will remain a fertile ground for defenses.

Was the information actually confidential? Are there instances of prior disclosure? Would the information have been discovered inevitably or through the discovery process? Did the client have a duty to disclose? Does the disclosed information reveal something illegal?

In some instances, an attorney will face a decision about the client relationship, so these arguments may be difficult to make. But in others, the arguments will be justified in view of litigation exposure. As always, close attention to the causal chain is a must when responding to clients who sue.

Standing and Damages

Defending lawyers often involves defending against damages theories that stretch the bounds of the law and the imagination. We anticipate that these suits will be no different and, if anything, that data breach litigation will involve more than its fair share of novel theories.

Most states require “actual loss” in suits against lawyers, so plaintiffs are frequently foreclosed from pursuing consequential damages or theories that rely upon conjecture and speculation. Breaches of confidentiality are especially susceptible to such theories, and lawyers will be wise to keep the “actual loss” case law close at hand and to look for opportunities to challenge standing under Article III in the absence of an identifiable injury.

As with other technology-related developments, the key principles will remain the same, but their application may change as the technology evolves and as firms and clients become more sensitive to the risks posed by cyberattack.

Notwithstanding all of the uncertainty, one thing is for sure: every client should review their coverage with their insurer to make certain that they are protected in the event of cyberattack.

Reprinted with permission from Law360. (c) 2017 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.