Lawmakers in six states have responded quickly to the massive data breach at TJX Companies, Inc. with various bills designed to strengthen merchant security and/or render companies liable for third party companies’ costs arising from data breaches. These latest bills – introduced in California, Connecticut, Illinois, Massachusetts, Minnesota and Texas – represent a new front of state legislative activity to regulate privacy and data security and expand requirements beyond the current data breach notification and data security laws that many states have enacted in recent years. To date, Minnesota is the only state to enact such legislation, which was signed into law by its Governor on May 21, 2007.
Minnesota’s New Law
The Minnesota law, H.F. 1758, amends Minnesota’s data breach notification law and contains security and liability components. The security requirements take effect August 1, 2007 and apply to any “person or entity conducting business in Minnesota” that accepts credit cards, debit cards, stored value cards or similar cards “issued by a financial institution.” Such companies are prohibited from retaining the following card data after authorization of a transaction:
- “the full contents of a track of magnetic stripe data” (which encompasses the “card verification value” or CVV – a unique authentication code embedded on the magnetic stripe);
- the three to four digit security code on the back of the card by the signature block (also known as CVV2); and
- any PIN verification code number. If a debit card with PIN is used, a company is prohibited from retaining the data more than 48 hours after authorization of the transaction.
The liability provision of H.F. 1758 applies to data breaches occurring after August 1, 2008. It requires companies to reimburse card-issuing financial institution for the “costs of reasonable actions” to both protect its cardholders’ information and to continue to provide services to its cardholders after a breach. The reimbursement would cover costs related to providing cardholders with notification of the breach, cancellation and reissuance of cards, closing or reopening of accounts and stop payments, and cardholder refunds for unauthorized transactions charged to their accounts. A financial institution may also bring an action to recover for the costs of damages it pays to cardholders resulting from a breach.
The Five Pending Bills
The April 27, 2007 blog entry posted here discussed in detail California’s A.B. 779 as introduced. Since that posting, A.B. 779 has been amended in various California Assembly Committees and now resides with the Appropriations Committee. The amended bill extended the scope of the bill beyond just retailers to all persons or businesses conducting business in California that own or license computerized data containing personal information. The 90-day record destruction requirement in the original bill has been deleted, but the amended bill now has a host of other restrictions on storing payment card data. Among its requirements, the bill requires:
- account numbers retained by businesses be “indecipherable” to unauthorized persons;
- that payment related data sent across a network be encrypted;
- that companies have role-based restrictions for employee access to such data; and
- the bill also adds a provision that is broader than Minnesota’s financial institution reimbursement provision, requiring vendors that maintain, but do not own or license breached personal information, to reimburse data owners and licensees for “reasonable and actual costs” of providing data breach notification.
In the Texas legislature, the House passed H.B. 3222, which would require companies that accept, process or maintain credit card, debit card and other financial institution-issued cards to follow the Payment Card Industry’s Data Security Standard (“PCI DSS”). The PCI DSS are extensive industry security standards designed to prevent identity theft that the major credit card issuers impose on merchants that store, process or transmit cardholder data. While H.B. 3222 excludes financial institutions from the security standards, it empowers them, subject to certain conditions, with a right of action for actual damages against other companies they believe have violated the provision.
The other pending bills, Connecticut S.B. 1089, Illinois S.B. 1675 and Massachusetts H. 213 all contain provisions similar to Minnesota’s liability provision making companies liable to banks or financial institutions that incur costs arising from a breach. It should be noted that the liability provisions of Massachusetts’ H. 213 were not included in omnibus versions of data breach notification, credit freeze and data security and disposal bills that have recently passed the Massachusetts House and Senate, and which await action by conference committee to resolve differences between the two versions.