United States: Legislators Propose Differing Approaches To Federalizing Corporate Responsibility For Data Breaches

In the past year, members of the U.S. Congress and Senate on both sides of the aisle have proposed data privacy bills that would impose nationwide standards on companies who collect and/or share consumers' personal information. Currently, all 50 states have separate, but often overlapping, data privacy regimes—each subjecting companies to various combinations of recordkeeping standards, data sharing restrictions, and data breach reporting requirements—creating a patchwork of state laws that can generate substantial uncertainty for corporations.

Support for federal legislation has been growing, and in January 2019, the Government Accountability Office recommended that Congress consider developing comprehensive data privacy legislation.[1] The bills that have been proposed differ widely, and while many commentators feel 2019 is a critical year for enacting such legislation, sufficient support has yet to coalesce around a single bill. Key sticking points include preemption of state data privacy laws, punitive sanctions (if any) for company executives, and the method of enforcement for any new federal privacy law.

Key stakeholders such as state attorneys general have come out strongly against any preemption efforts, with 32 joining a recent letter to Congress to oppose any federal legislation that preempts state laws.[2] On the other side, a majority of Federal Trade Commission ("FTC") Commissioners testified in recent hearings in favor of some form of preemption[3] while industry groups continue to lobby for federal legislation that simplifies the regulatory landscape. Looming large in the backdrop of this debate is the California Consumer Protection Act ("CCPA") set to come into effect in 2020 and considered to be on par with the European General Data Protection Regulation ("GDPR") and, in some ways, even more burdensome for regulated companies.

In this post, we provide a survey of the recent federal data privacy proposals, highlighting their key differences and potential implications.

The Data Care Act ("DCA")[4]

The DCA, first introduced by Senator Brian Schatz (D-HI) in December 2018, enjoys strong support from a group of 15 Democratic senators.[5] The DCA draws on corporate fiduciary duty principles by imposing on companies the duties of care, loyalty, and confidentiality towards consumers whose personal information they store and/or share. The duty of care would require companies (1) to "reasonably secure" consumers' stored personal information and (2) to notify those consumers of any data breaches. The duty of loyalty would forbid companies from using consumers' data in ways that would result in "reasonably foreseeable" harm. And the duty of confidentiality would allow companies to share stored consumer data only with others who contractually agree to exercise these same duties of care and loyalty.

The DCA proposes to enforce these new fiduciary duties through both enforcement actions by the FTC and civil suits by individual states' attorneys general. Penalties would vary based on how long a company was in violation and on how many consumers were harmed. The proposal does not go so far as to create a private right of action for individuals, although some Democratic legislators have expressed support for this feature.[6]

Importantly, the bill explicitly does not preempt state law, and Senator Schatz himself has expressed that he is opposed to preemption unless the federal legislation contains strong substantive privacy rules.[7]

The Consumer Data Protection Act ("CDPA")[8]

Perhaps the most comprehensive legislation proposed is the CDPA, sponsored by Senator Ron Wyden (D-OR). First introduced in the Senate in November 2018, the bill, if passed, would have significant consequences for both corporations and their officers. The Act takes a sweeping administrative law approach, proposing modifications to the Federal Trade Commission Act that would establish a new bureau within the FTC and give the FTC broad authority to set corporate data privacy standards , including what constitutes "reasonable cyber security standards" and "reasonable physical, technical, and organizational" data protection measures. It would also give the FTC increased abilities to sanction those not in compliance with these standards. The Act would cover all corporations with annual revenues of $50 million or more or which store information on 1 million or more customers, but would exempt data brokers[9] and news organizations[10].

Unique to the CDPA among other competing bills is its definition of "personal information," which is defined to encompass information "reasonably linkable to a specific consumer or consumer device"—a much broader scope than that of other federal bills and current state laws.

Notably, the CDPA proposes to create a consumer "opt-out" plan via an FTC administered "do not track" website, where consumers could register their refusal to allow companies to share their personal information. Under the Act, a company may not require consumers to waive "do not track" rights in order to use its product; however, it may require those who opt out to pay a small additional fee for the product. The CDPA proposes certain minimum standards for data privacy and security and would require companies to conduct "impact studies" to measure system security. The Act further requires that, if requested, a company must share with a consumer that consumer's stored data and with whom the company has shared it.

The CDPA also proposes substantial sanctions for violations by corporations and officers. By redefining "unfair" business practices to include practices "creating a significant risk of unjustified exposure of personal information," it would newly allow the FTC to collect civil penalties for data security violations. Additionally, it would increase the FTC's civil penalty caps from $10,000 to the greater of $50,000 or 4% of a company's revenue: a punishment that mirrors those imposed by the GDPR. And, notably, it would impose responsibility on individual executives of the largest corporations (those with over $1 billion in annual revenue or storing data on more than 50 million consumers) by requiring them to submit annual reports certifying compliance with the FTC's regulations. Officers who knowingly provide inaccurate certifications could face fines and imprisonment up to 20 years.

The Data Breach Prevention and Compensation Act ("DBPCA")[11] and the Corporate Executive Accountability Act ("CEAA")[12]

Senator Elizabeth Warren's (D-MA) plan comes as two bills. The first, the DBPCA, is a response to the Equifax breach and exclusively deals with credit reporting agencies, proposing to fine them a minimum of $100 for every costumer whose information is stolen in a data breach and a maximum of 50% of the credit agency's revenue from the previous year. The cap would increase to 75% if the credit agency does not report the breach within 10 days or if the breach results from the company's failure to comply with FTC regulations. The Act would also create an FTC Office of Cybersecurity to inspect the major credit reporting agencies.

The second, the CEAA, is not specifically a data privacy bill, but, nevertheless, would have significant implications for officers of corporations who are the victims of data breaches. Like Sen. Wyden's CDPA, the CEAA would apply to executives of corporations with over $1 billion in annual revenue, making them criminally liable for certain violations. Among other things, the CEAA would impose prison time on executives for any federal or state law violations (whether criminal or civil) resulting in damage to, among other things, the "personal data" of U.S. citizens (one year for first offenses and three years for subsequent offenses). While most federal criminal laws require that a corporate officer act with knowledge or intent, the CEAA would impose liability where an officer acted negligently, a significant broadening of the potential for executive criminal sanctions and raising significant due process concerns.[13]

Notably, these acts would explicitly not preempt state data privacy laws. The DBPCA expressly states as much, and the CEAA does not create a federal data privacy regime at all. In fact, that it specifically provides for criminal liability for failure to follow state data privacy laws suggests that the Act is intended only to supplement the 50 states' regulatory regimes.

The American Data Dissemination Act ("ADDA")[14]

While there have been a number of Republican and bipartisan proposals, currently the main Republican proposal is a bill proposed by Senator Marco Rubio (R-FL). The bill prioritizes providing clarity to companies that store and share personal data. The Act does not itself create rules, but rather directs the FTC to make recommendations within 180 days and commits Congress to passing a comprehensive law within a year of receiving the recommendations. The law envisions imposing on companies regulations such as dissemination restrictions, mechanisms for individuals to view and dispute their stored personal information, and generally acceptable practices of responsible data collection and maintenance. The law also recommends that the FTC exempt smaller and newly formed companies from regulation, setting out factors for the FTC to consider in setting such exemptions, but not providing explicit thresholds as other bills do.

The ADDA is the only proposal discussed here to expressly preempt all current state data privacy laws. It sweeps widely: the law "shall supersede any provision of the law of a State relating to" (i) "records covered by this Act" or (ii) "any other personally identifiable information or personal identification information."

Social Media Privacy and Consumer Rights Act ("SMPCRA")[15]

Senator Amy Klobuchar (D-MN) is the primary sponsor of the leading bipartisan privacy bill, introduced in January 2019 with co-sponsorship from Senators Richard Burr (R-NC), John Kennedy (R-LA), and Joe Manchin (D-WV).

The primary feature of the bill is so-called "opt-in consent," requiring companies to inform users of how their data will be used and permitting them to refuse consent to those uses. The bill also permits users to request a copy of all of their personal data held by the company, free of charge. Finally, the bill requires that companies notify consumers within 72 hours if there has been a breach of their personal data.

Under the SMPCRA, the FTC is tasked with enforcement of violations of the Act as unfair or deceptive practices and state attorneys general are also empowered to bring civil actions for "appropriate relief" under the Act. The Act would not provide for sanctions for executives of violating companies, although the companies themselves could be fined up to $10,000 per violation under the FTC's current unfair or deceptive practices rules. The Act also explicitly does not preempt state laws regarding privacy.

The Path Forward

These federal data privacy bills differ significantly in substance and there will be continued vigorous debate across and among the parties on the appropriate legislative approach to the area. One major issue is whether a final bill should impose duties on companies prior to any data breaches, after a data breach occurs, or both. For instance, the CDPA focuses largely on reasonably securing data storage systems in order to avoid data breaches, while the DCA would follow many current state laws and create after-the-fact notification requirements.

Another issue to be addressed is to which companies federal privacy obligations will apply. All of the proposals agree there should be some allowances for smaller, less established companies, but each varies in terms of degree. Further, while many state laws carve out liability and notification exceptions when compromised data is encrypted, none of these bills expressly create any such safe harbors. Likewise the issue of criminal penalties for individual executives may be a significant sticking point.

Finally, preemption will remain a point of contention, particularly given the large role played by state attorneys general under the current regulatory framework. Time will tell whether and how the political process will address these issues. Until then, companies should continue to monitor these developments, which may significantly impact the obligations and costs of collecting and storing personal data within the United States.

With assistance from Daniel Lee James.


[1] Government Accountability Office, "Internet Privacy: Additional Federal Authority Could Enhance Consumer Protection and Provide Flexibility" (Jan. 2019), https://www.gao.gov/assets/700/696437.pdf.

[2] Available at http://www.illinoisattorneygeneral.gov/pressroom/2018_03/Committee_Leaders_letter.pdf.

[3] Cleary Cybersecurity and Privacy Watch, "FTC Commissioners Continue Calls for National Data Privacy and Security Legislation" (May 29, 2019), https://www.clearycyberwatch.com/2019/05/ftc-commissioners-continue-calls-for-national-data-privacy-and-security-legislation/.

[4] For the full text of the bill, see https://www.congress.gov/bill/115th-congress/senate-bill/3744/text.

[5] Inside Privacy, "Democratic Senators Introduce Privacy Bill Seeking to Impose 'Fiduciary' Duties on Online Providers" (Dec. 21, 2018), https://www.insideprivacy.com/data-privacy/democratic-senators-introduce-privacy-bill-seeking-to-impose-fiduciary-duties-on-online-providers/.

[6] Ben Brody and Daniel Stoller, "Democrats Seek Expansion of Corporate Liability in Privacy Bill," Bloomberg (May 22, 2019), https://www.bloomberg.com/news/articles/2019-05-22/democrats-seek-expansion-of-corporate-liability-in-privacy-bill.

[7] Mark Sullivan, "Inside the Upcoming Fight Over a New Federal Privacy Law," Fast Company (Jan. 4, 2019), https://www.fastcompany.com/90288030/inside-the-upcoming-fight-over-a-new-federal-privacy-law.

[8] For the full text of the bill, see https://www.wyden.senate.gov/imo/media/doc/Wyden%20Privacy%20Bill%20Discussion%20Draft%20Nov%201.pdf.

[9] These are companies that engage in the sale of third-party information.

[10] The CDPA would not regulate a company's journalism activities, but would regulate its business activities. For example, a news organization's data storage as part of its preparing news stories would not be covered, but its data storage associated with advertising sales would be.

[11] For the full text of the bill, see https://www.warren.senate.gov/files/documents/Data%20Breach%20Prevention%20and%20Compensation%20Act%20of%202018.pdf.

[12] For the full text of the bill, see https://www.warren.senate.gov/imo/media/doc/2019.4.2%20Corporate%20Executive%20Accountability%20Act%20Text.pdf.

[13] For a more in-depth discussion of the negligence standard proposed in the CEAA, see Cleary Enforcement Watch's April 10, 2019 post at https://www.clearyenforcementwatch.com/2019/04/senator-warren-proposes-bill-to-hold-corporate-executives-criminally-accountable-for-negligent-conduct/.

[14] For the full text of the bill, see https://www.congress.gov/bill/116th-congress/senate-bill/142/text?format=txt&q=%7B%22search%22%3A%5B%22s.+142%22%5D%7D&r=1&s=1.

[15] For the full text of the bill, see https://www.congress.gov/bill/116th-congress/senate-bill/189/text.

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