Companies Should Think About Cybersecurity In Terms of Reducing Regulatory, Legal Risks

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By Joyce E. Cutler  

June 20 — Companies need to think about cybersecurity in terms of reducing risk and regulatory and legal headaches rather than in terms of return on investment, panelists at Stanford Law School's “E-Commerce Best Practices” conference said June 16.

The Federal Trade Commission and National Institute of Standards and Technology help craft the way implementing security measures are presented to the C-suite, panelists said during a session on cybersecurity.

Misguided Focus?

Although managers may understand that their company might be hacked or be sued by regulators, the issue on which they focus is the return on investment and how much money they can save by implementing standards, said Joseph V. DeMarco, partner at DeVore & DeMarco LLP in New York.

A good accountant can provide precise information about accounts receivable and fraud, DeMarco said. “But cyber is different as we all know because the information is moving around, data is coming into the organization at the speed of light, devices are coming on and off the network every day” and the “bad guys are hiding behind layers and layers of anonymity.”

Focusing on return on investment and how risk will be reduced by “x” percent, DeMarco said, fails to consider that following standards reduces legal, business and reputational risks.

As a prosecutor for 10 years, DeMarco said he “picked through the wreckage of every data breach imaginable.”

“Recurring themes do present themselves,” he said. “And if you follow any one of the models, you are going to reduce risk” and increase ability to detect and respond to wrongdoing effectively and efficiently.

“And finally, when the regulators come knocking or the plaintiffs' attorneys come calling, you will be able to answer them with satisfactory answers that are going to dramatically improve a good outcome,” DeMarco said.

FTC Actions as Guidance

The FTC has brought large enforcement actions against companies such as Facebook Inc. and Microsoft Corp. that ended in 20-year consent decrees, said Thomas Smedinghoff, a partner with Edwards Wildman Palmer LLP in Chicago.

In a case in which Wyndham Worldwide Corp. challenged the FTC's enforcement authority, the U.S. District Court for the District of New Jersey in April held that the FTC has authority under the “unfairness” prong of the FTC Act to bring enforcement actions to remedy unreasonable data security practices (FTC v. Wyndham Worldwide Corp.,2014 BL 94785, D.N.J., No. 2:13-cv-01887, 4/7/14).

“One of the more interesting parts of the opinion is the court basically says, look to past FTC decisions. Look to see how they treated this in the past and that you can use as guidance for how you're going to be treated and what your obligation is likely to be,” Smedinghoff said, adding that knowing what reasonable measures to take is a challenge for businesses.

DeMarco said he wasn't surprised the FTC was reluctant to disclose in “any meaningful format what it views as a reasonable security.”

NIST Cybersecurity Framework

Under an executive order from President Barack Obama, the NIST in February released a final voluntary cybersecurity framework of best practices for the protection of critical infrastructure.

The framework is written in language that is understandable and approachable to those who don't normally deal with cybersecurity, such as corporate directors, said Donald Vieira, a partner with Wilson Sonsini Goodrich & Rosati in Washington.

DeMarco said he expects the NIST guidelines will become a de facto standard of care, and businesses should consider the NIST standards as they think about privacy and security.

Françoise Gilbert, founder and managing director of the IT Law Group in Palo Alto, Calif., said the NIST framework is “a very good tool to communicate” how to accomplish security goals and is a “nice, organized, simple way to get there.”

To contact the reporter on this story: Joyce Cutler in San Francisco at

To contact the editor responsible for this story: Katie W. Johnson at


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