5 Proactive Steps For Employers and Businesses in a Post-Equifax World

Companies should proactively prepare for changes in consumer behavior and corporate responsibility.

By now, most people have heard about the massive data breach at Equifax, one of the four US credit bureaus along with Experian, TransUnion and Innovis, affecting 143 million people. Credit bureaus (also known as consumer reporting agencies) compile and keep a file containing a person’s credit history, including things like the types of credit, how long credit accounts have been open, how much available credit is utilized/available, whether bills are paid on time, late payments/collection notices/foreclosure notices, and public records such as liens and bankruptcies, as well as personal information such as Social Security Number (SSN), date of birth (DOB), and current and previous addresses. Credit bureaus make a report of a person’s credit history (their “credit report”) available to that person, and to employers and other businesses.

Employers and businesses often want to base decisions on whether to offer a person their products or services such as a loan/mortgage/credit offer, the interest rate to charge on that offer, a cell phone plan, an insurance policy, etc., or extend that person an offer of employment or a lease, on as much available relevant information as possible.  This often includes a review of that person’s credit history. Credit reporting agencies monetize accumulated credit history and associated personal information by making credit reports available to employers, insurers, service providers and other businesses for a fee, as permitted by applicable law. If an employer or business wants to obtain your credit report, they obtain your permission to access your report as required by law and ask you to provide certain sensitive personal information about you which they will use to request your report, and they pay a fee to one or more of the credit bureaus to receive a copy of your credit report.

Many employers and businesses rely on easy access to credit reports.  However, this may be one of the more likely casualties of the Equifax breach. As noted earlier, 143 million Americans may now be at risk for identity theft using their sensitive personal information from this one breach event alone. Unlike a credit card number, which can be changed in the event the data is compromised, SSNs and DOBs (which were compromised in the Equifax breach) can’t be changed. This is why the Equifax breach is so significant – unlike most previous breaches, the scale of this breach and the nature of information compromised mean that consumers will be at risk for, and must remain vigilant for, identity theft for the rest of their lives, which will likely drive changes in the way people monitor and manage their credit reports and sensitive personal information.

Most of the advice and guidance regarding the Equifax breach to date has been consumer-focused – what consumers can and should do to protect themselves in the post-Equifax world. This includes recommendations for more robust use of credit freezes currently offered by the credit bureaus and use of third party monitoring services which alert consumers to (or require the consumer’s approval for) changes in their credit report, representing a shift in the spectrum towards consumer identity protection and away from access to easy credit such as point-of-sale, “save 20% if you open an account today”-type offers requiring an instant check of your credit. It is also likely the earthquake caused by the Equifax breach will result in additional security and legal requirements not just for credit bureaus, but for all companies possessing sensitive personal information such as SSNs and DOBs, as well as industry-driven or legislatively-mandated enhanced best practices and/or new ways for consumers to help them control access to their credit reports in an effort to minimize identity theft, such as a tool to manage security freezes at all three credit bureaus simultaneously and make it easier to impose, and temporarily lift, such freezes. The Equifax breach is also likely to increase consumer acceptance of more complex login processes, such as multi-factor authentication.

Employers and businesses should start thinking about how they can and should adapt to the coming post-Equifax changes in consumer and credit bureau behavior, and increases in corporate responsibility with respect to security and collection/use of sensitive personal information. By taking proactive steps, companies can demonstrate to their employees and customers that they are sensitive to the importance of identity protection and security. Here are 5 proactive steps companies may want to consider:

1. Address consumer credit freeze/release approval in the new employee hiring process and other processes requiring a consumer credit check (such as point-of-sale credit offers).

While implementing a credit freeze will help protect a person from identity theft, it’s not without its drawbacks. As of today, these drawbacks include the need to separately implement or lift freezes on a per-credit bureau basis, and the fact that the freeze must be lifted (temporarily or permanently) before an employer or business can perform a credit check. Despite this drawback, more people will likely implement credit freezes in the post-Equifax world, which will impact companies’ ability to easily complete background checks or receive point-of-sale credit offers.

  • Employers and other businesses performing a consumer credit check should anticipate this and consider proactively modifying their credit check process by adding a question to their credit report authorization form asking whether a person has a credit freeze, or whether that person’s approval is required for the release of their credit report. If that person answers “yes,” the employer or business should have a standard exception process to work with that person to ensure the freeze is temporarily lifted, or approval for the credit check is given, so the employer or business can perform the credit check.
  • Retailers offering point-of-sale credit offers should consider ensuring their offer disclosures include a statement that people with credit freezes may not be eligible for the offer due to the inability to verify their credit history. For those businesses which use sales associates to offer point-of-sale promotions, consider requiring them to ask whether the consumer has a credit freeze in place, and if so notify them if the freeze renders them ineligible for the offer.

Employers and businesses should also know which credit bureau(s) they use for background checks, and be prepared to provide this information to make it as easy as possible for a prospective employee or customer to implement a temporary lift of the credit freeze. It may be worth having a short URL handy which can be provided to a prospective employee or customer who wants to temporarily lift their credit freeze to enable them to take advantage of the offer on the spot or at a later time.

2. Enable multi-factor authentication for access to online services and consumer portals.

Most businesses use a username and password as access credentials. Some, but not all, have moved to a more secure authentication mechanism known as multi-factor authentication. Multi-factor authentication requires a user to provide not only a username, but two or more of the following “authentication elements” to validate the user’s identity: (1) something you know (e.g., a password, the answer to a challenge question), (2) something you have (e.g., a one-time PIN or password or a code delivered specifically through the user’s mobile device), and/or (3) something you are (e.g., facial recognition or fingerprint). Each factor must be independent of the other so that knowing one factor does not reveal another. Other data, such as geolocation information or time-based access requirements, can be used as well. The most commonly-known type of multi-factor authentication is two-factor authentication, where two authentication elements (of which one is typically a password) are required. Multi-factor authentication helps reduce the chance a bad actor could successfully exploit a username and password obtained through a security breach, through phishing, or through other social engineering attack vectors. Companies can use multi-factor authentication to demonstrate to its users (and potential users) that it places a high value on security.

Some companies argue that the burden of providing additional verification does not outweigh the simplicity of a username/password, especially where the company is not collecting any sensitive personal information. However, multi-factor authentication is an industry standard in certain areas, such as under the current Payment Control Industry Data Security Standard (PCI-DSS) for companies that are required to be PCI compliant, and will likely continue to gain traction as an industry standard, or customer expectation, in other areas. The National Institute of Standards and Technology (NIST) recommends using multi-factor authentication wherever possible. For companies where multi-factor authentication is not an industry standard or legal requirement, consider offering multi-factor authentication anyway, or offering it as an enhanced security option to customers concerned about protecting access to their accounts.

3. Evaluate whether there is a true need to collect SSNs and DOBs from consumers, and/or other creative ways to validate SSN and DOB information.

Companies which collect Social Security Numbers or dates of birth from their users should consider whether the collection of this information is truly required. One of the core tenets of data privacy is the Collection Limitation principle, which advocates for limits on companies’ collection of personal data. HIPAA takes this a step further and applies a “minimum necessary standard” – companies should limit the use and disclosure of collected personal information to the minimum necessary to accomplish the intended purpose. Companies should consider following HIPAA’s “minimum necessary standard” even if they are not subject to HIPAA. With respect to sensitive personal information such as SSN and DOB, companies should look carefully at whether they truly need to collect this information, and for what purpose. If there is another way to accomplish the same goal without collecting the information, consider implementing that alternative approach. Here are two examples:

  • With respect to SSNs, instead of asking for a user’s SSN for validation purposes considering asking for the sum of the digits in their SSN, or the sum of the digits in their SSN plus the digits in their home street address. This provides a strong identity validation mechanism without the need to capture and store SSNs.
  • With respect to DOBs, if validating a user’s age (e.g., for COPPA purposes), consider whether the month and year is sufficient, and keep a flag indicating that the age information was verified instead of the month/year information itself.

4. Review and freshen (or implement) their incident response and incident communications plan(s).

To many, Equifax’s response has been a lesson in how not to manage communications regarding a security breach. Companies should take the opportunity to learn from Equifax’s missteps and review and freshen up their incident response and incident communication plan(s). For companies still without an incident response/incident communications plan, now is the time to ensure one is in place. A few things to consider:

  • According to press reports, the Equifax breach allegedly stemmed from the failure to timely implement a security update to the Apache Struts Web Framework. As part of incident response preparedness, work with IT to ensure that your company is actively monitoring for hardware/software security patches, and is applying them as quickly as possible following release.
  • There have been numerous reports regarding sales of Equifax stock valued at $1.8 million by three senior Equifax executives within days of Equifax’s discovery of the breach. While Equifax has stated that the executives were not aware of the breach, whether or not the executives (including the CFO and President of US Information Systems) had knowledge doesn’t really matter – the perception and optics of it are awful in the eyes of the public, the SEC, and state attorneys general. Consider ensuring that the entire senior team is notified immediately in the event of a security breach, and have your General Counsel or external breach counsel discuss with them the risks of continuing with any automated stock sale programs in light of the breach.

5. Consider offering credit monitoring as an employee benefit.

Finally, employers may want to consider adding credit monitoring as an employee benefit, by offering subsidized or free credit monitoring services to their employees through a partnership with a credit bureau or a third-party provider such as AllClear ID. While there are some questions as to the value of credit monitoring in protecting against identity theft, services that notify you and/or require your approval before a new account is opened can be very valuable in fighting identity theft. As the possibility of identity theft is becoming a fact of life in the 21st century, companies may find it beneficial to help their employees guard their identity. Among other benefits to companies, minimizing identity theft reduces the time employees need to take away from work, whether as PTO or lost productivity, to deal with the repercussions of having their identity stolen, and provides employees with increased peace of mind with respect to identity protection.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The What, Why and How of SLAs, aka Service Level Agreements (part 2)

Every company uses technology vendors, such as Software-as-a-Service providers, to provide critical components of their business operations. One pervasive issue in technology vendor agreements is the vendor’s commitment to the levels of service the customer will receive.  A representation to use commercially reasonable efforts to correct product defects or nonconformity with product documentation may not be sufficient for a customer relying on a technology vendor’s service for a mission-critical portion of its business. In this situation, the vendor may offer (and/or a customer may require) a contractual commitment as to the vendor’s levels of service and performance, typically called a “Service Level Agreement” or “SLA.” Service Level Agreements (SLAs) ensure there is a meeting of the minds between a vendor and its customer on the minimum service levels to be provided by that vendor.

In Part 1 of this post, I walked through uptime and issue resolution SLAs.  In this second part, I cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Other Types of Commitments in SLAs

Other common types of SLAs in technology agreements include latency SLAs and customer service SLAs.

Latency SLAs. “Latency” is the time it takes for a server to receive a server request, process it, and send a response. For example, when you load a webpage, a server request is sent to a web server to deliver the webpage, the server processes the request, and sends a response with the code to render the page in the user’s web browser. Latency can be affected by a number of factors, including the geographic location of servers, network/Internet capacity, and server optimization. For companies using a vendor to provide services as part of its client-facing systems (e.g., an address verification service), minimizing latency to ensure a high level of performance is critical. A latency SLA is a commitment to a maximum roundtrip response time for a vendor server request. Latency SLAs typically exclude the time it takes to get from the customer’s server to the boundary of the vendor’s network, and vice versa (as this is outside of the vendor’s control).

Customer Service SLAs. In some vendor relationships, ensuring the prompt provision of customer support is a critical component of the relationship. For example, if a vendor is providing support to a customer’s clients or employees, or is providing level 2 escalation support, customer support SLA commitments may be important to the customer to ensure a high level of service.  Customer support commitments often include commitments on time to first response (the time from the submission of a request to the time an agent opens the support ticket to begin working on it); time to resolution (total time needed to resolve the issue); average speed to answer (the percent of calls answered within a maximum time, e.g., 85% of calls within 30 minutes, or percent of emails answered within a maximum time, e.g., 90% of emails within 4 business hours); and/or abandonment rate (the maximum number of calls being abandoned in queue before a support agent picks up the call).

SLA Remedies

In order to ensure the service level commitments made by a vendor have teeth, the SLA should have remedies available to the customer in the event of a failure to meet one or more SLA commitments. The remedies are often the most heavily negotiated section of the SLA. There are a variety of remedies that can be applied in the event of a SLA failure.

Service Credits. One of the more common forms of remedy is a service credit, often a percentage of fees paid by the customer for the period in which the SLA failure occurred.  For example, if a vendor fails to meet a 99.9% monthly SLA, a service credit equal to a percentage of the monthly fees paid by the customer would be applied to the next monthly invoice.  A credit is often provided on a tiered basis, up to 100% of the fees for the relevant period based on the size of the SLA miss. Vendors may want to include language ensuring that if multiple credits are available for the same reporting period (e.g., a credit for failure to meet the uptime SLA as well as the issue resolution SLA), only the greater credit will apply.  The credit is usually applied to the next invoice, or if there will be no additional invoice, paid directly to the customer.  For a service credit related to an uptime SLA commitment, instead of a percentage of fees some vendors will offer a credit equal to the fees earned by the vendor during the period of time during which the Service was unavailable during the previous measurement period (or an average of the amount during previous measurement periods), under the theory that the credit is an accurate reflection of the actual fees that would have been earned by the vendor had the service been available in compliance with the SLA.  Customers should carefully consider what fees are used to calculate the credit – customers will want this to be as inclusive as possible.

Termination. In the event of a SLA failure, another remedy commonly offered by vendors is a right to terminate. Vendors typically put restrictions around the exercise of this right, e.g., termination is the sole and exclusive remedy available; termination is limited to the service subject to the SLA failure, not the entire service agreement; it is offered on a “use it or lose it” right which can only be exercised for a period of time following the measurement period in which the SLA failure giving rise to the termination right arose; or the right to terminate is only triggered by multiple failures, such as failure to meet its SLA commitments in three (3) consecutive months or any two (2) out of three (3) consecutive calendar quarters. Customers should carefully consider whether the limits on these rights are appropriate (e.g., ensure that “sole and exclusive remedy” applies only to a SLA failure, and would not preclude the customer enforcing its rights and remedies for any other breaches of the vendor agreement; ensure a right to terminate extends to the entire service agreement if the affected service component is a significant portion of the value of the relationship to the customer; etc.)

Other creative remedies. Vendors and customers should consider whether other creative remedies for a breach of the SLA, such as waiver of fee minimums, waiver or imposition of other contractual obligations, or provision of additional services (e.g., a certain number of free hours of professional services), may be an appropriate remedy for the customer and an appropriate motivator for the vendor to meet its SLA commitments.

Closing Thoughts – Things to Watch For

  • Remember that most vendors are trying to provide as close to 100% uptime as possible, and the best possible service they can to their clients. A SLA is intended to be a floor on performance, not a ceiling.
  • Some vendors do not include a SLA in their standard service agreement, instead letting customers ask for one. In my experience, less customers will ask for a SLA than you’d think.  It’s always a good idea to ask a vendor to ensure they include their SLA with the service agreement at the outset of the contract negotiation process.
  • If the vendor will not agree to include a SLA, ask them why.
    • In some cases, vendors will not provide a SLA with credits to all but their largest clients, relying on the fact that as a multi-tenant platform all clients receive the benefit of the SLAs provided to their largest clients. In this event, customers should consider whether to fight for a direct SLA or rely on their commitments to larger clients (which commitments may change over time).
    • If you can’t get a SLA from a vendor, customers should consider whether to push for a termination for convenience right (and refund of prepaid but unaccrued fees) in the event they are dissatisfied with the service levels they are receiving from the vendor.
    • Customers should also ask whether the service is truly a mission-critical service. If not, it may be worth considering how hard to fight for the SLA, or if the customer can offer to concede the SLA to win on another open negotiation point of greater importance.
  • Customers should watch for language in the vendor agreement that gives the vendor the right to unilaterally change terms of the agreement, instead of having changes mutually agreed upon. This unilateral right is often broad enough to allow a vendor to change the terms of the SLA as well. If so, customers may seek to limit the scope to exclude the SLA, or ensure that the agreement includes a termination right as described above.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

The What, Why and How of SLAs, aka Service Level Agreements (part 1)

Every company uses technology vendors, such as Software-as-a-Service providers, to provide critical components of their business operations. One pervasive issue in technology vendor agreements is the vendor’s commitment to the levels of service the customer will receive.  A representation to use commercially reasonable efforts to correct product defects or nonconformity with product documentation may not be sufficient for a customer relying on a technology vendor’s service for a mission-critical portion of its business. In this situation, the vendor may offer (and/or a customer may require) a contractual commitment as to the vendor’s levels of service and performance, typically called a “Service Level Agreement” or “SLA.” Service Level Agreements (SLAs) ensure there is a meeting of the minds between a vendor and its customer on the minimum service levels to be provided by that vendor.

At a high level, a SLA does three things:

  1. Describes the types of minimum commitments the vendor will make with respect to levels of service provided by the vendor;
  2. Describes the metrics by which the service level commitments will be measured; and
  3. Describes the rights and remedies available to the customer if the vendor fails to meet their commitments.

In many cases, a SLA is presented as an exhibit or appendix to the vendor agreement (and not a separate agreement). In others, a SLA may be presented as a separate document available on a vendor’s website.  Think of the former as a customer-level SLA which is stated directly in (and quite often negotiated on a customer-by-customer basis as part of) the service agreement with that customer, and the latter as a service-level SLA which the vendor wants to apply equally to every user of its service.

In this two-part post, I’ll explain the contents of, reasons for, and important tips and tricks around technology SLAs.  Part 1 will cover uptime and issue resolution SLAs.  Part 2 will cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Common types of commitments in SLAs

The most common types of commitments found in technology SLAs are the uptime commitment and the issue resolution commitment.

Uptime SLA Commitment

An uptime commitment is generally provided in connection with online services, databases, and other systems or platforms (a “Service”). A technology vendor will commit to a minimum percentage of Service availability during specified measurement periods.  This percentage is typically made up of nines – e.g., 99% (“two nines”), 99.9% (“three nines”), 99.99% (“four nines”), 99.999% (“five nines”), etc.  Some SLAs will use “.5” instead of “.9”, for example, 99.5% or 99.95%”.   Uptime is typically calculated as follows:

(total minutes in the measurement period - minutes of Downtime in that period) / Total minutes in the measurement period

Definitions are key. The right definitions can make all the difference in the effectiveness of an uptime SLA commitment. Vendors may gravitate towards a narrower definition of “Downtime” (also called “Unavailability” in some SLAs) to ensure they are able to meet their uptime commitment, e.g., by excluding a slowdown that makes the Service hard (but not impossible) to use. Customers should look carefully at this definition to ensure it covers any situation in which they cannot receive substantially all of the value of the Service. For example, consider the difference between Unavailability/Downtime as a period of time during which the Service fails to respond or resolve, versus a period of time during which a material (or non-material) function of the service is unavailable. The SLA should define when the period of Unavailability/Downtime starts and ends, e.g., starting when the vendor first learns of the issue, and ending when the Service is substantially restored or a workaround is in place; customers should look at this carefully to ensure it can be objectively measured.

Mind the measurement period. Some vendors prefer a longer (e.g., quarterly) measurement period, as a longer measurement period reduces the chance a downtime event will cause a vendor to miss its uptime commitment. Customers generally want the period to be shorter, e.g., monthly.

Consider whether the uptime percentage makes sense in real numbers. Take the time to actually calculate how much downtime is allowed under the SLA – you may be surprised. For a month with 30 days:

  • 99% uptime = 432 minutes (7 hours, 12 minutes) of downtime that month
  • 99.5% uptime = 216 minutes (3 hours, 36 minutes) of downtime that month
  • 99.9% uptime = 43.2 minutes of downtime that month
  • 99.99% uptime = 4.32 minutes of downtime that month

One critical question customers should ask is whether a Service is mission-critical to its business.  If it’s not, a lower minimum uptime percentage may be acceptable for that service.

Some vendors may offer a lower uptime commitment outside of business hours, e.g., 99.9% from 6am to 10pm weekdays, and 99% all other times. Again, as long as this works for a customer’s business (e.g., the customer is not as concerned with downtime off-hours), this may be fine, but it can make it harder to calculate.

Ensure the Unavailability/Downtime exclusions are appropriate. Uptime SLAs generally exclude certain events from downtime even though the Service may not be available as a result of those events. These typically include unavailability due to a force majeure event or an event beyond the vendor’s reasonable control; unavailability due to the equipment, software, network or infrastructure of the customer or their end users; and scheduled maintenance.  Vendors will often seek to exclude a de minimis period of Unavailability/Downtime (e.g., less than 5/10/15 minutes), which is often tied to the internal monitoring tool used by the vendor to watch for Service unavailability/downtime. If a vendor wouldn’t know if a 4-minute outage between service pings even occurred, it would argue that the outage should not count towards the uptime commitment.

Customers should make sure there are appropriate limits to these exclusions (e.g., force majeure events are excluded provided the vendor has taken commercially reasonable steps to mitigate the effects of such events consistent with industry best practices; scheduled maintenance is excluded provided a reasonable amount of advance written notice is provided.  Customers should watch out for overbroad SLAs that try to exclude maintenance generally (including emergency maintenance).  Customers may also want to ensure uptime SLAs include a commitment to take reasonable industry-standard precautions to minimize the risk of downtime (e.g., use of no less than industry standard anti-virus and anti-malware software, firewalls, and backup power generation facilities; use of redundant infrastructure providers; etc.)

Don’t overlook SLA achievement reporting. One important thing customers should look for in a SLA is how the vendor reports on SLA achievement metrics, which can be critical to know when a remedy for a SLA failure may be available. Vendors may place the burden on the customer to provide notice of a suspected uptime SLA failure within a specified amount of time following the end of the measurement period, in which case the vendor will review uptime for that period and verify whether the failure occurred. However, without proactive metrics reporting, a customer may only have a suspicion of a SLA failure, not actual facts. Customers using a mission-critical system may want to consider asking for proactive reporting of SLA achievement within a certain amount of time following each calendar month.

Issue Resolution SLA Commitment

Of equal importance to an uptime commitment is ensuring that a Service issue (downtime or otherwise) will be resolved as quickly as possible.  Many technology SLAs include a service level commitment for resolution of Service issues, including the levels/classifications of issues that may occur, a commitment on acknowledging the issue, and a commitment on resolving the issue.  The intent of both parties should be to agree on a commitment gives customers assurances that the vendor is exerting reasonable and appropriate efforts to resolve Service issues.

Severity Levels. Issue resolution SLAs typically include from 3-5 “severity levels” of issues.  Consider the following issues:

Impact Example Classification
Critical The Service is Unavailable
High An issue causing one or more critical functions to be Unavailable or disrupting the Service, or an issue which is materially impacting performance or availability
Medium An issue causing some impact to the Service, but not materially impacting performance or availability
Low An issue causing minimal impact to the Service
Enhancement The Service is not designed to perform a desired function

Issue resolution SLAs typically use some combination of these to group issues into “severity levels.”  Some group critical and high impact issues into Severity Level 1; some do not include a severity level for enhancements, instead allowing them to be covered by a separate change order procedure (including it in the SLA may be the vendor’s way of referencing a change order procedure for enhancements). Vendors may include language giving them the right to reclassify an issue into a lower severity level with less stringent timeframes. Customers should consider ensuring whether they should have the ability to object to (and block) a reclassification if they disagree that the issue should be reclassified.

Acknowledgment Commitment. Issue resolution SLAs typically include a commitment to acknowledge the issue. As with the uptime SLA, the definition of the acknowledgment timeframe is important (when it starts and when it ends). A vendor will typically define this as the period from the time it is first notified of or becomes aware of the issue to the time the initial communication acknowledging the issue is provided to the customer.  Customers should look at the method of communication (e.g., a post to the vendor’s support page, tweet through their support Twitter account, an email, a phone call from the customer’s account representative required, etc.) and determine if a mass communication method versus a personal communication method is important.

For critical and high impact issues, vendors (especially those operating multi-tenant environments) will often not offer a specific acknowledgment commitment, instead offering something like “as soon as possible depending on the circumstances.”  The argument for this is that for a critical or high impact issue, a vendor wants all available internal resources triaging and working the problem, not reaching out to customers to tell them there is a problem. In many cases, this may be sufficient for a customer provided there is some general acknowledgment provided to a support page, support Twitter account, etc. to alert customers that there is an issue. In others, a customer may want to push for their account representative, or a vendor representative not involved in triaging the problem such as an account executive, to acknowledge the issue within a fixed amount of time, putting the burden on the vendor to ensure it has appropriate internal communication processes in place.

Resolution Commitment. Issue resolution SLAs also typically include a time commitment to resolve the issue. One important thing to focus on here is what “resolve” means.  Vendors may define it as the implementation of a permanent fix or a workaround that temporarily resolves the problem pending the permanent fix; in some cases, vendors may also define it as the commencement of a project to implement a fix.  Customers should ensure that a vendor promptly implement a permanent fix if a workaround is put in place, and that failure to do so is a failure under the SLA. Many vendors are reluctant to provide a firm issue resolution timeframe, as the time required to resolve or implement a workaround is dependent on the issue itself, and are often unwilling to negotiate the resolution commitment or commit to a fixed timeframe for resolution.  Customers should ensure the resolution commitment is reasonable and that the vendor is doing everything it can to correct issues.  For example, for critical and high impact issues, consider an issue resolution commitment of “as soon as possible using continuous diligent efforts” – as long as the vendor is working diligently and continuously to fix the issue, they’re in compliance with the SLA. For lower impact issues, consider a commitment to implement a fix or workaround in the ordinary course of business.

In part 2, I’ll cover other types of technology SLA commitments, SLA remedies, and other things to watch for.

Eric Lambert has spent most of his legal career working in-house as a proactive problem-solver and business partner. He specializes in transactional agreements, technology/software/e-commerce, privacy, marketing and practical risk management. Any opinions in this post are his own. This post does not constitute, nor should it be construed as, legal advice. He is a technophile and Internet evangelist/enthusiast. In his spare time Eric dabbles in voice-over work and implementing and integrating connected home technologies.

Blockchain and Distributed Ledger Technology Will Change the World (Eventually)

Many people associate “blockchain” with the crypto-currency Bitcoin. However, they are not one and the same. Bitcoin is an application; blockchain and distributed ledger technology are the methods behind it. Given the widespread potential applications of blockchain and distributed ledger technology, it is poised to revolutionize many aspects of the world around us. It may prove to be as disruptive and innovative of a force as augmented reality, or the Internet itself. New articles touting blockchain and distributed ledger technology are coming every day, even while the technology is unknown or confusing to many people. What is it? How might it change the world? And what legal and other risks does it bring?

What is Distributed Ledger Technology and Blockchain?

Centralized Ledgers

Let’s start with what we know – a centralized ledger. Ledgers (what we’ll call a database, list, or other information record) have played an important role in commerce for millennia, recording information about things such as physical property, intangible property including financial holdings, and other assets. The most recent innovation has been the move from physical ledgers (paper, tablets, etc.) to electronically stored ledgers. A “centralized ledger” is a ledger maintained and administered in a single, central location (e.g., a computer database stored on a server) accessible by anyone without use of access controls (public) or through an access control layer by persons or organizations with valid login credentials (permissive). This is a “hub-and-spoke” system of data access and management. Centralized ledgers have historically had many benefits, such as minimized data redundancy, limited number of access points to the data for security purposes, centralized administration, and centralized end user access. However, there are also disadvantages, such as greater potential for loss or inaccessibility if the central location suffers a hardware failure or connectivity outage, inability to recover lost data elements, and a dependence on network connectivity to allow access to the ledger by its users.

Distributed Ledgers

One way to address these disadvantages is through a distributed ledger, where an electronic ledger is distributed (mirrored) to a network of participants (aka “nodes”) through a software program so that each participant has a complete and identical copy of the ledger. Nodes can be individuals, sites, companies/institutions, geographical areas, etc. There is no centralized administrator or “primary node” — if a change is made to one copy of the ledger, that change is automatically propagated to all copies of the ledger in the system based on the rules of the system (called a “consensus algorithm“) which ensures that each distributed copy of the ledger is identical. (For example, in Bitcoin, each node uses an algorithm that gives a score to each version of the database, and if a node receives a higher scoring version of the ledger, it adopts the higher scoring version and automatically transmits it to other nodes.) Since the distributed ledger software on each node validates each addition to the distributed ledger, it’s very difficult to introduce a fraudulent transaction (to put it another way, transactions are audited in real time). Essentially, each node builds an identical version of the distributed ledger using the information it receives from other nodes. The use of distributed models in computing goes back to the origins of the Internet itself — ARPANET, which evolved into what we know today as the Internet, used a distributed model instead of a linear model to manage the transfer of data packets between computer networks.

The software on each node uses cryptographic signatures to verify that it is authorized to view entries in, and make changes to, the distributed ledger. If a participant with rights to modify the ledger makes an addition to the ledger using the participant’s secure keys (e.g., a record of a change in ownership of an asset or recording of a new asset), the addition to the ledger is validated by the consensus algorithm and propagated to all mirrored copies of the ledger, which helps to ensure that the distributed ledger is auditable and verifiable.

Thus, the four central tenets of a distributed ledger are:

  1. distributed copies among nodes via client software;
  2. cryptographic signatures to allow nodes to view, or add to, the distributed ledger in an auditable and verifiable fashion;
  3. a consensus algorithm to ensure distributed copies of the ledger match among participants without the need for a centralized administrator; and
  4. record permanency so that verified entry accepted to the ledger via the consensus algorithm becomes permanent (it can be corrected via a later addition to the ledger but never removed).

Unlike a centralized ledger such as a database, where the data records and access/usage logs are maintained separately, a distributed ledger maintains data records within a validated structure that captures access and changes within the data store itself. Whereas the server with the centralized ledger is different from the computers which retrieve data from the centralized ledger, each node in a distributed ledger is an equally trusted “peer” of every other node. Another key difference between centralized and distributed ledgers is that a distributed ledger cannot be forked — if you make a copy of a centralized ledger and store it somewhere else, it will be out of sync with the original copy, whereas each copy of a distributed ledger is kept identical by the client software.

Blockchains

A “blockchain” is a specific way of implementing distributed ledger technology – or more precisely, it’s a specific type of distributed ledger. In a blockchain ledger, each record of new value added to the ledger and each transaction affecting entries in the ledger (which we will collectively call “blocks”) includes a timestamp and a cryptographic verification code based on a data signature from the previous block called a “hash” linking it to the previous block, forming a block “chain.” Because each block is cryptographically tied to the previous block via one-way hash, the entire chain is secure – a client can verify that a block in the blockchain validates against the previous block, but does not allow someone to trace the blockchain forward. If a block in the chain is altered, it changes the hash value and no longer matches the hash stored in later blocks, and the alteration will be rejected by the nodes on the blockchain network. In a blockchain, transactions entered into the system during a specified period of time are bundled together and added to the blockchain as a new block.

Bitcoin is an early example of a blockchain application. Participants can add new bitcoins to the blockchain by solving a cryptographic puzzle (this is called “mining” and takes a lot of computing power). Transactions for the purchase and sale of bitcoins are also recorded in a block in the Bitcoin blockchain – the blockchain is the public ledger of all Bitcoin transactions.

Blockchain applications can be grouped into 3 categories: Blockchain 1.0 applications (crypto-currencies such as Bitcoin); Blockchain 2.0 applications (financial applications); and Blockchain 3.0 applications (other emerging applications). Blockchain applications, like other distributed ledgers, can be either public (the client software does not have an access control layer, meaning anyone with access to the software can access the blockchain network), or permissive (the client software has an access control layer to restrict access to the blockchain network). It can be optimized to handle transactions (such as currency transactions) or logic (such as managing business and governance rules). Public blockchain networks can be a permanent record of transactions, whereas permissive blockchain networks can protect against external hacking attempts.

How might blockchain and distributed ledgers change the world?

The impact of new technology presents at first as rapidly disruptive (positively and negatively), but often manifests organically and transparently to change the world over time.

Roy Amara, a former president of the Institute of the Future, said that people overestimate a technology’s effect in the short term and underestimate it in the long run, a statement known as “Amara’s Law.” However, I think a corollary is in order – the impact of new technology presents at first as rapidly disruptive (both positively and negatively), but often manifests organically and transparently to change the world over time at a proportional rate to the maturity of the commercially available applications, to consensus on technological standards, and to decreasing costs to implement (and increasing ROI from implementing) the technology in practical business and consumer situations. For example, RFID technology was touted early on as a “change the world” technology, and it has — but most prominently through integration of the technology organic and innovative improvements to supply chain and inventory management. Social networking is viewed by many as a “killer app” which helped usher in the third Age of the Internet, and it has changed the world by changing how we connect with others — we now post updates instead of sending letters or emails to our friends. Both took years to become pervasive in society and industry. A “killer app” is a catalyst that accelerates the adoption of a new technology.

Blockchain and distributed ledger networks have the potential to change the way many systems and business processes work across industries. Since blockchain and distributed ledger networks are platform-agnostic, a distributed ledger could be stored in different hardware/software configurations across different nodes, reducing the need for expensive and time-consuming upgrades to support the distributed model. For example, a permissioned blockchain model could help an organization such as the US Veterans Administration better manage appointment scheduling across a large number of hospitals and clinics (in fact, a resolution was recently passed in the US House of Representatives promoting just that, “to ensure transparency and accountability.” Financial and currency transactions are a major focus of practical applications of distributed ledger networks and blockchain technology. The technology could also be used in applications such as better and more secure management of governmental records and other services; tracking tax collection and receipts; managing assets; identity verification; decentralized voting; managing and tracking inventory levels and B2B/B2C product fulfillment; tracking the “data supply chain” for the flow of data among systems; managing system access controls; protection of critical public and privacy infrastructure; tracking royalties due to artists for the use of their works; and “smart contracts” (aka “blockchain contracts”) to create, execute, and enforce agreements between parties when certain pre-arranged conditions occur. Distributed ledger networks have the advantage of being more secure as the consensus algorithm makes it considerably difficult for a cyber-attacker to successfully alter the distributed ledger. It could also allow for greater access transparency, a central tenet of many privacy principles, by allowing individuals to access records in the ledger relating to them or containing their information.

The companies that immediately benefit from a new disruptive business method such as blockchain are those which seek to innovate applications of the method to monetize it, obtain a first mover advantage, and ideally seize significant market share for as long as possible. Industry groups and trade associations will form to seek to promote it, and regulators will begin to take notice. Blockchain and distributed ledger technology is already following this pattern. In late September 2016, two members of the US House of Representatives formed the Congressional Blockchain Caucus as a bipartisan group, and a “Blockchain Innovation Center” opened in Washington, DC. A coalition of lawyers and academics have founded the Digital Currency and Ledger Defense Coalition (DCLDC) whose mission, per their website, is “to help protect individual constitutional rights and civil liberties” with respect to the emerging technology. Groups such as the Hyperledger Project seek to promote the adoption of distributed ledger networks and blockchain applications. As distributed ledger and blockchain matures and start-ups present intriguing new products and services coupled with a strong value proposition for businesses to early adopt the technology, companies will begin to implement blockchain and other distributed ledger technologies in a variety of ways.

Risks and Challenges Associated with Blockchain and Distributed Ledger Technology

As companies evaluate the adoption blockchain and distributed ledger applications, they will need to focus on the risks and challenges raised by the technology. These include:

  • Ensuring the ROI and business case is there. Blockchain and distributed ledger technology is not intended to replace existing centralized ledgers such as databases. If a number of parties using different systems need to track something electronically that changes or updates frequently, a distributed ledger may be a good solution. If those needs are not there, or if there is a continuing need to rely on paper transaction records, a centralized ledger continues to be the better choice. Companies need to ensure there is a compelling ROI and business case before implementing the technology.
  • Record retention risks. One of the features of blockchain and distributed ledger networks is record permanency. This may be incompatible with the requirements for data to be destroyed and deleted after a period of time, such as credit/debit card data under PCI rules, HR data under various regulatory requirements, and the limitations of a company’s own record retention policy.
  • Data Privacy. Distributed ledger technology such as blockchain is inherently designed to share information among every participant/node. If information in a ledger transaction or block contains private information, such as an account number or company confidential information, it will be visible to every user of every node. This is one of the reasons permissive and privacy distributed ledgers are a focus of many companies seeking to innovate in the space. Additionally, as nodes in a distributed ledger network can be geographically disparate, rules and requirements for the transfer of data between geographies may play a major role. It is also likely that at some point, decryption technology will evolve to the point where cryptographic signatures may no longer be considered safe.
  • Loss of Control. Companies routinely implement controls (processes and procedures) to manage their systems and operations, which controls may be audited by customers/partners or certified under standards such as SOC 2. But who is accountable for a database distributed across geographies and companies? Use of a distributed ledger system with nodes outside of a company’s systems means ceding some control to an automated process and to a decentralized group of participants in the distributed ledger/blockchain. An error in a record in a distributed ledger becomes permanent and can be corrected but never removed.
  • A Square Peg in a Legal and Regulatory Round Hole. As is often the case, one of the challenges for lawyers and others is determining how existing laws and regulations will likely be interpreted to fit new technologies such as blockchain and distributed ledger; where new laws may be required and how permissive or restrictive they may be; and how enforcement and penalties of both new and existing laws will play out. However, a distributed ledger network may cross multiple jurisdictions, resulting in cross-border regulation and enforcement issues. All but the earliest adopters often take the “herd on the savanna” approach (staying in the center of the herd as the safest point, and migrating to one edger or another once the risks to the outliers has been better gauged). Additionally, contract law requires, at its core, offer, acceptance and consideration between the contracting parties. The emergence of “smart contracts” that rely on computer algorithms to establish the formation and performance of contracts may challenge the nature and application of traditional legal principles of contract law such as contract formation and termination, and the traditional focus of laws on the acts of persons (not automated technologies).

Finally, any technology brings both benefits and potential risks. If the benefits outweigh the risks on the whole, the public interest is not served when the legal, regulatory and privacy pendulum swings too far in response. The spread of blockchain and other distributed ledger technologies and applications will be dependent on the creation and fostering of a legal, regulatory, and privacy landscape that fosters innovation in the space.

Key Security Provisions for Vendor/Partner Contracts

One of the most important lessons from the 2013 Target breach was that hackers will look for the weakest link in a company’s security chain when seeking a point of entry. Often, that weakest link is the vendors and partners which integrate with your IT infrastructure or have login credentials to your systems. Target’s HVAC vendor suffered a phishing attack that resulted in hackers obtaining access credentials to Target’s network which they used as their point of entry. Companies are increasingly doing security diligence on their vendors and partners to ensure that if they have access to the company’s network or systems, they will meet minimum security requirements.  It’s critical that your vendors and partners agree to minimum contractual security commitments as well. I often use a “security addendum” with controlling language to ensure that my standard provisions control over any conflicting provisions in the vendor/partner agreement, but will sometimes embed them directly into the contract.

Here are some of the provisions I like to include in vendor and partner agreements:

  • Definitions of Personal Information and Financial Account Information.  It’s important to define what “personal information” and “financial account information” mean.  In many cases, your vendor/partner’s definition of these terms may differ from yours. Ensuring you’re on the same page (e.g., you may consider IP addresses to be personal information, they do not) can be critical in the event there is an unauthorized release of information.  Be careful using a list of information types as the list may change over time; instead, consider a broad definition with examples.
  • Credentials. If you are providing credentials to your vendor/partner to access your network or systems, or that of a third party (e.g., a marketing service, a cloud hosting environment, etc.), ensure they will only use them as required by the contract.  Ensure they fall under the contractual definition of Confidential Information and will be treated as such.  Access to credentials should be limited to those with a “need to know.”
  • Safeguards.  I like to include a requirement to implement and follow administrative, physical and technical safeguards (no less rigorous than industry standard) designed to protect information and credentials.  This can be a good catch-all that can be leveraged if the vendor/partner has a problem later on and did not use industry standard security safeguards.  I also like to call out the importance of installing security software patches immediately to reduce the risk of an exploitable security hole.  If the vendor/partner has obtained security certifications (e.g., SSAE16, ISO 27001, etc.) that you are relying on, ensure they provide evidence of current certification upon request and do not let certifications lapse during the term of the Agreement.
  • Anti-Phishing Training.  Over 90% of hacking attacks start with a “phishing” attack. Consider specifically requiring your vendors/partners to provide anti-phishing training to all employees.
  • Payment Account Information.  If the vendor/partner will not be handling payment account information, add an affirmative obligation that the vendor/partner will not access, use, store, or process payment account information. If you are afraid that information might be inadvertently provided to the vendor/partner, consider adding a provision stating that if any payment account information is inadvertently provided to the vendor/partner, as long as they destroy it immediately and notify your company the vendor/partner will not be in breach of the affirmative obligation not to use payment account information.  If your vendor/partner will handle payment account information, ensure you have appropriate language that covers both current and future PCI-DSS (Payment Card Industry Data Security Standard) versions.  If appropriate, add language making clear that payment account information will be stored in active memory only, and not stored or retained on the vendor/partner’s servers (e.g., where the payment information is “tokenized” and/or securely transmitted to your company’s own servers at the time the transaction is processed).
  • Information Security Questionnaire.  Include the right to have the vendor/partner complete a written security questionnaire once a year signed by a corporate officer. Requiring an annual questionnaire can help identify whether your vendors/partners are on top of emerging threats and risks. If you have limited resources to conduct audits, the responses to the questionnaires can help you identify which vendors/partners may be best to audit.  As part of the questionnaire, ask for copies of the vendor/partner’s disaster recovery plan and business continuity plan, and certificate of insurance for the vendor/partner’s cyber security policy if your company is named as an additional insured.
  • Audit Rights.  Include a right to do a security audit of a vendor/partner’s information technology and information security controls. This should include the right to conduct penetration testing of the vendor/partner’s network, ideally on an unannounced basis.  Make sure the vendor/partner is obligated to correct any security discrepancies found at their expense; if they don’t make corrections to your reasonable satisfaction, you should be able to exit the contract.  Ensure you can use internal and third party resources to conduct the training. In addition to a right to audit on a regular basis (e.g., once per year), allow the right to audit after a security breach so you can do your own analysis of how well the vendor/partner has bulletproofed their systems in light of a breach.
  • Security Breach.  Define what a “security breach” is (consider a broad definition that includes security incidents as well).  Ensure the vendor/partner promptly notifies your company in the event of a security breach, ideally by email to a “role” mailbox or to your CIO/CTO.  The vendor/partner should take any triage steps necessary to close the immediate security hole and then thoroughly review and bulletproof its systems and networks.  The vendor/partner should agree to work with your company and any government entities in any investigation of the breach.  Ensure that your company, not the vendor/partner, decides whether and how to communicate with affected individuals.  Ensure the vendor/partner bears the costs associated with a security breach.
  • Preservation Notices and E-Discovery.  If the records of the vendor/partner may be important if litigation is brought against your company, consider adding a clause ensuring that the vendor/partner will comply with any document preservation/litigation hold notice you provide, and that the vendor/partner will reasonably assist with electronic discovery requests.  A “friendly” clause like this can help avoid issues and strain on the partnership if litigation occurs.

Once you have these provisions in your agreement, don’t forget to tie them into your risk allocation provisions. If the vendor/partner carries insurance to protect against security breaches, ensure you are an additional insured and ask for a certificate of insurance annually. Ensure your indemnification section fully covers any breach of security obligations, and consider excluding these from your limitation of liability to the greatest extent possible.