By: Aaron Krowne
In a major recent case testing California’s medical information privacy law, part of the California Medical Information Act, or CMIA (California Civil Code § 56 et seq.), the Third District Court of Appeals in Sutter Health v. Superior Court held on July 21, 2014 that confidential information covered by the law must be “actually viewed” for the statutory penalty provisions of the law to apply. The implication of this decision is that it just got harder for consumers to sue for a “pure” loss of privacy due to a data breach in California and possibly beyond.
Not So Strict
Previously, CMIA was assumed to be a strict liability statue, as in the absence of actual damages, a covered party that “negligently released” confidential health information was still subject to a $1,000 nominal penalty. That is, if a covered health care provider or health service company negligently handled customer information, and that information was subsequently taken by a third party (e.g., a theft of a computer, or data device containing such information), that in itself triggered the $1,000 per-instance (and thus, per-customer record) penalty. There was no suggestion that the thief (or other recipient) of the confidential health information needed to see, or do anything with such information. Indeed, plaintiffs had previously brought cases under such a “strict liability” theory and succeeded in the application of CMIA’s $1,000 penalty.
Sutter Health turns that theory on its head, with dramatically different results for consumers and California health-related companies.
Sutter was looking at a potential $4 billion fine, stemming from the October 2011 theft of a computer from its offices containing 4 million unencrypted client records. Sutter’s computer was password-protected, but without encryption of the underlying data this measure is easily defeated. Security at the office was light, with no alarm or surveillance cameras. Believing this to be “negligent,” some affected Sutter customers sued under CMIA in a class action. Given the potential amount of the total fine, the stakes were high.
The Court not only ruled against the Sutter customers, but dismissed the case on demurrer, meaning that the Court determined that the case was deficient on the pleadings, because the Plaintiffs “failed to state a cause of action.” The main reason, according to the Court, was that Plaintiffs failed to allege that an unauthorized person actually viewed the confidential information, therefore there was no breach of confidentiality, as required under CIMA. The Court elaborated that under CIMA “[t]he duty is to preserve confidentiality, and a breach of confidentiality is the injury protected against. Without an actual confidentiality breach there is no injury and therefore no negligence…”.
The Court also introduced the concept of possession, which is absent in CMIA itself, to delimit its new theory interpreting CMIA, saying: “[t]hat [because] records have changed possession even in an unauthorized manner does not [automatically] mean they have been exposed to the view of an unauthorized person.” So, plaintiffs bringing claims under CMIA will now have to allege, and ultimately prove, that their confidential information (1) changed possession in an unauthorized manner, and that (2) it was actually viewed (or, presumably, used) by an unauthorized party.
The Last Word?
This may not be the last word on CMIA, and certainly not the general issue of the burden of proof of harm in consumer data breaches. The problem is that it is extremely difficult to prove that anything nefarious has actually happened with sensitive consumer data post-breach, short of catching the perpetrator and getting a confession, or actually observing the act of utilization, or sale of the data to a third party. Even positive results detected through credit monitoring, such as attempts to use credit cards by unauthorized third parties, do not conclusively prove that a particular breach was the cause of such unauthorized access.
The Sutter court avers, in supporting its ruling, that we don’t actually know whether the thief in this case simply stole the computer, wiped the hard drive clean, and sold it as a used computer, and therefore no violation of CIMA. Yet, logically, we can say the opposite may have just as well happened – retrieval of the customer data may very well have been the actual goal of the theft. In an environment where sensitive consumer records can fetch as much as $45 (totaling $180 million for the Sutter customer data), it seems unwise to rely on the assumption that thieves will simply not bother to check for valuable information on stolen corporate computers and digital devices.
Indeed, the Sutter decision perhaps raises as many questions as answers on where to draw the line for “breach of confidential information.” To wit: presumably, a hacker downloading unencrypted information would still qualify for this status under the CMIA, so interpreted. But then, by what substantive rationale does the physical removal of a hard drive in this case not qualify? Additionally, how is it determined whether a party actually looked at the data, and precisely who looked at it?
Further, the final chapter on the Sutter breach may not yet be written – the data may still be (or turn out to have been) put to nefarious use, in which case, the court’s ruling will seem premature. Thus, there is likely to be some pushback to Sutter, to the extent that consumers do not accept the lack of punitive options in “open-ended” breaches of this nature, and lawmakers actually intend consumer data-handling negligence laws to have some “bite.”
Naively, it would seem under the Sutter Court’s interpretation, that companies dealing with consumer health information have a “blank check” to treat that information negligently – so long as the actual viewing (and presumably, use) of that information by unauthorized persons is a remote possibility. We would caution against this assumption. First, as above, there may be some pushback (judicially, legislatively, or in terms of public response) to Sutter’s strict requirement of proof of viewing of breached records. But more importantly, there is simply no guarantee that exposed information will not be released and be put to harmful use, and that sufficient proof of such will not surface for use in consumer lawsuits.
One basic lesson of Sutter is that, while the company dodged a bullet thanks to a court’s re-interpretation of a law, they (and their customers) would have been vastly safer had they simply utilized encryption. More broadly, Sutter should have had and implemented a better data security policy. Companies dealing with customer’s health information (in California and elsewhere) should take every possible precaution to secure this information.
Do not put your company and your customers at risk for data breaches, contact a certified privacy attorney at OlenderFeldman to make sure your company’s data security policy provides coverage for all applicable health information laws.