Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Privacy & Cybersecurity volume discussing topics including government initiatives, M&A risks and cloud computing within key jurisdictions worldwide.

1 What were the key regulatory developments in your jurisdiction over the past year concerning cybersecurity standards?

Mainstream media in Germany has continued its extensive coverage of cybersecurity-related topics, especially the major breaches that have occurred around the world.

Cybersecurity requirements in the General Data Protection Regulation (GDPR) have continued to play a major role in companies’ implementation efforts. The importance of these efforts has been highlighted by the initial fining decisions of the German supervisory authorities, with several fines sanctioning inadequate IT security. In this context, a decision of the supervisory authority of the German state of Baden-Württemberg against the provider of a German social network attracted significant attention. Hackers had been able to access unencrypted passwords, which ultimately led to a €20,000 fine. In its press release, the supervisory authority made clear that the fine would have been much higher, had the provider not contacted the regulator immediately and cooperated fully.

The IT Security Association Germany (www.teletrust.de) has prepared a document ‘What is “state of the art” in IT security?’, published in February 2019 together with the European Union Agency for Cybersecurity (ENISA). The document aims to provide interested parties with recommended actions and guidelines on the ‘state of the art’ required for technical and organisational measures.

In legislative developments, Germany is currently preparing to further update its main cybersecurity law, the BSI Act (Act on the Federal Office for Information Security). Following the implementation of the Directive on Security of Network and Information Systems (NIS Directive) in 2017, the German government has circulated a first draft of further amendments. This draft has been discussed vividly and led to quite massive criticism. If implemented as currently planned, non-compliance with cybersecurity requirements could lead to GDPR-style fines, the number of affected companies would significantly increase and the German Federal Office for Information Security (BSI) would gain additional competences. Many commentators have pointed out that the complexity of the relevant provisions and the difficulties of identifying which specific obligations would apply for individual companies would increase quite substantially.

The BSI, under its president Arne Schönbohm, has continued its active outreach to all relevant actors in the field and successfully formed a substantial number of new alliances in this area. The BSI continues to publish sector-specific guidance documents regarding cybersecurity. The BSI also had a particular focus on creating awareness for cybersecurity in the energy sector. The authority awarded certificates to several companies under the Cloud Computing Compliance Controls Catalogue. Finally, the BSI completed a substantial revision and reorganisation of its IT-Grundschutz catalogue.

CEO fraud and ransomware continue to be a highly relevant issue despite frequent warnings by a number of institutions.

Other regulators have continued to thoroughly review cybersecurity topics. Regulators for financial services on a European and German level have updated several guidance documents regarding IT in general, cybersecurity, cloud computing or outsourcing and breach reporting.

2 When do data breaches require notice to regulators or consumers, and what are the key factors that organisations must assess when deciding whether to notify regulators or consumers?

Since 25 May 2018, the key general data breach notice obligations are the respective obligations under the GDPR. Since that date, the number of breaches reported to the data protection authorities has increased significantly, with many actors taking a very cautious approach and a decision to rather err on the side of over-reporting.

The German Federal Data Protection Act does not contain any comparable obligation (any more), but the German Telemedia Act (TMG) and the German Telecommunications Act (TKG) continue to contain additional breach notification obligations for providers of information society services and providers of electronic communications services. The obligations in the TKG are based on the European framework in Directive 2002/58; Germany has not implemented Directive 2018/1972, the European Electronic Communications Code, yet. In addition, there are sector-specific obligations (eg, in social security, energy, financial services, electronic signatures, among others).

The implementation of the NIS Directive has created additional notification obligations, which are not tied to personal data, but to security incidents in general. This has further increased complexity, as one breach may require the notification of several regulators in parallel.

Regulators have updated their expectations for the reporting of breaches, including for situations where third-party service providers are involved, such as in cloud computing. In addition to the general risk management motivation, the implementation of the PSD2 directive has led to additional awareness in this area. Most regulators now make available online tools for actual reporting.

In terms of enforcement, fines for failing to report breaches have not been common yet, but warnings are increasing. Litigation of affected individuals as a reaction to breaches has also been limited so far, so in general the notification obligations to regulators and affected individuals take centre stage when evaluating breach response strategies.

3 What are the biggest issues that companies must address from a privacy perspective when they suffer a data security incident?

Meeting legal obligations to notify breaches is extremely difficult without proper preparation: timelines for the required notifications are ambitious and investigating factual and legal topics in parallel and taking into consideration the interdependencies can be extremely challenging.

We have seen more and more breaches with a significant international dimension, adding further complexity because of the need to coordinate the response across different jurisdictions and time zones.

Companies must generally try to quickly determine what has actually happened, stop the underlying issue (ideally without compromising evidence) and then decide whether there are legal obligations to notify the breach to regulators and affected individuals. Depending on the extent of the breach, there may be obligations to inform shareholder and there is very often also a need to check the actual insurance status. Finally, the public relations fallout can be very significant and needs to be actively managed.

Following a breach notification, data protection and other regulators might also be interested in the company’s activities in general, so companies should be prepared that such notifications may lead to additional audits in related and unrelated fields.

If a breach or a suspected breach has occurred and needs to be investigated, such investigation itself is subject to German data protection and employment laws. These are highly relevant in a number of aspects. Generally, German data protection authorities have been taking a rather strict view regarding the retention of data such as log files in preparation for possible investigations, which can make it difficult to trace back attackers. In addition, the scope of possible investigations may be limited, because the authorities have taken the position that employers who permit private use of the internet or email are subject to secrecy of telecommunications, putting them at risk of criminal investigations if the review of a breach or security incident goes beyond the limits of secrecy of telecommunications. Finally, many companies have an organised workers’ representation, the works council, which needs to be involved in most IT-related topics.

Third parties involved in investigating and responding to a breach must be contractually bound to maintain confidentiality and to implement appropriate IT security measures. In many instances, they will be acting as processors, which means that there needs to be a written agreement with certain mandatory content, as required by the GDPR. If, for example, forensics firms are located outside the European Union, there will be additional issues regarding international data transfers.

4 What best practices are organisations within your jurisdiction following to improve cybersecurity preparedness?

Preparation is crucial. We recommend preparing for possible security incidents by setting up an internal and external panel of experts, which would include forensics firms and outside lawyers, but also advisers for public relations topics, and to enter into the required contracts well before an incident occurs. This will save critical time if there is an actual incident.

A written, detailed breach response plan is another critical element of the preparations. There are still too many companies having a response plan that looks more like ‘we will inform management, the legal department and IT, and they will work this out.’ These plans need to be much more detailed in order to be actually useful and there needs to be list of individuals assigned to be the core incident response team.

We strongly recommend to also test the plan periodically by simulating an incident or a breach and going through the required steps, including possible additional knowledge that only develops after investigations have actually begun.

For organisations with an international footprint, there must be an alignment of local, regional and international plans. This needs to involve some thinking on, for example, how to respond to situations where decision makers are located in different time zones.

Finally, given the rapid development of applicable law and regulatory guidance, there is a need to continually monitor legal development and to update the plans accordingly.

5 Are there special data security and privacy concerns that businesses should consider when thinking about moving data to a cloud hosting environment?

German public opinion is still quite sceptical regarding cloud computing, but German organisations are increasingly moving their data to cloud providers. In early July 2019, the supervisory authority of the German state of Hesse published a position that schools in the state of Hesse cannot use Microsoft Office 365 or comparable Apple or Google cloud offerings because of possible access by US authorities, ‘digital sovereignty’ and alleged increased duties of care for public authorities when processing personal data. The supervisory authority also points out that there are open questions regarding the telemetry functions in Windows 10.

In the German tradition, cloud computing is usually considered to be a form of a controller-processor relationship. In the light of the recent judgment of the Court of Justice of the European Union, there are now some questions whether this perspective will continue to dominate under the GDPR, or whether we will see ‘joint control’ with increasing frequency. Under article 26 of the GDPR, joint controllers also need to enter into an agreement.

Like German law in the past, the GDPR now has a quite extensive list of specific contents required in the contract with processors (here: the cloud provider). We are seeing initial market practice evolve regarding template documents in this regard, after several industry associations and regulators have published suggestions for language to address the legal requirements.

International data transfers to recipients outside the European Union are usually of particular interest. Very often, German customers demand that the cloud environment should be physically located in Germany or at least in the European Union, even though the legal framework for international data transfers to recipients outside the European Union would typically apply and allow transfers in other countries, such as the United States. Vendors who have opened data centres in Germany have been able to attract many German customers who had been sceptical about cloud computing beforehand.

Organisations need to remember that the international transfer restrictions still apply if the data is stored in Germany, but there is access to the data from outside the European Union.

In dealing with the different means for ensuring a legal basis for international data transfers, German companies have very often expressed scepticism regarding the mid- and long-term survival of the EU-US Privacy Shield and very often demand that vendors enter into standard contractual clauses, even though a vendor is already certified under the Privacy Shield. The Snowden allegations continue to be very present among German customers and vendors from countries outside the European Union continue to face very intense scrutiny regarding possible obligations to cooperate with law enforcement in their home countries.

Both the EU-US Privacy Shield and the standard contractual clauses currently face certain legal uncertainties:

The standard contractual clauses, and possibly also the Privacy Shield, are under review by the Court of Justice of the European Union in Case C-311/18. Following a hearing in Luxemburg in early July 2019, the Advocate General is currently expected to publish his option on 12 December 2019, with the court’s decision expected in early 2020. The court might invalidate the European Commission’s decision determining that Privacy Shield provides an adequate level of data protection or the European Commission’s decision that the Standard Contractual Clauses provide an adequate level of data protection.

In separate proceedings, the Court of Justice of the European Union has been asked to rule on the validity of Privacy Shield (Case T-738/16). A hearing that was initially scheduled for early July 2019 has been postponed. This case will be decided following the case regarding the Standard Contractual Clauses.

We highly recommend that the technical and organisational measures of the respective cloud provider are reviewed in detail and that such review is documented. There is also a legal requirement to periodically update such review, as IT security standards and measures can change over time. Encryption of data, both at rest and in transit, tends to be a topic that attracts significant interest in this context.

When thinking about using cloud services, organisations should also check for legal requirements arising out of other areas of the law. Typical examples are German tax law, which requires that certain tax-relevant documents are kept in Germany (or at least the European Union).

Germany has recently updated its laws and relaxed criminal law restrictions on the use of third parties by medical professionals, certified accountants, lawyers, certain forms of insurance and the public sector. While not all details are fully clear yet, the new framework has significantly reduced legal uncertainties for these sectors when using third-party providers, including in a cloud and outsourcing context.

6 How is the government in your jurisdiction addressing serious cybersecurity threats and criminal activity?

Germany had implemented national laws very similar to the NIS Directive already before the NIS Directive was finalised. Germany was also very quick in implementing the NIS Directive after it was finalised. In the light of recent ransomware attacks, sophisticated attacks against the German parliament and widespread fears of foreign countries trying to interfere with the national election in September 2017, many stakeholders have already argued that additional measures need to be taken to deal with cyberthreats on a national and European level.

The German BSI and the domestic intelligence services are very actively involved in raising awareness of cybersecurity threats and in making specific recommendation for actions (eg, in response to ransomware, CEO fraud and general IT security challenges).

Law enforcement, while generally understaffed to deal with the complexities of cybersecurity threats, has set up central units in most of the German states with special cybersecurity expertise. These units have had some notable successes in the past months in tacking large-scale online crimes. Companies are strongly encouraged to contact law enforcement if they are the target of online criminals.

7 When companies contemplate M&A deals, how should they factor risks arising from privacy and data security issues into their decisions?

Unfortunately, privacy and data security issues are still very often not treated with the required care in the context of M&A deals. A company’s data and IT systems are very often a crucial factor for the entire operation and special care should be used to determine if data, especially customer data, has been collected lawfully and whether it can be used as intended post-closing.

German data protection authorities have started issuing fines where the parties to an M&A transaction wrongly assumed that they could just sell customer data and failed to comply with legal requirements regarding the information of the data subjects and providing an opportunity opt out or even seek consent.

With the background of increased attacks against a company’s information technology systems, due diligence should pay particular attention whether business secrets, critical know how and personal data have been properly protected against theft. Valuations of companies are now critically dependent on IT security and intruders are becoming more sophisticated by the day.

These topics should be addressed through appropriate language in the representations and warranties in the underlying deal documentation.

THE INSIDE TRACK

When choosing a lawyer to help with cybersecurity, what are the key attributes clients should look for?

The lawyer needs to be able to explain legal concepts and requirements to a non-legal, especially technical audience, but he or she also needs to be able to truly understand what has happened from talking to technical experts.

The regulatory framework is evolving quite dynamically, so it is important to be up to date regarding the latest developments.

Project management skills and experience with internal investigations and crisis situations. For larger clients, the ability to work in an international setup and across time zones will be important.

What issues in your jurisdiction make advising on cybersecurity and privacy complex or interesting?

Cybersecurity and privacy work occurs at the intersection of a large number of legal and non-legal areas. The field is also currently moving at high speed. Incidents and breaches can be a threat to the survival of an organisation and successfully helping clients navigate challenges in this kind of crisis is usually very rewarding.

How is the privacy landscape changing in your jurisdiction?

The interpretation of many of GDPR’s provisions is not settled yet, so everybody needs to continue monitoring the legal developments and to update processes and documentation. Unfortunately for organisations, international data transfers and their legal bases have been subject to significant changes and uncertainties for years and these are going to continue.

What types of cybersecurity incidents should companies be particularly aware of in your jurisdiction?

Recent developments have made clear that ransomware can have a crippling effect on companies. Threats arising out of non-technical attacks, such as CEO fraud, persist and have even increased. This makes clear that effective defensive measures against cybercrime are not limited to technology, but need to also involve organisational measures and especially increased training of employees.