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Contract Corner: Cybersecurity (Part 3)

Over the last two weeks, we discussed contract provisions designed to address the implementation of preventive security measures, as well as responding to security incidents. Our third and final blog post in this series focuses on contractual provisions that address the allocation of liability for breaches that result in security incidents.

Because of the potential for large-scale damages from a security incident, customers and service providers are generally very focused on the allocation of liability in indemnification and liability provisions. Below we list some key issues to consider when drafting these contract provisions.

  • Rather than relying on general negligence or contract breach standards, consider adding security incidents resulting from a contractual breach as separate grounds for indemnification coverage.

  • Determine whether indemnification is limited to third-party claims or includes other direct and/or indirect damages and liabilities caused by a security incident.

  • Coordinate indemnification defense with incident response provisions and consider the effect on the customer’s client relationships where the vendor assumes such defense.

  • Assess whether all potential damages from a security incident are covered by the damages provisions, including any damages that may be considered indirect or consequential.

  • To determine the allocation of liability, consider the contract value, industry norms, type of data at issue, potential business exposure, cost of preventative measures, and cause of the security incident.

  • Consider calling out specific damages related to a security breach that are not subject to any cap or exclusion to provide clarity and protection—such damages can include the costs of reconstructing data, notifying clients, and providing them with identity protection services.

With cyber attacks growing in number and sophistication on a daily basis and the increased amount and value of data that is at risk to such attacks, cybersecurity concerns are top of mind for senior management.

This post is part of our recurring “Contract Corner” series, which provides analysis of specific contract terms and clauses that may raise particular issues or problems. Check out our prior Contract Corner posts for more on contracts, and be on the lookout for future posts in the series.

Click here for Part 1.

Click here for Part 2.

Copyright © 2019 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

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About this Author

Peter Watt-Morse, Morgan Lewis, Intellectual property lawyer
Partner

Peter M. Watt-Morse, one of the founding partners of the firm’s Pittsburgh office, has worked on all forms of commercial and technology transactions for more than 30 years. Peter works on business and intellectual property (IP) matters for a broad range of clients, including software, hardware, networking, and other technology clients, pharmaceutical companies, healthcare providers and payors, and other clients in the life science industry. He also represents banks, investment advisers, and other financial services institutions.

412-560-3320
A. Benjamin Klaber, Intellectual property attorney, Morgan Lewis
Associate

A. Benjamin Klaber practices on a Morgan Lewis team that counsels clients on technology, outsourcing, and commercial transactions, intellectual property matters, mergers and acquisitions, private equity, venture capital, and general corporate matters. Before law school, Benjamin was a quantitative analyst in the investment management industry after earning a B.S.E. in operations research and financial engineering. He is a member of the Emerging Leadership Board of the Pittsburgh Venture Capital Association.​​

412-560-7422