By now, many U.S. businesses (hopefully) have taken steps to familiarize themselves and to contend with the patchwork quilt of state laws that sets forth standards regarding what must be done in the wake of an IT security breach affecting customer data. (Click here for more background on that topic.) While contingency planning in light of these laws (now present in 44 states and the District of Columbia) usually entails some up-front costs in the form of diverted resources and attorney’s fees, the overall cost of implementation has been relatively low. It may be fitting, then, that the perceived benefit of these laws has been similarly minimal, with some estimating only a 2% reduction in identify theft in recent years that can be attributed to data breach notification legislation.

 It is perhaps as a result of such low estimated return that some states now are starting to implement tougher standards describing the steps that businesses bust take in order to prevent such breaches from occurring in the first place. Nevada’s law is the first and went into effect on October 1, 2008. Massachusetts is set to follow with a more detailed set of regulations in January, with Michigan and Washington State in the process of considering similar measures.

 The Nevada provision is succinct:

A business in this State shall not transfer any personal information of a customer through an electronic transmission other than a facsimile to a person outside of the secure system of the business unless the business uses encryption to ensure the security of electronic transmission.

“Encryption” and “personal information” are defined by reference to other statutes and have meanings similar to those typically used in the notification laws. (See NRS 597.970.)

The effect of the Nevada law is to give a victim of identify theft resulting from data breach a statutory standard of care to enforce against the business that, as a result of negligent (or other) non-compliance with the law, experienced the breach that led to the identify theft in question. Other questions pertaining to the practical implementation of the standard remain, including how to show a causal link between the breach and the ID theft and whether some injury short of ID theft – such as the cost of signing up for credit monitoring – would be support a damages claim sufficient to allow a case to proceed to trial. However, it is clear that companies doing business in Nevada now have a tangible interest in deploying encryption technology to protect the data of customers living in that state.

In Massachusetts, the stakes could be even higher. There, the state’s Office of Consumer Affairs & Business Regulation has adopted regulations, to become effective on January 1, 2009, that provide detailed definitions of the standards businesses must meet in order to bring their data handling technology and protocols into compliance. (See 201 CMR 17.00.) While the Massachusetts regulations’ enabling statute does not create a private cause of action for failure to comply, it does give the state attorney general the authority to file a lawsuit for injunctive relief and, in some cases, civil penalties up to $5,000.00 per violation.

As with the notification laws, there is no unified, federal standard for data handling to pre-empt what may become another medley of state laws for businesses to navigate. If these laws become more commonplace (and it appears that they very well may), it will become even more critical for companies conducting interstate transactions to work closely with counsel in order to ensure their compliance with all applicable data handling standards and safeguards.