Optimizing Breach Notification

Abstract

Maintaining data security is a crucial social objective in the digital age. An emerging strategy to ensure adequate security is through breach notification laws, which require firms to provide notice upon discovering a security breach. These laws are pervasive. All fifty states, several federal laws, the E.U’s GDPR and the OECD have incorporated notification schemes into an array of privacy and data security efforts. However, these laws are also in flux. Jurisdictions are constantly updating these laws by introducing new definitions, requirements and exceptions. In view of the important regulatory challenges ahead, this Article interrogates the structure and efficacy of the diverse set of data breach notification statutes and proposes an optimal regulatory path forward. In doing so, it provides crucial insights about both breach notification laws and theories about legal remedies more generally.

The Article begins by introducing the foundations of data breach notification statutes and their normative justifications. Here, it breaks new ground by offering a novel taxonomy of potential justifications. In particular, a breach notification statute can be designed to promote four distinct objectives: deterring firms from applying inadequate security ex ante, mitigating the harms caused to individuals ex post, driving information flows about security breaches to regulators and enhancing the autonomy of harmed individuals. Importantly, different regulatory design strategies determine which of these justifications is featured most prominently and, in many cases, promoting one objective undermines a different one. Further, this Article assesses conventional wisdom about breach notification statutes that frames these unique laws within more traditional legal remedies (such as negligence, reputational sanctions and strict liability). The Article demonstrates that these traditional legal paradigms fail to capture the uniqueness of breach notification. As a result, breach notification cannot be subsumed into these well-worn models.

Finally, the Article examines overlooked consequences of breach notification schemes. To start, the foundations of data breach notification statutes are complicated by central yet under-theorized (in this context) concepts from cybersecurity and tort law — moral luck and activity levels. The Article applies these concepts to the different normative justifications and demonstrates how breach notification risks unfairness and inefficiency. The Article concludes by demonstrating how these complications can be overcome and provides a roadmap for regulators to craft notification schemes that optimize their normative preferences while assuring fairness and efficiency.

Keywords: tort theory, data protection, data security, activity levels, GDPR, breach notification, cyber-insurance, reputation sanctions, tort and luck, nation state hackers, ransomware, privacy, information law,

JEL Classification: K1, K13, K10, K39, K40