Merchants Liable For Data Breaches

What do online merchants, and have in common? They’re three in a small, but growing, list of ecommerce sites hacked for their customer’s credit card data.

Not only are there legal ramifications for not protecting customers’ private data, but breached companies also stand to lose an average of $128 in business per compromised record. That’s according to a 2007 survey of 35 breached merchants by Ponemon Institute, an independent privacy-management-research firm in Michigan.

It’s the Federal Trade Commission that sets guidelines for e-merchants holding customer data. Merchants must "protect the security, confidentiality, and integrity of personal information collected from or about consumers." Ones that don’t take “reasonable steps” to do so, can be required by the FTC to submit to, and pay for, security audits for up to 20 years-even without a security breach.

Since 2002, the commission has charged 20 companies for breachable data. The FTC can’t impose fines or pursue legal action, but it can refer cases to the Department of Justice for criminal charges or damages, a move it’s made only once.

Security compliance

To comply with FTC guidelines, all sensitive customer data such as credit card numbers, credit verification codes, or log-in identifiers must be:

  1. Encrypted by a “validated cryptographic module that has been approved by the National Institute of Standards and Technology,” an agency of the U.S. Department of Commerce.
  2. Protected by a periodically-changed password with a minimum of six characters, including upper and lower case letters, numbers and, if possible, symbols.
  3. Transmitted using a secure connection. The FTC doesn’t stipulate how secure a network must be, only that it’s encrypted.
  4. Destroyed when no longer needed. All businesses, including e-merchants, are required to “properly dispose of” private consumer data pursuant to the “Disposal Rule” of the Fair and Accurate Credit Transactions Act of 2003 (FACTA).

The FTC also looks at these factors when considering charges against an e-merchant. Merchants should:

  • Refer requests for customer information to designated individuals in the company trained to safeguard personal data.
  • Make secure transmission automatic when collecting information online from customers.
  • Caution customers against transmitting sensitive data, like account numbers, via email or in response to unsolicited email or pop-up messages.
  • Check with software vendors regularly to get and install patches that resolve software vulnerabilities.
  • Use anti-virus and anti-spyware software that update automatically.
  • Maintain up-to-date firewalls, particularly if using broadband Internet connection.
  • Regularly ensure that unused server ports are closed.
  • Use an up-to-date intrusion detection system to alert of any network attacks.
  • Insert a dummy account into customer lists and monitor the account to detect any unauthorized contacts or charges.

Additionally, FACTA stipulates that merchants may include no more than the last five digits of the card number, and must delete the card’s expiration date, from any electronically printed credit or debit card receipts given to its customers. This law does not apply to transaction records the merchant retains. Meanwhile, merchants should never store card verification codes.

Breach of contract liability

An e-merchant’s online privacy policy is considered an online contract between the store and its customers. If outside parties are given access to the information claimed as private-whether by accident, outsourcing or hack- “breach of contract law” allows consumers to sue and collect damages including reasonable attorney’s fees.

Under this law, a suit brought by the New Jersey’s Division of Consumer Affairs resulted in a December 2001 settlement between Toys R Us and the state of New Jersey. It required Toys R Us to pay a $50,000 fine and revamp its privacy policy to indicate that customer information would be passed along to a third-party marketing firm. Two class action suits calling for damages for every customer whose data was passed along were filed around the same time.

Privacy policies also put legal bite to anti-hacking provisions. In a 2000 New York district court case, upstart domain registrar used automated software to download data on’s existing domain customers. Since automated downloads were specifically prohibited in’s online privacy policy, the court found that Verio’s downloading “lacked authorization” and thus was illegal under the Computer Fraud and Abuse Act of 1984.

In all, merchants who collect and maintain customer information have a solemn legal responsibility to protect that data at all costs. Just as consumers go to great lengths to protect their identity, e-merchants should go to even greater lengths to protect the data entrusted in their care.

Additional Resources

Consider these additional resources to help fight, detect data breaches.

SANS Institute

“The 20 Most Critical Internet Security Vulnerabilities”

Scanning tools and services to monitor network vulnerabilities

Open Web Application Security Project

“The 10 Most Critical Web Application Security Vulnerabilities”


Breach notification requirements, state by state

Sample FTC breach notification letter

Alphabetical list of validated crypt graphic modules approved by the National Institute of Standards and Technology

FTC Guide for Business: “Protecting Personal Information”

Jennifer D. Meacham
Jennifer D. Meacham
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