UK: Data Breach Liability: A Landmark UK Court Ruling And Its Impact On Middle East Businesses

Deliberate or negligent acts of employees are a common source of data breaches globally. On 1 December 2017, the High Court of England and Wales ruled that a company can be held liable for the acts of a rogue employee who was responsible for a deliberate data breach. The employee in question exposed the personal data of almost 100,000 employees on the internet. In this article, we look at the Morrisons court decision, its relevance to businesses in the Middle East and whether UAE's existing liability principles could be used to impose liability upon employers in similar circumstances.

Background

In 2014, a senior IT auditor (the "Employee") at Morrisons Supermarket Plc, a supermarket chain in the UK ("Morrisons"), posted personal data of almost 100,000 employees on the internet. This data included names, addresses, dates of birth, phone numbers, national insurance numbers, bank account numbers and salary details. The Employee was charged with fraud and breach of the UK Data Protection Act ("DPA") and convicted to a term of eight years' imprisonment.

More than 5,000 employees of Morrisons whose personal data was disclosed subsequently brought a claim for compensation against Morrisons for: (i) direct liability for breach of the DPA; and/or (ii) vicarious liability for the actions of the Employee.

The Employee worked in the audit department at Morrisons.

In 2013, when dealing with a request by Morrisons' auditors as part of its yearly statutory audit, the Employee was provided with payroll data relating to Morrisons' employees on an encrypted USB stick. He copied the payroll data from the USB stick and stored it on his computer. He then downloaded that data from his personal computer onto a USB stick and posted the information onto a file-sharing website. It later transpired that the disclosure by the Employee was motivated by a grudge relating to an earlier disciplinary matter.

Court ruling

Direct liability

The Court held that Morrisons was not directly liable for the data breach under the DPA. That is because direct liability is imposed on a "data controller" as defined under UK legislation.

The Court found that whilst Morrisons was the "data controller" in respect of the original payroll data, the Employee "became the data controller in respect of that information once he put himself in the position of determining the purposes for which and the manner in which the personal data" was to be handled, i.e. when the Employee copied the data for the purpose of disclosing it on the internet.

The Claimants argued that, under the DPA, appropriate technical and organisational measures must be taken against unauthorised or unlawful processing of personal data and that there should be direct liability on Morrisons for failing to take these measures. However, the Court held that Morrisons did not fall short of its obligations in this regard (except in one respect) for reasons including:

  • that it would be impracticable for a company to monitor internet searches by employees;
  • that the method of transferring the data (i.e. on an encrypted USB stick which was personally handed to the Employee) was a safe means of transferring the data; and
  • that no-one at Morrisons knew or ought reasonably to have known that the Employee bore a grudge against its employer and could not be trusted with the data.

The Court found that Morrisons fell short of taking appropriate measures in one respect: that it had no organised system for the deletion of data, such as the payroll data which was stored on the Employees' computer for a brief time, for the purposes of onward transmission to KPMG. The Court stated that "where data is held outside the usual secure repository used for it [...] there is an unnecessary risk of proliferation and of inadvertent disclosure (let alone deliberate action by an employee) revealing some of that data."

However, the Court held that this failure did not cause the disclosure because the information would have likely have been copied by the time the employer conducted a check on deletion if an employee was determined to copy the data. 

Vicarious liability

Vicarious liability arises where one person is held liable for breach of duty of another (whether under tort or statute), even though that person did not commit the offence itself.

In order to establish vicarious liability, the Court had to determine: (i) a necessary relationship between the wrongdoer and the defendant (which in this case was established by virtue of their employment relationship); and (ii) a sufficiently close connection between the employer's actions and his employment.

The Court determined that an employer can be held vicariously liable for breaches of the DPA by its employee even where the employer is not the "data controller" at the time of the breach and where the employee processes the data without authority in his own right.

The Court also held that there was an unbroken thread that linked the Employee with his work and the disclosure of the data, for the following reasons: (i) the Employee had been deliberately entrusted with and assigned to deal with the data; and (ii) his role in respect of the data was to receive it, store it and disclose it to the auditor. The fact that he chose to disclose it to others who were not authorised was nonetheless closely related to what he was tasked to do. The fact that the disclosure occurred at the Employee's home, outside working hours and using his own laptop did not break the chain of events.

In summary, the Court found that Morrisons was vicariously liable for the Employee's actions and, accordingly, liable to pay damages to the Claimants for the losses that they suffered. Permission to appeal the decision has, however, been granted as the Court was troubled by the fact that the Employee's motives were to cause loss to Morrisons, which is also the effect of this court decision.

Relevance to the Middle-East

The Morrisons judgment will directly affect companies established in the UK who have branches in the Middle East. A number of the provisions in the DPA will be applicable to the branch operations, for example, data transfers from the UK company to the branch.

The DPA also applies to companies established outside the UK or the European Economic Area (the "EEA") but which use equipment in the UK for processing data. This could catch both group companies using UK-based servers and local entities in the Middle East that contract with third party hosting or IT service providers who use servers in the UK.

Based on the Morrisons judgment, an employer can be vicariously liable for an employee's actions even where the employee processed the data without authority. This ruling could also have an impact on the interpretation of data protection laws in the Middle East, particularly those modelled on UK or European legislation (such as the DIFC Data Protection Law and ADGM Data Protection Regulations in the financial services free zones of Dubai and Abu Dhabi respectively). Local regulators have historically looked to UK and European case law to guide interpretation of local legislation.

Finally, this judgment illustrates the growing global focus on corporate or management liability where there is wrongdoing by an employee, particularly where that wrongdoing is connected with data breaches that impact a large number of people. We expect to see a greater scrutiny across the world in the future on the safeguards put in place by companies around the control and management of data and access to or use of data by employees.

Legislation in the UAE relating to liability and cyber/ data breaches

Data protection and cyber laws in the Middle East

Countries in the Middle East face significant threat from external cyber attacks at a country level. However, all businesses in the region also face internal cyber and data breach threats from their employees.

There are laws in place to deal with perpetrators of cyber and data breach incidents across the region. In the UAE, for example, the 2012 Law Concerning Combating Information Technology Crimes in the UAE (the "Cyber Crimes Law") sets out fines and penalties that can be imposed on persons guilty of various IT crimes, including unauthorised access to IT systems resulting in the publication or disclosure of data and disclosure of information obtained through the illegal reception or interception of communications. The UAE constitution and Penal Code also protects the right to privacy and penalties can be imposed for a breach of privacy.

The data protection regimes in the region are also developing at a rapid pace. Dubai International Financial Centre ("DIFC") and Abu Dhabi Global Market ("ADGM") both have a data protection regime in place that is modelled on the UK regime. Qatar became the first country in the region to issue national data protection legislation in 2016 and several other countries have announced that they are considering the introduction of data privacy laws. In addition, Europe's General Data Protection Regulation (the "GDPR") is due to come into force in May 2018 and will have considerably wider impact on Middle East businesses than the current regime (see our separate article on the impact of the GDPR on organisations in the Middle East [1]).

Combined with these legislative developments, we have seen the passing of a draft regulation in Saudi Arabia to introduce a class action regime in securities disputes in May 2017 and the DIFC Court rules already contain a provision for group litigation.

Against this background, companies in the region need to be aware of the liability provisions that already exist, which could mean that both companies and management individuals could be held liable for loss to data subjects, after a cyber attack or data breach incident.

Can liability be imposed on employers within the Onshore UAE and DIFC regimes?

The UAE civil code contains provisions where liability can be imposed on individuals and companies so that "Any harm done to another shall render the doer .. liable to make good the harm".

There are also broad provisions within the UAE companies law which impose liability on companies for mismanagement.

Companies are liable for the acts of their employees pursuant to Article 313 of the UAE Civil Code, which holds that an employer is liable for the acts of its employee "if the harmful act was committed by the said person in the course of or by reason of carrying on the duties of his post".

Dubai Supreme Court decisions have found that an employer is liable even if the employee is taking advantage of his employment or acting on his own accord in a certain way with or without the employer's knowledge. For the employer to be held liable, it is not necessary to show that the employer was negligent or at fault, if it can be shown that the employee was at fault and carried out the harmful act.

In DIFC, the Law of Obligations No.5 of 2005 sets out vicarious liability principles which apply to companies operating in the free zone. Pursuant to Article 15, "An employer is jointly liable with his employee in respect of liability of the employee under this Law arising in the course of his service."

The relationship of service is interpreted widely and "depends on the substance of the relationship between the two parties in all its aspects, rather than its form. It is not essential that there should be a contract of service between them."

In summary, the analysis applied in the Morrison's judgment could therefore be applied under both UAE and DIFC Law in considering whether the employee's acts were within the "course of carrying on duties" or in the "course of his service" and could justify vicarious liability upon his/her employer. Accordingly, companies in the UAE are at risk of similar actions to those in the Morrisons case.

Conclusion

Businesses need to stay vigilant to both internal and external cyber and data breach threats. This includes a need to ensure that their organisation understands the data flowing within its business and has proper processes in place to control and limit the dissemination of data. This understanding can be achieved through a comprehensive data protection audit, which may include a review of contracts, policies and applicable regulations.

Businesses should also be aware of a common practice in this region to file claims against management individuals, for example by filing police complaints against a general manager of a business or to add the board of directors into a civil claim. Allegations of mismanagement under the UAE Companies Law are also increasingly common. Given that the potential number of victims which may be affected by a data breach can be very high, companies will need to consider whether their existing insurance arrangements are likely to cover management liability and vicarious liability for data breaches by malicious employees.

There has been an increase in take-up of cyber insurance in the Middle East, partially due to the increase in cybercrimes and new legislation in the region, including legislation in Qatar which is due to be passed imminently and, which imposes an obligation on data controllers to notify the regulator of any data breaches.

The coming into force of the GDPR in May 2018 (which imposes a compulsory breach notification requirement) and increasing local regulation in this area has also generated further interest in cyber insurance by Middle East businesses. Companies need to ensure that data protection policies, breach response plans and other internal processes and controls relating to data management are aligned with relevant laws and regulations.

 Footnote

[1] https://www.clydeco.com/insight/article/the-impact-of-gdpr-on-businesses-in-the-middle-east

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