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Remember when technology contracts felt a bit … simpler? Liability caps, often tucked neatly within broader clauses, were almost a standard feature. They would typically limit a party's potential financial exposure to a predetermined amount, maybe tied to contract fees.
Data privacy was a consideration, sure, but perhaps not the central, high-stakes issue it is today.
However, the landscape has fundamentally shifted. Data privacy has surged from a background concern to a core business imperative, profoundly altering the dynamics of technology agreements.
Those once-routine liability caps? They are now the subject of intense scrutiny and strategic evolution, reflecting the escalating costs of noncompliance and the stark reality of the financial and reputational fallout from data breaches. What was once a predictable element of risk allocation is now a complex and high-stakes area of negotiation.
In the pre-EU General Data Protection Regulation and California Consumer Privacy Act era, data breaches were frequently treated as just another potential contractual risk, not always needing specialized, tailored provisions. General limitations of liability clauses, designed to cover a large list of potential issues, were often deemed sufficient.
But as data breaches became more frequent, sophisticated and clearly costly, the need to change this approach became increasingly apparent. The high expenses associated with a data breach — mandatory notifications, complex legal proceedings, extensive remediation efforts, regulatory fines that could reach staggering sums, and the often-irreparable damage to brand reputation — quickly made the relatively modest caps common in older tech contracts very sizable.
How the GDPR, CCPA reshaped the landscape
The introduction of landmark data privacy regulations like the GDPR and CCPA marked a watershed moment. These regulations didn't just tweak the rules, they fundamentally reshaped the playing field, ushering in an era of heightened accountability and significantly increased potential liability for data breaches.
The GDPR and CCPA imposed stringent, far-reaching requirements for data protection across the board. Noncompliance was no longer a minor infraction. It became a potentially catastrophic event, carrying the risk of substantial fines, severe reputational damage, and the initiation of costly civil litigation.
General limitations of liability clauses are no longer considered sufficient to address the specific risks associated with data privacy. Instead, we have seen the rise of dedicated provisions meticulously crafted to address data privacy liabilities specifically. Negotiations surrounding these provisions are now more intense, more detailed, and carry higher stakes than ever before.
SaaS agreements
Software as a Service agreements, central to the modern cloud-centric technology landscape, present a particularly nuanced scenario. SaaS providers, by their very nature, handle substantial volumes of customer data, making them attractive targets for cyberattacks and data breaches.
So, data privacy liability caps in SaaS agreements are a frequent and intensely debated point of negotiation. While many SaaS agreements initially propose standard limitation of liability clauses that cap liability at a multiple of the annual subscription fees, sophisticated customers are increasingly pushing back. They are advocating for significantly higher caps and, more importantly, demanding specific carve-outs for data privacy breaches, ensuring these are treated with the seriousness they warrant.
On top of that, indemnification obligations, where the SaaS provider agrees to protect the customer from losses arising from data breaches they cause, are becoming increasingly common.
Cloud computing agreements
Cloud computing agreements, including Infrastructure-as-a-Service and Platform-as-a-Service models, introduce slightly different dynamics. These agreements often operate under a "shared responsibility model."
This model generally dictates that while the cloud provider is responsible for the security of the cloud infrastructure itself, the customer typically bears primary responsibility for securing the data and applications they deploy on that infrastructure. This means that the cloud provider's liability caps specifically related to data privacy breaches may, in some instances, be lower than those seen in SaaS agreements, reflecting their more limited direct control over the customer's data.
However, liability for breaches demonstrably caused by the cloud provider's negligence or failure to provide adequate security measures, as explicitly defined and agreed upon in the contract, is often subject to higher caps, or even uncapped liability, particularly when the provider fails to meet agreed-upon security standards.
Outsourcing agreements
The rise of information technology outsourcing adds complexity to data privacy liability. Outsourcing offers cost-efficiency and expertise but increases data breach risks.
Strict data privacy requirements and higher liability caps are now common in these agreements. The significant financial consequences of data breaches, especially under the GDPR, have led many organizations to demand uncapped liability from their outsourcing partners.
Detailed service level agreements with financial penalties for security failures are also becoming standard, reflecting the high stakes involved in handling sensitive personal data.
The rise of uncapped liability and the escalating cost of noncompliance
The looming shadow of potentially massive regulatory fines, most notably under the GDPR, has radically changed the risk calculation surrounding data privacy liability caps. Many organizations, particularly those handling sensitive data or operating in highly regulated sectors, are now routinely insisting on uncapped liability for data breaches if proven to be caused by the service provider's gross negligence, willful misconduct, or a clear failure to comply with applicable data privacy laws and contractual obligations.
This move points to the stark reality that the potential financial and reputational damage stemming from a major data breach can far exceed any previously conceivable contractual limitation, potentially jeopardizing the very viability of the affected business.
Failing to meet stringent data privacy rules brings about significant and growing financial consequences. Recent years, especially 2023, have seen record fines and settlements in both the EU and U.S., highlighting the real financial dangers of breaches and noncompliance. In 2022 alone, according to IBM's 2022 Cost of a Data Breach Report, the average data breach in the EU cost over 4.35 million euros, and the trend is upwards.
GDPR enforcement in the EU
GDPR enforcement is becoming increasingly rigorous. EU data protection authorities are issuing substantial fines based on breach severity, the data involved, and an organization's efforts at mitigation.
For instance, in 2023, Meta received a massive GDPR fine of 1.2 billion euros from Ireland's Data Protection Commission for data transfer violations to the U.S., clearly illustrating the significant financial exposure under the GDPR.
US regulations and a complex state-by-state picture
The U.S. lacks a single federal law like the GDPR, resulting in a more complex landscape of state laws like the CCPA, California Privacy Rights Act, and sector-specific rules like the Health Insurance Portability and Accountability Act and the Gramm-Leach-Bliley Act.
California's attorney general is actively enforcing the CCPA, and while direct fines are less than the GDPR, the potential for class-action lawsuits significantly increases financial risks.
The growing number of state-level data privacy laws further complicates compliance for national businesses.
Data privacy liability caps in tech contracts are now a critical element of risk allocation. Careful consideration of the contract's context, data sensitivity, potential breach impacts, and the evolving regulatory environment is essential.
Given stricter rules, more frequent and costly enforcement, and increasingly sophisticated threats, businesses must strategically adapt their negotiation and risk management. A proactive and informed approach to data privacy contract negotiation is no longer optional, it is vital for mitigating risks, building resilience and fostering successful, sustainable technology partnerships.
Irina Beschieriu is deals counsel for Atos IT Solutions and Services, Inc.
