Uncapping risk: The growing burden of data privacy liability in tech contracts

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