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Cloud Security and Privacy: A Legal Compliance and Risk-Management Guide, Part 1

In this two-part series, legal expert Robert McHale, author of Data Security and Identity Theft: New Privacy Regulations That Affect Your Business, provides a comprehensive overview of the legal security and privacy risks associated with cloud computing. Part 1 discusses the principal federal and state laws regulating cloud activities. Part 2 provides a practical due diligence checklist companies should consult before entering into a cloud service agreement.
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While storage of user data on remote servers is hardly a recent phenomenon, the current explosion of cloud computing warrants a closer look at the associated privacy and security implications.

Cloud computing carries with it its own unique risks regarding the privacy, confidentiality, and security of business information, which companies must fully assess before migrating to the cloud. Armed with an appropriate legal compliance and risk-management strategy—and strong, fully-negotiated contractual protections—companies should be able to safely transfer their data and applications to the cloud.

Part I of this article discusses the principal federal and state laws regulating cloud activities, and the legal security and privacy risks associated with cloud computing.

Part II of this article provides a comprehensive due diligence checklist, which includes a critical examination of key terms found in many standard cloud service agreements, for any company considering utilizing a cloud-based service provider.

U.S. Laws and Regulations Governing Data Security and Privacy

The United States has numerous federal and state data security and privacy laws with implications for cloud computing. Unfortunately, there is not a single, comprehensive legal framework in which the rights, liabilities, and obligations of cloud providers and cloud users are regulated or defined. Instead, U.S.-based cloud users and providers must rely upon a veritable hodgepodge of (oftentimes) sector-specific laws to evaluate their legal risks and obligations, and the contractual terms between them.

The most notable data security and privacy laws are examined here.


The federal Health Insurance Portability and Accountability Act (HIPAA) establishes a comprehensive regulatory framework controlling the use and disclosure of individually identifiable health information by “covered entities,” principally health care providers and health plans.

Under HIPAA’s Privacy Rule, a covered entity may not use or disclose protected health information (PHI) unless as permitted or required by the Rule, or as authorized in writing by the individual affected.

Similarly, HIPAA’s Security Rule is designed to safeguard the confidentiality, integrity, and availability of electronic protected health information (EPHI). The Security Rule sets forth detailed administrative, physical, and technical standards to ensure that, among other matters, only those who are authorized to have access to EPHI will have access.

With respect to disclosure to cloud service providers, covered entities may not store PHI with a provider absent an agreement (a “business associate contract”) wherein the provider agrees to be bound by the same HIPAA privacy and security requirements as the covered entity itself.

The business associate contract must further specify that if the cloud service provider receives a subpoena for a patient record that it is storing on behalf of a covered entity, special reporting obligations are triggered. Under HIPAA, covered entities must notify the patient of, and give the patient an opportunity to object to any subpoena requiring disclosure of a patient’s PHI.


The Health Information Technology for Economic and Clinical Health Act (HITECH Act), enacted as part of the American Recovery and Reinvestment Act of 2009, establishes new breach notification requirements that apply to HIPAA covered entities and their business associates which access, maintain, retain, modify, record, store, destroy, or otherwise hold, use, or disclose unsecured protected health information (PHI).

In particular, the HITECH Act requires HIPAA covered entities to notify affected individuals, and requires business associates to notify covered entities following the discovery of a breach of unsecured PHI. The notification requirement is only triggered if the breach poses a significant risk of financial, reputational, or other harm to the affected individual.

Prior to disclosing PHI to cloud providers, organizations should ensure (as part of their contract) that the provider will observe the breach notification requirements under the HITECH Act.

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act (GLBA) has two key provisions carrying significant privacy implications for “financial institutions” storing data in the cloud: the Financial Privacy Rule and the Safeguards Rule.

The Financial Privacy Rule governs the collection and disclosure of customer’s personal information by financial institutions, and by any company, regardless of whether they are a financial institution, who receives such information. Under the Financial Privacy Rule, prior to disclosing consumer personal information to a service provider (including cloud providers), a financial institution must enter into a contract with the service provider prohibiting the service provider from disclosing or using the information in any manner other than to carry out the purposes for which the information was disclosed.

The Financial Privacy Rule also requires financial institutions to provide their customers with a privacy notice at the outset of their relationship, and annually thereafter, explaining how their personal financial information is being collected, shared, used, and protected. The notice must also state that customers have the right to opt out of having their personal financial information being shared with nonaffiliated third parties.

The Safeguards Rule requires all financial institutions to develop, implement, and maintain a “comprehensive information security program” to protect nonpublic customer information. The Safeguards Rule require financial institutions to periodically monitor and test their security program, and to update the safeguards as needed with the changes in how information is collected, stored, and used. Further, prior to allowing a service provider access to customer personal information, the financial institution must:

  • Take reasonable steps to select and retain service providers that are capable of maintaining appropriate safeguards for the customer information at issue.
  • Require the service providers by contract to implement and maintain such safeguards.

Given the complex administrative, technical, and physical information safeguards requirements imposed by the GLBA, managing the risks associated with nonpublic information stored in the cloud may prove particularly challenging.


The USA PATRIOT Act provides authority for law enforcement agencies to compel disclosure of virtually any document, including electronic documents held by cloud providers.

Section 215 of the Act permits the issuance of ex parte Magistrate Judge court orders:

    “The Director of the Federal Bureau of Investigation or a designee of the Director (whose rank shall be no lower than Assistant Special Agent in Charge) may make an application for an order requiring the production of any tangible things (including books, records, papers, documents, and other items) for an investigation to protect against international terrorism or clandestine intelligence activities, provided that such investigation of a United States person is not conducted solely upon the basis of activities protected by the first amendment to the Constitution.”

Further, those who receive a Section 215 court order are severely restricted in their ability to reveal to others that they received such an order, or to alert the subject of the order that the order was received. Problematically, those who use cloud providers to store or process their data may not even know that the government obtained their records.

Likewise, pursuant to Section 505 of the Act, the FBI may demand, through the use of National Security Letters (NSLs), personal customer records (including e-mails, financial records, and consumer reports) from financial institutions and wire or electronic communication service providers without any prior court approval.

Because any electronic data stored in the United States is potentially subject to ex parte governmental disclosure, a few foreign governments (most notably the Canadian provinces of British Columbia and Nova Scotia) have enacted various restrictions and/or prohibitions regarding the cross-border transfer of information with U.S.-based cloud providers.

Electronic Communications Privacy Act

The Electronic Communications Privacy Act (ECPA) sets out provisions for the access, use, disclosure, interception, and privacy protections of electronic communications.

Generally speaking, the ECPA proscribes the unauthorized access of electronic communications service facilities, and any electronic communications in storage. The ECPA also prohibits “electronic communications service providers” from divulging the contents of such communication while it is in electronic storage.

Additionally, the law prevents government entities from requiring disclosure of electronic communications, such as email messages, from a provider without proper procedure (for example, via a trial subpoena or warrant).

Despite the strict mandates against disclosure, use of cloud service providers carries some risk, as there have been many instances where service providers have been compelled to disclose information upon receipt of a court order.

It has yet to be established whether the protections available for information in the cloud against a governmental demand for disclosure is or is not greater than those available for records held by third parties. In light of this uncertainty, measuring the risk involved with cloud computing against governmental demands for information is difficult.

E-Discovery and the Federal Rules of Civil Procedure

Under Rule 26 of the Federal Rules of Civil Procedure, all parties to a federal lawsuit are required to disclose (without awaiting a discovery request) a copy of all electronically stored information (ESI) that the disclosing party has in its possession, custody or control and which it may use to support its claims or defenses.

(Some states have adopted similar rules for e-discovery for lawsuits at the state level.)

A party is required to produce the ESI in the form(s) in which it is ordinarily maintained or in reasonably usable form(s), or in the form specified in the request for production.

Businesses must take measures to preserve ESI not only at the inception of a lawsuit, but whenever litigation is reasonably anticipated. In this regard, parties are required to initiate a litigation hold and cease from further destruction of a company’s documents which may be relevant to a lawsuit.

The legal requirements imposed by the Federal Rules of Civil Procedure on litigants who store information in the cloud can therefore be quite problematic, as otherwise discoverable and relevant data may not be easily accessible by the parties’ cloud service providers, may not be properly preserved, or may be inextricably intertwined with others’ data so as not to be produced without compromising the privacy of others. To avoid this issue, companies should acquaint themselves with their cloud service provider’s retention policies, and be confident that if a litigation hold needs to be initiated, their data will be properly segregated and retained.

Massachusetts Data Security Regulations

In 2007, Massachusetts mandated the adoption of detailed information security regulations in order to reduce the number of data security breaches.

The resulting regulations, 201 CMR § 17.00 et seq. (effective March 1, 2010), impose detailed administrative and technical obligations on any person that owns, licenses, stores or maintains “personal information” of Massachusetts residents (for example, name and Social Security number, financial account number or credit card number). The regulations also impose significant technical requirements for any computers, systems, or networks involved in the maintenance or transmission of personal information.

Companies subject to the Massachusetts regulations must take reasonable steps to ensure that third-party service providers (including cloud providers) with access to personal information have the capacity to protect such information consistent with the Massachusetts regulations and applicable federal regulations.

Companies must also require that their third-party service providers contractually agree that they have appropriate security measures for personal information.

It is important to note that the Massachusetts regulations apply to any business, whether or not operating in Massachusetts, handling personal information of Massachusetts residents. In the cloud context, companies need to ensure that their cloud providers maintain appropriate security measures to protect stored data involving personal information of Massachusetts residents.

The European Union Data Protection Directive

The location of information stored in the cloud can have a profound impact upon the level of privacy and confidentiality protections afforded the information in question, and upon the privacy obligations of the cloud provider.

For instance, the European Union's Data Protection Directive, which regulates the processing of personal data within the EU as a means to safeguard individual citizens’ privacy, is of particular significance.

Under the EU Data Protection Directive, personal data may be transferred to third countries (non-EU member states) only if that country provides an “adequate” level of protection. Most notably, the United States is not on the list of countries that meet the EU’s “adequacy” standard for privacy protection. Accordingly, an organization that does its processing in the cloud may be violating EU law if the data goes to a server outside of the EU to prohibited countries, such as the United States.

In order to provide a means for U.S. companies to comply with the Directive (and thereby ensure continued trans-Atlantic transactions), the U.S. Department of Commerce, in consultation with the European Commission, developed a “Safe Harbor Program” designed to protect accidental information disclosure or loss.

U.S. companies can opt into the program and self-certify as having “adequate” privacy protections, provided they adhere to the following seven Safe Harbor principles:

  • Notice: Organizations must notify individuals about the purposes for which they collect and use their information. Individuals must also be notified about the types of third parties to which the organization discloses the information, and the choices and means the organization offers for limiting such disclosure.
  • Choice: Organizations must give individuals the ability to opt out of the collection and forward transfer of their data to third parties.
  • Onward Transfer: Organizations may only transfer information to a third party if the third party subscribes to the Safe Harbor principles, or is subject to the Directive. Alternatively, the organization can enter into a written agreement with such third party requiring that the third party provide at least the same level of privacy protection as is required by the relevant Safe Harbor principles.
  • Access: Individuals must be able to access information held about them, and correct or delete it if it is inaccurate.
  • Security: Organizations must take reasonable precautions to protect personal information from loss, misuse and unauthorized access, disclosure, alteration, and destruction.
  • Data Integrity: Data must be relevant and reliable for the purpose it is to be used.
  • Enforcement: There must be effective means of enforcing these rules, verifications that an organization's commitments to adhere to the Safe Harbor principles have been implemented, and obligations to remedy problems arising out of failure to comply with the principles.

Continue reading this article in Part II.

Final Note

The information contained herein is not intended to constitute legal advice or a legal opinion as to any particular matter. The contents are intended for general information purposes only, and you are urged to consult with an attorney concerning your own situation and any specific questions you may have.

Robert McHale, Esq. is the founding Partner of R | McHale LLC, a full-service law firm whose corporate practice represents clients on a wide variety of IT and intellectual property law matters, including privacy and data security, copyright, trademark, licensing, and other proprietary protections.

He may be contacted at: robert.mchale@rmchale.com

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Last Update: November 17, 2020