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Cloud Security and Privacy: A Legal Compliance and Risk-Management Guide, Part 2

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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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Due Diligence and Cloud Service Agreements

An organization’s contractual agreement with a cloud service provider is perhaps the most critical component in evaluating cloud computing risks, and therefore should be carefully examined before being entering into a cloud relationship.

Cloud Service Agreements (CSAs) should clearly describe the services provided, guarantees, warranties, limitations, liabilities, and the responsibilities and rights of each party.

Proper due diligence requires inquiry into the following categories of concern: data security, performance, limitations of service, data migration, government and third-party litigation access, handling of trade secrets/confidential information, and exit plan, all of which are discussed in detail below.

Data Security

To properly manage the operation risk associated with cloud services, the cloud provider’s level of data security should be carefully examined. At a minimum, the following should be ascertained:

  • Is the cloud provider contractually obligated to protect the customer’s data at the same level as the customer’s own internal policies?
  • Who has access to customer data, and what are their backgrounds?
  • Where is the provider’s data center physically located, and what safeguards exist to prevent data centers from unauthorized access (for example, 24/7 security personnel)?
  • Does the provider promise to maintain user data in a specific jurisdiction and/or to avoid certain jurisdictions?
  • What are the provider’s migration policies regarding moving data back internally or to alternate providers? (Companies need to make sure that no data is lost or falls into the wrong hands.)
  • Does the provider conduct regular backup and recovery tests?
  • Do the provider’s security policies comply with all applicable regulatory rules?
  • Is the provider willing to undergo on-demand or periodic audits and security certifications?
  • Is the provider required to investigate illegal or inappropriate activity?
  • Is the provider required to disclose any new vulnerabilities that may affect the confidentiality of customer data, or the integrity and availability of their services?
  • In the event of lost or compromised data, can the data be backed up, and can it be easily reconstituted from the backups?
  • What are the provider’s policies on data handling/management and access control? Do adequate controls exist to prevent impermissible copying or removal of customer data by the provider, or by unauthorized employees of the company?
  • What happens to data when it is deleted?
  • What happens to cloud hardware (for example, trailers of servers) when the hardware is replaced?


For many companies, the continued availability of cloud services is of critical importance. The inability to access data stored in the clouds can cause significant business interruption, lost revenue and lost goodwill. Before entering into a CSA, be sure to obtain satisfactory answers to the following questions:

  • Does the provider have multiple power feeds from separate sources?
  • Does the provider have multiple communication links from diverse suppliers (in order to safeguard against service disruption due to connectivity problems)?
  • Has the provider paid out any service-level credits in the past six months, and if so, what were they paid out for?
  • Have any of the provider’s customers experienced an interruption in service, and if so, for how long?
  • Is the provider able to continuously provide services (and access to customer data), even around scheduled service downtimes?
  • Can the provider seamlessly transfer customer data to an alternate supplier, if the need arises?
  • Are there special circumstances known to the provider which make an interruption of services a reasonable possibility? (For instance, is the provider undergoing financial difficulty? Is it relying upon a financially troubled sub-contractor? Is it involved in litigation?)
  • In the event of data loss, how quickly will the provider perform data restores?
  • What liability (if any) does the provider have to the user in the event of interruption of service or loss of data due to a force majeure (such as war, government sanction, embargo, or power outage)?
  • What is the provider’s contingency plan in the event of a natural disaster? For example, does the provider have the means to quickly transfer customer data and redeploy customer applications to a secondary location?
  • What contractual obligations (if any) will the provider assume regarding uptime, and are any uptime warranties included?

Limitations of Service

CSAs frequently contain several exclusionary clauses that should give companies contemplating migrating to the cloud significant reason to pause. Such clauses should be carefully scrutinized and, where appropriate, qualified or deleted. The most onerous clauses are identified below.

  • The unilateral right to limit, suspend, or terminate the service (with or without notice) (and for any reason)
  • Disclaimer of liability relating to service quality and availability
  • Disclaimer of all warranties, including the implied warranties of merchantability and of fitness for a particular purpose
  • Disclaimer of liability for third-party action
  • Remedy limitations, including total damages capped (such as a return of fees paid), and/or exclusion of consequential damages (such as loss of profits/revenue)

Data Segregation

Currently, most cloud service providers offer their services on a shared server basis. Special care should be taken to ensure that your company's data is not inadvertently mingled with that of a competitor’s. The following questions should be asked to ascertain the provider’s data segregation procedures:

  • What procedures does the provider have in place to ensure that a competitor does not have access to customer data, even if both customer and competitor are hosted on the same server?
  • How frequently does the provider monitor its server to confirm that data is properly segregated?

Governmental and Third-Party Litigation Access

The CSA should clearly state how the cloud provider will respond to legal requests for information, and what notice and opportunity for objection the cloud user is granted. For instance:

  • Is the provider required to notify the user if the provider receives a subpoena, search warrant, or other lawful request for user information?
  • Will the cloud provider seek a protective order to prevent and/or limit disclosure of company data?
  • In the event of litigation, how are litigation holds enforced? What are the procedures to make sure user data is segregated and retained?
  • How are e-discovery requests handled? How is metadata protected? And how is information searched for and retrieved?
  • Which party bears the costs associated with processing data for discovery purposes?

Trade Secrets and Confidential Information

The CSA should include a provision to maintain the confidentiality of a company’s trade secrets and proprietary information, although even then storage of a company’s trade secrets with a cloud provider carries significant risk.

Under the Uniform Trade Secrets Act, for a company’s proprietary information to be accorded trade secret status, the trade secret must be, at a minimum, the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Whether a transfer of trade secrets to a cloud provider extinguishes the trade secret has yet to be ruled upon. A company’s trade secrets may lose their status as such even in circumstances where the cloud provider commits to keeping confidential any information it receives.

Certainly, where the cloud provider’s terms of service allows the provider to see, use, or disclose information, this would probably vitiate the user’s claim that the information is a trade secret.

Likewise, the CSA should be reviewed to determine whether privileged communications remain intact.

Generally speaking, privileged communications, such as those of a client to his or her attorney, are destroyed if shared with third parties.

If the CSA allows the provider to read, use, or disclose the information, then privilege will most likely be lost. If, on the other hand, the CSA allows the provider only to store the information, without the right to look at the information, then the privilege probably survives the transfer of the data to the provider.

Exit Plan

An exit plan defining each party’s obligations in the event of a termination of services should also be clearly set forth in the CSA. For instance,

  • How long after termination of service will customer data be returned to the customer, and in what form?
  • Is the provider required to assist the customer in transferring data to a new provider or back to a self-managed platform?
  • Is the provider required to maintain a backup copy of customer data post-termination in perpetuity, or is all customer data to be destroyed within a certain time frame?
  • How is customer data disposed of at the end of the relationship with the provider?
  • What happens to customer data in the event the provider goes out of business?
  • For encrypted data, how is the data to be decrypted when it is returned?
  • Can the user’s data and applications be readily transferred to and from the cloud so as to avoid being locked in to any particular cloud vendor?

Naturally, as cloud services become consolidated into only a handful of big players, the ability to negotiate the terms of a CSA will become increasingly difficult. Nonetheless, given the current stage of robust cloud competition and consumer skepticism regarding cloud safety, the ability to negotiate terms is at a relative high point. Companies should leverage this fact to insist upon terms that maximize protection of their data and minimize their legal risks.


Significant benefits are associated with adopting cloud services, including lower costs, less need for on-site support, and scalability.

Migrating to the cloud also carries with it its own unique data security and privacy risks, and legal and regulatory compliance obligations.

Due diligence of the service provider, together with a carefully drafted service agreement specifying each parties’ rights, obligations, and liabilities, are perhaps the most critical risk mitigation measures a company can adopt before deploying into the cloud.

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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