New EU Rule To Likely Force U.S. Retailers To Disclose U.S. Data Breaches Immediately

The European Union will soon require all companies doing business in Europe to notify customers "as soon as they become aware" of a data breach. For U.S. retailers that move will likely force global notification if a retailer has any European customers, because there won't be time to determine who was hit or what was taken. Given the lack of time to positively rule out a Euro impact, retailers will have to just disclose.

That may be an inevitable consequence of globe-spanning E-Commerce. Here's another: Those stricter, faster breach-notification requirements will also hit U.S. retailers that have handed off European order-handling to third parties and even retailers that don't officially serve European customers at all. The less connection a retailer thinks it has with European customers, the more of a mess it's likely to be.

On Monday (June 20), EU vice president Viviane Reding told a banking conference in London that this fall she'll be pushing through a bill requiring businesses to notify customers immediately whenever there's a serious data-security breach. The new law's breach-notification requirements will be modeled on an EU telecom law that took effect in May and defines how fast a breach must be reported:

"As soon as the provider of publicly available electronic communications services becomes aware that such a breach has occurred, it should notify the breach to the competent national authority. The subscribers or individuals whose data and privacy could be adversely affected by the breach should be notified without delay in order to allow them to take the necessary precautions."

Reding said that U.S. companies with online customers in Europe will be covered by the new privacy legislation, and she pointed to the Sony breach in April as an example. "Only recently, we witnessed a massive security theft in online gaming services affecting millions of users around the world," Reding said. "Frequent incidents of data security breaches risk undermining consumers' trust in the online economy."

If that were coming from a U.S. senator or congressman, it would sound a lot like posturing. Coming from the VP of the European Commission, it's more likely a done deal.

And it all sounds like it makes sense, at least until you hit the requirement to notify customers as soon as there's been a breach. The principles are good. But the practical problem is that the worst time to try to evaluate a breach is immediately after it has been discovered. It's almost impossible to know how bad the breach is at that point—even getting a reasonable idea of the extent of the damage can take days or weeks.

And with no way to instantly determine how serious a breach is, retailers will be in a bizarre position. To meet the proposed EU requirements, they'll have to assume the worst in every breach that potentially involves European customer data. That means they'll need to notify customers even in cases where, in the end, it turns out the breach was minor. So much for improving trust in the online economy.

For U.S. retailers, the situation is even stranger.For U.S. retailers, the situation is even stranger. In practical terms, any European customers will have to be notified immediately if there's any breach that might affect them, even if the group is tiny. That notification won't remain quiet for long—news reports will bounce the word back to the U.S. Then retailers will have a much larger task notifying U.S. customers of the breach.

Never mind what U.S. data-breach standards are—whichever country has the tightest standards will rule the situation. (That has actually been formalized in India's new data-breach rules, but it's a de facto result of how the European law will work.)

In fact, the smaller a U.S. retailer's footprint in Europe, the more troublesome a problem this is likely to be. It's bad enough for a retailer like Gap, which now uses an outside vendor called FiftyOne to do order-taking and shipping in dozens of countries. That arm's length transaction almost certainly won't be enough to shield Gap from the new EU requirements, but at least Gap will know it has customers in Europe.

Although companies like FiftyOne handle local currencies, tariffs and logistics, they're not in a position to be in the center of a data breach for their retailer clients. Gap will still have to stay on top of European law and do the notifications.

But consider the situation of a retailer that has no official E-Commerce presence in the Euro zone. Customers can see the Web site, but no orders are officially accepted there. What happens when a third-party parcel-forwarding service such as Bongo or BayRu takes orders from Euro-zone customers and gives the retailer a U.S. address? The retailer doesn't even know it has European customers.

If there's a breach, and European customer payment-card data is stolen, the retailer may manage to dodge legal penalties for not immediately notifying European customers—after all, the retailer really didn't know those customers were in Europe. But that will likely happen only after bureaucratic hassles and bad publicity.

(There's an even worse scenario: one where the first indication a retailer gets of a data breach is when a European customer's stolen card data leads back to the retailer that didn't know it had any European customers. You can't get farther behind the curve than that.)

Short of lobbying for international agreements that provide a little protection (or a lot more consistency), U.S. retailers may be stuck. In this game, whoever has the toughest rules wins.