Scottish Borders Council was issued with a £250,000 fine by the Information Commissioner's Office (ICO) last year after a firm it hired to process its employees' pension records failed to dispose of that information in a way that met the security requirements of the Data Protection Act (DPA).
However, following an appeal by the Council, Tribunal judge Mr Justice Warren ruled that there was not a legitimate basis for the ICO to issue a monetary penalty (15-page / 120KB PDF) in this case.
Scottish Borders Council may yetbe issued with an enforcement notice or be subject to other regulatory action after Mr Justice Warren ruled that its "procedures in relation to contracts for data processing were too serious" simply to allow the Council's appeal.
"There was no liability to a monetary penalty in this case because looking at the facts and circumstances of the contravention, whilst it was serious, it was not of a kind likely to cause substantial damage or substantial distress," the judge said.
Data protection law expert Kathryn Wynn of Pinsent Masons, the law firm behind Out-Law.com, said that the ruling would have implications for future data breach cases and that it would "blunt the talons" of the Information Commissioner in his enforcement of data protection laws.
Under the DPA, data controllers are required to take "appropriate technical and organisational measures" to ensure against the "unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data".
When outsourcing personal data processing to others, data controllers are required to select processors that can provide "sufficient guarantees" that they can properly meet the "appropriate technical and organisational measures" requirement and that they will "take reasonable steps" to "ensure compliance".
The data controllers must establish a written contract with data processors specifying that the processor may only undertake processing activities that the controller tasks them with, whilst the contract must also hold the processors to meeting the "appropriate technical and organisational measures" requirement of the DPA. The data controller is also responsible for those personal data security standards being met by the processors to which they outsource and so must ensure that it monitors the processors' compliance with its contractual obligations.
The ICO can serve organisations with monetary penalties of up to £500,000 if they breach the Act.
In order for a fine to be justified, an organisation must be guilty of a "serious contravention" of the data protection principles in a way that is "likely to cause substantial damage or substantial distress". The breach must also be shown to have been either carried out deliberately or by an organisation or person who knew or should have known about the risk of the breach and the damage or distress it could cause but did not take "reasonable steps to prevent the contravention" happening.
Mr Justice Warren ruled that the ICO had failed to show that Scottish Borders Council's data breach was "likely to cause substantial damage or substantial distress" and was therefore not a case in which a monetary penalty should have been issued.
The judge took the view after determining that the standard of proof for assessing the likelihood of substantial damage or substantial distress requires that a data breach has to be likely to cause such damage or distress rather than for it merely to be likely for those consequences to be possible.
"In this case, it seems to us that the fact that the data processor was a specialist contractor with a history of 25-30 years of dealings with Scottish Borders carries weight," the judge said. "He was no fly by night. The council had good reason to trust the company."
"Focussing on the contravention we have been unable to construct a likely chain of events which would lead to substantial damage or substantial distress. What did happen was of course startling enough. Again, though, looking at the facts of the case, what did happen was in our view a surprising outcome, not a likely one," he added.
Wynn said: “An example of potential damage and distress that can stem from data breaches is identify theft or some other form of financial crime. However, showing evidence that identity theft has actually occurred is extremely difficult, even if it has been widely accepted that identity theft is a foreseeable consequence of data being lost, stolen or otherwise disclosed in an unauthorised fashion."
“Since the ICO was given the power to serve monetary penalties we have seen organisations consider the issue of data security more seriously, despite the fact the threshold for issuing a monetary penalty has been high. However, whilst this case was decided in accordance with the facts and circumstances specific to it, it sets a precedent for future appeals against data breach monetary penalties as it further raises the threshold that needs to be met by the ICO to serve a monetary penalty,” she said.
“The ruling will serve to blunt the talons of the Information Commissioner by requiring a greater standard of evidence over the damage and distress suffered by individuals as a result of a data breach in order for a monetary penalty to be justified," she said. "It is inconsistent with the general direction of travel around data security and protection in the EU, as reflected in the current draft of the proposed EU Data Protection Regulation."
"UK organisations must not be lulled into a false sense of security in relation to the reduced chances of facing a monetary penalty from the ICO following this ruling when it looks likely that the threshold for penalties will be lowered, and the levels of possible fines raised, under a reformed EU data protection framework,” said Wynn.