INFORMATION PRIVACY AND THE MODERN GLOBAL FIRM: AN ARGUMENT ...

INFORMATION PRIVACY AND THE MODERN GLOBAL FIRM: AN ARGUMENT IN FAVOR OF COMPREHENSIVE FEDERAL LEGISLATION

Philip Larson, 2E, GMUSL, [email protected]

I. INTRODUCTION

The commercial distribution of consumers’ personal information is rapidly

multiplying. While this information can be used to benefit consumers by providing them

with more choices and better services, it can also be misused in ways that invade

consumers’ privacy and destroy confidences. The adoption of two emerging technologies

– Service-Oriented Architectures (SOAs) and Business Process Management Suites

(BPM) – are breaking down organizational processes into individual tasks and other

manageable segments. These technologies have made it more common for an

organization’s business processes to consist of a network of decentralized services.. To

stay competitive, organizations are outsourcing many services in these business processes

in order to benefit from cheap foreign labor markets. While this can help organizations

reduce costs, it is also putting consumers’ personal data in the hands of a growing number

of foreign commercial entities. Consumers are losing control of their personal data.

To address these privacy concerns the time has come for the United States to

enact comprehensive federal privacy legislation. Part II of this article describes how

SOA and BPM technology are enabling companies to outsource business processes and

thereby distribute consumers’ personal data to growing numbers of global service

providers. Part III argues that self-regulation has not provided sufficient protection for

consumers’ privacy. Part IV discusses the limitations of the existing “sectional”

approach to United States federal privacy law in addressing concerns over potential

1

abuses by third-party outsourcing service providers. Part V argues that Congress should

address these deficiencies by enacting comprehensive federal privacy legislation.

II. THE ADOPTION OF EMERGING TECHNOLOGIES AND INCREASED DEPENDENCE ON OUTSOURCING ARE MAGNIFYING DATA PRIVACY ISSUES.

The world is getting smaller. Organizations are adopting emerging technologies

that are making it easier to transact with service providers located anywhere in the world.

As a result, consumers’ personal information is increasingly being distributed to a wider

network of companies magnifying the risk of data privacy and security abuse.

A. Business Process Outsourcing (BPO) and Networks of Global Service Providers.

Outsourcing is the practice of shifting an organization’s operations to a third party

vendor.1 Business process outsourcing (BPO) is when an organization leverages third

party services to streamline a variety of processes from administrative support to

telemarketing and product development.2 The market for BPO is growing rapidly in

multiple industries.3 While there are many models of outsourcing, the two most common

are on-shoring - outsourcing to a vendor located domestically - and off-shoring -

outsourcing to a vendor in a different country.4 While India is the most preferred

1 Outsourcing, http://en.wikipedia.org/w/index.php?title=Outsourcing&oldid=61793844 (last visited July 3,

2006).

2 Business Process Outsourcing, http://en.wikipedia.org/w/index.php?

title=Business_process_outsourcing&oldid=16941873 (last visited July 3, 2006).

3 On a global scale, IDC has estimated that the worldwide market for BPO will reach $641.2 billion by

2009, up from $382.5 billion in 2004. Romala Ravi, Brian Bingham & Lisa Rowan, Worldwide and U.S.

Business Process Outsourcing (BPO) 2005-2009 Forecase: Market Opportunities by Horizontal Business

Functions, Aug. 2005, at http://www.idc.com/getdoc.jsp?containerId=33815 (last visited July 3, 2006).

4 Modes of outsourcing, http://www.tutorial-reports.com/book/print/604 (last visited July 3, 2006).

2

destination for offshore BPO, continued growth of outsourcing to China and Eastern

Europe is expected to continue.

Organizations have cited many drivers for this trend towards increased

outsourcing of business processes. Cost savings is the most frequently cited driver, with

some estimates arguing that outsourcing can cut costs by 25-30% and up to 50% when

off-shored. 5 Outsourcing enables organizations to focus attention on their core

competencies without the distraction of having to manage non-core services.6 Moreover,

by using off-shore outsourcing vendors in different time zones, organizations benefit

from consistent, round-the-clock access to these services. In customer service processes,

this can reduce the difficulty of managing 24/7 customer support agreements. In product

development processes, this can reduce the time required to bring a new product to

market.7

However, while these benefits are driving adoption of BPO, certain risks have

slowed its adoption. Companies fear losing control over their operations and processes as

well as losing their expertise and industry knowledge to these third party service

providers.8 The relative financial instability of outsourcing vendors has also been a

5 For example, a study by University of California at Berkeley found that programming jobs paying $60-

80k in the United States go for as little as $8,952/year in China, $5,880 in India and $5,000 in Russia.

Lynn Ward, To Outsource or Not to Outsource?, E-CommerceTimes, June 17, 2003, at

http://www.ecommercetimes.com/perl/story/21700.html (last visited July 3, 2006).

6 Outsourcing, supra note 2.

7 Id.

8 Outsourcing, supra note 2.

3

concern. Moreover, as more third parties participate in an organization’s business

processes concerns over data privacy and information security have increased.9

B. Service-Oriented Architectures (SOAs) are Enabling Businesses to Leverage Services from Global Third-Party Service Providers.

Service-Oriented Architecture (SOA) projects are becoming more common across

a number of different industries.10 An SOA is a software architecture approach that

exposes an organization’s business components as reusable “services.”11 These services

are self-contained, reusable software components that can be invoked in a standard way

by other people and systems over the Internet.12

The scope of a service in an SOA can range from very narrow to quite broad. It

may be a simple, one-step task, such as updating an employee’s home address, or a more

complex task involving processing an invoice or approving a loan application. In the

travel industry, for instance, there are services that check hotel availability, book airline

tickets, make dinner reservations, etc. Each of these autonomous services might be

provided by separate vendors and combined by a single organization to create an overall

“vacation” process.

An SOA enables applications to easily pass data over the Internet to invoke

services from anywhere in the world. Therefore, in addition to enabling geographic

9 Id.

10 Michael Barnes, Daniel Sholler & Paolo Malinverno, Benefits and Challenges of SOA in Business

Terms, Gartner Group, Sept. 6, 2005, at http://www.gartner.com/DisplayDocument?

ref=g_search&id=485146 (last visited July 3, 2006).

11 Service Oriented Architecture, http://en.wikipedia.org/w/index.php?title=Service-

Oriented_Architecture&oldid=17012698 (last visited July 3, 2006).

12 Id.

4

independence, an SOA makes it easier for an organization to outsource services in its

business processes to third-parties.13 It is therefore understandable that the adoption of

SOA is gaining momentum, particularly in global organizations looking to outsource

aspects of its operations.14 While older applications typically reside in a single

geographic location, SOAs are enabling applications to become a composition of services

provided by multiple vendors located anywhere in the world. As long as the

performance, reliability and security of the services are sufficiently high, they can be

linked together as parts of these composite applications.15

Naturally, use of an SOA creates data security and data privacy concerns.16 The

messages exchanged between these services often contain user credentials and other

personal information necessary to invoke the service.17 This personal information may

include names, addresses, Social Security numbers or even credit card and banking

information. As a result, an increasing amount of U.S. consumer data is being located in

13 David Chappell, Service-Oriented Architecture: What Next?, Apr. 4, 2004, at

http://web-services.gov/chappell4804.ppt (last visited July 3, 2006).

14 Id.

15 Bob Sutor, Open Standards vs. Open Source, at http://www.sutor.com/newsite/essays/e-OsVsOss.php

(last visited July 3, 2006).

16 Eric Pulier & Hugh Taylor, Security in a Loosely Coupled SOA Environment, June 13, 2006, at

http://www.aspnews.com/strategies/print.php/11296_3613041 (last visited July 3, 2006) (arguing that as

long as quality of service, including performance, reliability and security, are sufficient, it does not matter

where on the planet the service is provided).

17 Id.

5

offshore databases and repositories making it more likely that the security or privacy of

the data will be compromised.18

C. Business Process Management (BPM) Software is Also Driving the Outsourcing of Services to Third-Party Service Providers.

Business Process Management (BPM) refers to software used to design, execute,

monitor and optimize an organization’s business processes.19 BPM is rapidly becoming

the preferred architecture for building agile composite applications by linking together

services exposed through an organization’s SOA.20 According to Gartner, adoption of

BPM is on the rise and will continue to grow at a “high rate” through the end of the

decade.21

BPM and SOA technologies therefore complement each other nicely. The more

business components a company exposes through their SOA, the more services BPM has

to orchestrate within the enterprise processes it manages. Using analytics capabilities,

BPM can also help benchmark and monitor the performance of the services executing in

the process to ensure they are aligned with performance goals.22 Therefore, BPM is

reducing the risk of outsourcing services to third parties by providing a standard

18 Pulier, supra note 23.

19 Business Process Management, http://en.wikipedia.org/w/index.php?

title=Business_Process_Management&oldid=61784948 (last visited July 3, 2006).

20 Id.

21 Gartner states that BPM new license revenue grew 17.3 percent from 2003 through 2004, amounting to

$603.4 million in 2004. Moreover, revenue grew across all 10 of the geographic regions and subsegments

showing that there is a major, global market for this technology. Jim Sinur, Janelle Hill & Michael

Melenovsky, Market Share: Pure-Play BPM Software Worldwide 2004, Gartner Group, Nov. 22, 2005, at

http://www.gartner.com/DisplayDocument?ref=g_search&id=487272 (last visited July 3, 2006).

22 Id.

6

mechanism for evaluating vendor performance and service reliability. Moreover, BPM

makes it much easier for organizations to swap services in and out of their enterprise

processes helping organizations become more agile and adapt quickly to changing

business needs. BPM reduces the cost for organizations to experiment with different

combinations of third party service providers enabling them to identify the most efficient

combination for their business. BPM can then encapsulate these best practices and

ensure the processes execute consistently and optimally.23

D. The Growing Adoption of BPM, SOA and BPO Creates Additional Concerns Over Data Privacy and Security.

Globalization has forced a “fundamental transformation from regional

economies to a single, integrated global economy.”24 With this transformation has come

increased awareness and concern over consumer privacy and security of personal data.

SOA and BPM are breaking down organizational processes into individual tasks

and other manageable segments making it easier to swap new services in and out of end-

to-end business processes. To stay competitive, organizations are outsourcing many

services in their business processes in order to benefit from cheap foreign labor markets.

It is now much easier to collect, analyze and transmit consumer information

instantaneously to a wider network of affiliates, service providers and partners.

While this has increased the efficiency and agility of organizations, it has also

raised new data privacy concerns. Foreign companies and workers are gaining access to

some of the most private information about American consumers. This information

23 Id.

24 Alison Diana, Outsourcing by the Numbers, E-commerce Times, Nov. 12, 2003, at

http://www.ecommercetimes.com/story/32114.html (last visited July 3, 2006).

7

includes credit card numbers, Social Security numbers, and bank records as well as

medical data.25 There have already been examples of employees at foreign outsourcing

companies using this data to steal from and defraud American consumers.26 Reports have

been made of Indian gangs offering to pay employees at outsourced call centers for

Western consumers’ credit card and bank account information.27 With over 150,000

American tax returns prepared in India in 2004, many fear that exploitation of personal

data will only increase.28 The privacy and intellectual property laws in common

outsourcing destinations like India, China and Russia, are not strict enough to protect

consumers.29 Additionally, since these processes can involve companies in many legal

25 Lou Dobbs, Is Nothing Private Anymore?, U.S. News & World Rep., May 17, 2004, available at

http://www.usnews.com/usnews/opinion/articles/040517/17dobbs.htm (last visited July 3, 2006)

(discussing the case of a disgruntled worker in Pakistan who threatened to post patient files on the Internet

if she was not given the back pay she was owed by her employer).

26 In April 2005, employees of a BPO company in Pune, India were arrested for the theft of $300,000 from

four Citibank customers. Citibank did not find out about the problem until it was notified of discrepancies

by its American customers. John Ribeiro, Indian Call Center Workers Charged with Citibank Fraud, April

7, 2005, at http://www.infoworld.com/article/05/04/07/HNcitibankfraud_1.html (last visited July 3, 2006).

27 Edmund Conway, Legal Challenge to Call Centres: Bank Union Claims Outsourcing to India Can

Contravene European Law, Daily Telegraph (London), Aug. 18, 2004, at 27.

28 Dobbs, supra note 33 (referencing comments from Sen. Liz Figueroa arguing in favor of privacy

legislation that would prevent “outsourcing without any protections for privacy”).

29 The U.S. placed India and China on its “priority watch list” of countries that do not provide adequate

protection to intellectual property. U.S. Department of State, China Has a High Rate of Intellectual

Property Infringement, Apr. 29, 2005, at http://usinfo.state.gov/usinfo/Archive/2005/Apr/29-580129.html

(last visited July 4, 2006). While there has been “some progress” in China’s efforts to enforce intellectual

property rights, the country still has “a long way to go.” Cassie Duong, Intellectual Property Rights

Protection Weak in China U.S. Says, June 7, 2006, at http://usinfo.state.gov/xarchives/display.html?

8

jurisdictions, there is question as to who may exercise authority when there are privacy

issues.

III. SELF-REGULATION HAS NOT PROVIDED ADEQUATE PRIVACY PROTECTION FOR CONSUMERS.

The United States has traditionally promoted a market-based self-regulatory

approach towards protecting information privacy combined with targeted, sectional

legislation. In 1998, the Online Privacy Alliance (OPA) was formed to encourage

industry self-regulation of privacy.30 The OPA created privacy guidelines that encouraged

two modes of self-regulation: 1) the adoption of privacy policies and 2) the creation of

certification groups.31 This approach has not provided adequate protection against the

misuse of consumer data by foreign companies.

A. Privacy Policies Are Insufficient to Protect Consumers’ Personal Data.

Privacy policies articulate the manner in which a company collects, uses, and

protects data, and the choices they offer consumers to exercise rights in how their

personal information is used.32 With privacy policies, consumers may determine whether

and to what extent they wish to make information available to companies.33 While

American law does not require companies to post privacy policies, under Section 5 of the

p=washfile-english&y=2006&m=June&x=20060608164932cagnoud0.1814234 (last visited July 4, 2006).

30 Marcia Smith, Internet Privacy: Overview and Pending Legislation, CRS Report for Congress, July 6,

2004, at http://fpc.state.gov/documents/organization/35133.pdf (last visited July 5, 2006).

31 Id.

32 Esther Dyson, Privacy Protection: Time to Think and Act Locally and Globally, Apr. 1998, available at

http://www.firstmonday.org/issues/issue3_6/dyson/index.html (last visited July 5, 2006).

33 Id.

9

FTC Act the FTC has sued companies for failing to comply with their stated privacy

policies.34

Nevertheless, the adoption of privacy policies has not provided adequate

protection to consumers. American law does not even require companies to post privacy

policies let alone ensure the policies are drafted in ways that actually protect consumers.

Moreover, having individual privacy policies for each website means users have to read

through thousands of statements in order to understand how each site they visit protects

their privacy. In many cases consumers have actually misinterpreted the meaning of

privacy policies and have been lulled into a false sense of confidence.35 It is an

unreasonable burden to require consumers’ to read all of these statements, particularly

when most of them state that they may change their policies at any time. Privacy policies

therefore do not sufficiently protect consumers from the misuse of their personal data by

third party service providers.

34 15 U.S.C. § 45(a).

35 A June 2005 poll stated that 75% of respondents falsely believed that the presence of a privacy policy on

a web site meant the company could not sell customers' information to others. Joseph Turow, Lauren

Feldman, and Kimberly Meltzer, Open to Exploitation: American Shoppers Online and Offline, June 1,

2005, at

http://www.annenbergpublicpolicycenter.org/04_info_society/Turow_APPC_Report_WEB_FINAL.pdf

(last visited July 5, 2006). Similarly, a 2003 poll claimed 57% of respondents believed that if a company

had a privacy policy, they would not share information with other entities. Joseph Turow, Americans and

Online Privacy: The System is Broken, Annenberg Public Policy Center, June 2003, available at

http://www.annenbergpublicpolicycenter.org/04_info_society/2003_online_privacy_version_09.pdf (last

visited July 5, 2006).

10

B. Private Sector Certifications Fail to Adequately Protect the Privacy of

Consumers’ Personal Information.

The Better Business Bureau (BBB), TRUSTe, and WebTrust have created “seals”

certifying various levels of privacy protection for participating websites.36 The seal may

only be displayed if the company abides by specific privacy principles. While advocates

of self-regulation suggest that these seal programs preclude the need for federal

legislation, these seal programs have not proven effective at protecting consumer privacy.

First, these seal programs do not carry the weight of law.37 Second, they tend to only

apply to data provided through an organization’s websites.38 Third, TRUSTe

and BBBOnline have been criticized for being mere corporate apologists rather than

defenders of privacy.39 Regarding TRUSTe, even people central to the establishment of

the seal program have been disappointed with it.40 Therefore, while these programs

combined with other forms of self-regulation are useful, the solution to protecting

consumer privacy is not complete without legislation bringing the weight of law behind

these transactions.

IV. THE UNITED STATES’ PATCHWORK OF FEDERAL PRIVACY LAW LEAVES TOO MANY PRIVACY GAPS.

36 Smith supra note 38.

37 Id.

38 Id.

39 Id.

40 Esther Dyson, who is credited with playing a central role in the establishment of the seal program, stated

that Truste's board "ended up being a little too corporate, and didn't have any moral courage." Paul Boutin,

Just How Trusty is Truste?, Wired News, Apr. 9, 2002, at

http://www.wired.com/news/exec/0,1370,51624,00.html (last visited July 6, 2006).

11

In addition to self-regulation, a variety of federal laws and regulations regarding

data privacy have emerged. Unlike the broader European approach to privacy law, U.S.

privacy law has been more “sectional.”41 The United States’ patchwork of privacy

legislation regulates how certain types of entities may use information, including health

care organizations, financial institutions, and consumer reporting agencies.

Unfortunately, current federal privacy laws do not protect individuals in many contexts

when foreign companies misuse their personal information.

A. The Gramm-Leach-Bliley Act and Consumer Protection in Financial Institutions.

In 1999, the Gramm-Leach-Bliley Financial Modernization Act (“GLBA”) was

enacted in order to protect the privacy of consumer information held by “financial

institutions.”42 The two primary components of the GLBA that govern the collection,

disclosure and protection of consumers’ nonpublic personal information are the Financial

Privacy Rule and the Safeguards Rule.

The Financial Privacy Rule gives consumers more control over how and when

financial institutions share their personal information.43 First, financial institutions are

prohibited from disclosing their customers' account numbers to non-affiliated companies

when it comes to telemarketing, direct mail marketing or other marketing through e-

mail.44 Second, when a financial institution passes consumer information to a service

41 Fred H. Cate, The EU Data Protection Directive, Information Privacy, and the Public Interest, 80 IOWA

L. REV. 431, 438 (1995).

42 15 U.S.C. §§ 6801-09.

43 Id.

44 FTC, In Brief: The Financial Privacy Requirements of the Gramm-Leach-Bliley Act , available at

http://www.ftc.gov/bcp/conline/pubs/buspubs/glbshort.htm (last visited July 15, 2006).

12

provider that service provider may only use the information for limited purposes.45 If the

consumer had no right to opt-out, the service provider may not sell the information to

other organizations or use it for marketing.46 However, if the service provider receives

nonpublic personal information from a financial institution and the consumer chose not to

opt-out, the service provider may use the information for its own purposes or re-disclose

it to a third party.47

The Safeguards Rule requires financial institutions to implement reasonable

safeguards to prevent misuse of clients’ nonpublic personal information.48 This rule

requires the company to develop, monitor and test their program to ensure the security of

their client’s information. Moreover, this rule requires companies to select only

appropriate service providers and require them by contract to implement the safeguards.49

Therefore, while both the Financial Privacy Rule and the Safeguards Rule provide

some protection from misuse of consumer information by third party service providers,

the protection is limited to companies providing services to “financial institutions.”

Therefore, the GLBA does not protect against abuse by offshore outsourcing vendors that

receive consumer information from other types of organizations and institutions.

B. Health Insurance Portability and Accountability Act

Enacted by Congress in 1996, the Health Insurance Portability and Accountability

Act (HIPAA) required the establishment of national standards for electronic health care

45 Id.

46 Id.

47 Id.

48 15 U.S.C. §§ 6801-09.

49 Id.

13

transactions.50 The HIPAA Privacy Rule, which took effect on April 14, 2003, applies to

health plans and any health care providers that transmit health information in electronic

form.51 In particular, the Privacy Rule protects all “individually identifiable health

information” held or transmitted by a “covered entity” or one of its business associates.52

In addition to requiring covered entities to take reasonable steps to protect the

confidentiality of communications with consumers of health care services, it also states

that a covered entity may not use or disclose protected health information unless the

individual authorizes it in writing.53

Therefore, similar to the Gramm-Leach Bliley Act, HIPAA provides some

protection against misuse of personal information by third party service providers

receiving health information from health care providers. However, HIPAA only applies

to “covered entities” which consist of those who pay for health care “in the normal course

of business.”54 This definition would not provide protection from misuse by many

offshore outsourcing vendors that receive information from other types of companies and

institutions.

C. Section 5 of the Federal Trade Commission Act.

Under the Federal Trade Commission Act (“FTCA”), the FTC is empowered to

(a) prevent unfair methods of competition, including unfair or deceptive acts in

commerce; (b) seek monetary redress for injured consumers; (c) prescribe trade

50 HIPAA, http://en.wikipedia.org/w/index.php?title=HIPAA&oldid=31293402 (last visited July 15, 2006).

51 45 C.F.R. 164.501.

52 Id.

53 Id.

54 42 U.S.C. 1395x(s).

14

regulation rules defining practices that are unfair or deceptive; (d) conduct investigations

relating to organizations engaged in commerce; and (e) make reports and legislative

recommendations to Congress.55

Section 5 of the Federal Trade Commission Act (“FTCA”) prohibits “deceptive”

business practices.56 Deceptive practices are material representations or omissions that are

likely to mislead consumers acting reasonably under the circumstances.57 The FTC stated

in 1998 that using personal information in violation of a posted privacy policy constitutes

a “deceptive practice” and is actionable under the FTCA. Since 1998, the FTC has been

quite successful in bringing suits against companies that fail to comply with their stated

privacy policies.58

In addition to prohibiting deceptive practices, Section 5 also prohibits “unfair”

practices.59 Unfair practices are those that are likely to cause consumers substantial

injury that is neither reasonably avoidable by consumers nor offset by countervailing

benefits to consumers or competition.60 The FTC has used this authority to successfully

bring suits against companies whose practices, while not in direct violation of their stated

privacy policies, still threaten data security. For example, the FTC sued DSW for having

55 15 U.S.C. §§ 41-58.

56 15 U.S.C. § 45(a).

57 Cliffdale Associates, Inc., 103 F.T.C. 110 (1984).

58 Petko Animal Supplies, Inc. (FTC Docket No. C-4133) (Mar. 4, 2005); Tower Records (FTC Docket No.

C-4110) (May 28, 2004); Microsoft Corp. (FTC Docket No. C-4069) (Dec. 20, 2002); Eli Lilly & Co. (FTC

Docket No. C-4047 (May 8, 2002). Documents related to these enforcement actions are available at

http://www.ftc.gov/privacy/privacyinitiatives/promises_enf.html (last visited July 8, 2006).

59 15 U.S.C. § 45(n).

60 Id.

15

insufficient security measures to protect credit card and checking account information

and found that this constituted an “unfair” practice.61 Similarly, BJ’s settled similar

charges for failing to encrypt information stored on its networks and failing to change

default user id and passwords leading to the breach of thousands of credit and debit cards

numbers.62 Most recently, the FTC levied a groundbreaking $15 million fine after finding

that ChoicePoint’s security measures violated Section 5 and resulted in a breach that led

to over 800 cases of identity theft.63

While the FTCA is different from GLBA and HIPAA in that it is not limited to

industry-specific institutions, the FTC has never used its Section 5 authority to bring suit

against a company that provided consumers’ personal information to a foreign affiliate

that then abused or misused the information. Therefore, the current application of the

FTCA does not provide adequate protection from offshore service providers that receive

consumers’ personal information from American companies in the context of enterprise

processes.

V. THE TIME HAS COME FOR COMPREHENSIVE FEDERAL PRIVACY LEGISLATION.

There is a growing risk to consumer privacy as businesses adopt emerging

technologies that create an increased dependence on outsourced services. The solution is

61 Press Release, FTC, DSW Inc. Settles FTC Charges, Dec. 1, 2005, at

http://www.ftc.gov/opa/2005/12/dsw.htm (last visited July 7, 2006).

62 Press Release, FTC, BJ's Wholesale Club Settles FTC Charges, June 16, 2005, at

http://www.ftc.gov/opa/2005/06/bjswholesale.htm (last visited July 8, 2006).

63 Press Release, FTC, ChoicePoint Settles Data Security Breach Charges; to Pay $10 Million in Civil

Penalties, $5 Million for Consumer Redress, Jan. 26, 2006, at

http://www.ftc.gov/opa/2006/01/choicepoint.htm (last visited July 8, 2006).

16

comprehensive federal privacy legislation. The general public, as well as a growing

consortium of private sector companies, supports national privacy legislation. Moreover,

comprehensive US legislation could harmonize privacy requirements with those of the

EU creating a model for the rest of the world.

A. The General Public Supports National Privacy Legislation

Opinion polls suggest that a majority of the American public would support

national privacy legislation. In a June 2001 Gallup poll two thirds of respondents were in

favor of new federal legislation that would protect online privacy.64 In April 2001, the

American Society of Newspaper Editors found that 51% of respondents were “very

concerned” and 30% were “somewhat concerned” that companies would violate their

personal privacy.65 In a 2002 Harris Poll, 63% of respondents considered current law

inadequate to protect their privacy and a majority of consumers stated they did not trust

businesses to handle their personal information properly.66

In particular, consumers have shown interest in legislation that would restrict a

company’s ability to provide their personal information to third parties. A 1991 Time-

CNN Poll stated that 93% of respondents believed companies should obtain permission

from the individual before selling personal information to a third party.67 A March 2000

Harris Poll found that 88% of users supported requiring a website to obtain consent

before sharing personal information with others.68

64 Id.

65 Id.

66 Id.

67 Electronic Privacy Information Center (EPIC), Public Opinion on Privacy, at

http://www.epic.org/privacy/survey (last visited July 4, 2006).

68 Id.

17

Therefore, the general public appears to support broad privacy legislation that

would give them greater control over how companies use their personal data.

B. There is Growing Support in the Private Sector for Comprehensive Federal Privacy Legislation.

The private sector traditionally has been opposed to broad federal privacy

legislation. Nevertheless, support for federal privacy legislation has been growing even

in the private sector, particularly among large, global firms. Recently, twelve companies

formed the Consumer Privacy Legislative Forum (“CPLF”), an advocacy group to lobby

for greater protection of private information.69 The CPLF includes both high tech

companies such as Microsoft, Google and eBay as well as companies that haven’t

traditionally had a large online presence such as Eastman Kodak Co., Eli Lilly and Co.

and Procter & Gamble Co. The broad range of industries represented by members of the

CPLF suggest that new data privacy issues are not unique to particular industries and that

sectional, targeted federal legislation is therefore inappropriate.

The group believes the “time has come” for “comprehensive harmonized federal

privacy legislation” to create a “uniform but flexible legal framework” for protecting

consumers’ personal data.70 While the CPLF has not yet recommended specific language

for the statute, the law would likely require businesses to provide notice to consumers

when collecting or using personal information and provide individuals control over how

the information is used.71

69 Consumer Privacy Legislative Forum, Statement of Support in Principle for Comprehensive Consumer

Privacy Legislation, June 20, 2006, at http://www.cdt.org/privacy/20060620cplstatement.pdf (last visited

July 15, 2006).

70 Id.

71 Id.

18

The members of the CPLF have given a number of reasons for their position in

favor of federal regulation. According to Nicole Wong, Google’s associate general

counsel, the "uneven patchwork" of state privacy laws in the United States has made it

difficult and expensive for companies to comply.72 Additionally, Microsoft supports

national legislation because it believes fear of identity theft and other abuses has chilled

commerce.73

Therefore, the current approach towards privacy law in the United States has

become burdensome on the private sector and a growing number of companies believe

the time has come for comprehensive, federal legislation.

C. Federal Privacy Legislation Would Harmonize U.S. Policy with International Laws.

As companies’ enterprise processes continue to invoke more and more services

from around the world to streamline operations and implement corporate strategy,

consumers’ personal data will pass between many countries with a variety of different

legal standards. Therefore, foreign privacy laws may apply to certain transactions. It is

important for any American legislation to consider these foreign privacy laws in

developing its own privacy legislation in order to prevent conflicting obligations on

global businesses.

72 Kim Hart, Firms Seek Federal Privacy Rules, Washington Post, June 21, 2006, at

http://www.washingtonpost.com/wp-dyn/content/article/2006/06/20/AR2006062001367.html (last visited

July 8, 2006).

73 Press Release, Microsoft Corporation, Microsoft Advocates Comprehensive Federal Privacy Legislation,

Nov. 3, 2005, at http://www.microsoft.com/presspass/press/2005/nov05/11-03DataPrivacyPR.mspx (last

visited July 8, 2006).

19

A comprehensive, harmonized federal approach to privacy legislation would be

more in line with most of the world than the United States existing patchwork approach.

The European Union Data Protection Directive, in effect since October 1998, created a

set of common rules for protecting personal data in the EU.74 The Directive requires

companies to ensure that data is collected only for specific purposes, is accurate and

current, and is discarded when no longer needed.75 The Directive creates certain

obligations on the “processors” of personal data defining the circumstances by which the

data may be transferred to a third party.76 Article 25 prohibits the transfer of personal

information regarding EU citizens to countries that lack “adequate” privacy laws.77

Therefore, since most countries do not have data privacy laws that satisfy the EU

standards, third party service providers are susceptible to legal challenges under the

Directive.78

The EU Privacy Directive has also dramatically influenced the adoption of

privacy law in non-EU countries. Argentina, Australia, Canada, Hong Kong, Hungary,

74 Press Release, European Union, EU Directive on Personal Data Protection Enters Into Effect, Oct. 23,

1998.

75 Id.

76 Id.

77 The EU determined that US privacy laws were inadequate in January 1999. However, the U.S.

Commerce Department negotiated a Safe Harbor agreement by which U.S. companies can exempt

themselves from the Directive. The Safe Harbor requires these companies to voluntarily adhere to a set of

privacy principles including notice, choice, onward transfer, security, data integrity, and access.

78 The EU sued Lloyds TSB stating that its outsourcing work to India put customers’ data at risk and

therefore violated the Directive. Jill Treanor, Union Claims Lloyds Outsourcing Breaches Data Laws,

Guardian (London), Aug. 18, 2004, at 26.

20

New Zealand and Switzerland have all adopted data protection laws that are substantively

very similar to the EU. In May 2003, Japan enacted a broad privacy bill applying to any

business that uses personal information databases.79 Additionally, even officials in India

have stated that they believe the EU Privacy Directive is comprehensive and that Indian

legislation will be “more or less based on the EU model.”80

Given that a large part of the world appears to be following the EU model by

adopting broad privacy legislation, American legislation must not fall behind or create

conflicting requirements on global businesses. By adopting comprehensive federal

legislation, the U.S. can harmonize its privacy requirements with those of the EU and

thereby create a unified model for the rest of the world. This will reduce the number of

conflicting privacy regulations imposed on global businesses and will create appropriate

privacy incentives for the rising number of third party service providers gaining access to

consumers’ personal information.

D. The FTC Supports More Comprehensive Privacy Legislation.

In addition to the general public and a growing portion of the private sector, the

FTC is also in favor of broader federal privacy legislation. The FTC has recognized that

the protection of data privacy and security “is increasingly international in nature.”81

They have even noted that the globalization of the marketplace means “an increasing

79 Amy Worlton, Asia Opts for EU-Style Privacy, Privacy in Focus, June 2003, at

http://www.wrf.com/publication_newsletters.cfm?

sp=title&year=2003&ID=10&publication_id=10468&keyword= (last visited July 8, 2006).

80 Privacy: India Drafting EU-Style Data Privacy Bill – Seeks to Attract Business from Europe, 104 Daily

Rep. for Executives A-18 (BNA) (May 30, 2003).

81 Prepared Statement of the FTC, Data Breaches and Identity Theft, June 16, 2005, at

http://www.consumer.gov/idtheft/pdf/ftc_06.16.05.pdf (last visited July 15, 2006).

21

amount of U.S. consumer information may be accessed illegally by third parties outside

the United States or located in offshore databases.”82

Given these structural changes, the FTC has recommended that Congress create a

broader, uniform privacy paradigm. For example, the FTC has recommended that

Congress extend the “Safeguards Rule” of the GLBA to companies that are not financial

institutions.83 Currently, the Safeguards Rule applies only to “customer information”

collected by “financial institutions” and therefore does not cover most data provided to

third party service providers.84 Therefore, while the GLBA restricts disclosure of a

consumer’s social security number and address by a financial institution, that same

information is often readily available for purchase on the Internet from a non-financial

institution.85

The FTC should also request that Congress extend its Section 5 authority to bring

suit against companies that provide consumers’ personal information to foreign affiliates

that do not have adequate security protections in place. This could simply be an

extension of the FTCA’s existing prohibition on “unfair” business practices. Providing

consumers’ personal information to third party providers that do not have adequate

security protections in place is “likely to cause consumers substantial injury that is

neither reasonably avoidable by consumers nor offset by countervailing benefits to

consumers or competition.” As such, the extension of the FTCA to cover this situation

would be entirely logical.

82 Id.

83 Id.

84 Id.

85 Id.

22

VI. CONCLUSION

The adoption of emerging technologies like SOA and BPM are helping to fuel

growth in business process outsourcing. This is creating a structural change in

organizations’ in which business processes are increasingly becoming a composition of

services provided by geographically dispersed affiliate and partner organizations.

Foreign companies and workers are gaining access to private personal information about

American consumers without adequate protections in place to prevent misuse. While the

use of privacy policies and private sector certifications have afforded some protection,

self-regulation itself is not adequate. Moreover, the United States patchwork of federal

privacy law applies only to specific areas like finance and healthcare leaving too many

gaps.

The time has come for comprehensive privacy legislation. The general public and

a growing number of companies in the private sector have recognized this need.

Comprehensive legislation would help the U.S. harmonize its privacy policies with the

international community protecting global companies from the threat of conflicting

legislation. Moreover, the FTC has acknowledged that broader legislation extending the

FTCA would enable it to more effectively protect the privacy interests of consumers

against misuse and abuse by third party service providers.

23