Business risks resulting from consumer privacy concerns are on the rise. Last week, Facebook and Twitter reported second quarter results which revealed that both companies lost a significant number of active users due to privacy and data protection concerns. Their stock price plummeted by approximately 20 per cent each, resulting in a combined loss in market value of approximately US$125 billion ($119 billion for Facebook and $6 billion for Twitter). This new type of business risk was, up until now, relatively hypothetical, despite the rise of other privacy compliance and legal risks over the last few years, as set out below:
- Recommended Stronger Enforcement Powers for the OPC
- PIPEDA Adequacy Review Under the GDPR
- Privacy Class Actions
- New Privacy Business Risk — Material Loss in Market Capitalization Value
Our federal data protection law (the Personal Information Protection and Electronic Documents Act or “PIPEDA”) works as an ombudsman model — i.e. a complaint driven system. It provides individuals with a right to file a complaint with the Office of the Privacy Commissioner ("OPC"). Once a complaint is received by the OPC, it will determine if it has jurisdiction over the matter and when the complaint is accepted, the OPC will conduct an investigation and issue its non-binding recommendations. Therefore, there is no risk of fines at present, although things are about to change.
There is a new mandatory security breach notification and recordkeeping obligation coming into force on November 1, 2018 in Canada. Organizations in breach of such regulation will be subject to fines of up to $100,000. Read about the security breach obligations and compliance requirements in our April 2018 bulletin.
Moreover, in its 2016-2017 annual report, the OPC made recommendations for a change to the current ombudsman model and stronger enforcement powers. On February 28, 2018, the Standing Committee on Access to Information, Privacy and Ethics (“ETHI”) presented its report on the review of PIPEDA entitled Towards Privacy by Design to the House of Commons. The ETHI recommended that PIPEDA be amended to grant the OPC stronger enforcement powers, such as the power to make orders and impose fines for non-compliance and broad audit powers, including the ability to choose which complaints to investigate. It is therefore expected that PIPEDA will, at some point in the near future, be amended to implement these recommendations. The coming into force of the recent European privacy regulation may expedite such a process.
The new EU regulation — the European General Data Protection Regulation (“GDPR”), which came into force on May 25, 2018 — contains stringent requirements as well as rigorous enforcement measures, including fines which may amount to the higher of €20 million or 4 per cent of the organization’s total worldwide revenues.
Under the GDPR, organizations operating in the EU are prohibited from transferring personal data to any non-member state whose laws do not adequately protect such data. The EU will therefore have to assess the adequacy of PIPEDA (and other data protection laws) under the GDPR. The ETHI recently put forward numerous suggestions aimed at reinforcing PIPEDA, to ensure that it will be considered as “adequate” under the GDPR. The Government of Canada recently issued its response letter in which it expressed its support for ETHI’s recommendations pertaining to aligning PIPEDA with specific provisions of the GDPR. It mentioned that the government is discussing the cross-border data transfers and interoperability of privacy regimes with EU nations and institutions. In addition, Canadian government officials are working closely with the European Commission to understand the requirements for maintaining Canada’s adequacy standing under the GDPR. Since the EU review is expected to occur by 2020, we can also expect some amendments to PIPEDA in order to align the Canadian law with the GDPR in the relatively short term.
In terms of monetary damages for privacy violations, the biggest threat emerging for an organization breaching data protection laws is privacy class actions. There are currently over 60 privacy class actions either pending or that have been recently certified in Canada. Although none of these have yet to be decided on their merits, large settlements have been obtained in some of these cases. An example is the Canada Student Loans privacy breach class action recently settled for $17,500,000.
Class actions must be based on a specific statutory privacy right or a general privacy tort which are not found in PIPEDA (or the substantially similar provincial data protection laws), although they are found in some of the provincial privacy laws (such as the Civil Code of Québec, the B.C. Privacy Act, etc.). The Court of Appeal for Ontario in the decision Jones v. Tsige recognized for the first time in Canada a new tort of “intrusion upon seclusion” in 2012. This new tort has made privacy class actions potentially viable, because it appears to permit privacy breach claims to be advanced for compensation without proof of harm (i.e. economic harm), without regard to the victim’s individual circumstances.
This privacy class action trend is unlikely to disappear. In its 2016-2017 annual report, the OPC suggested that Parliament consider creating a private right of action for PIPEDA violations as an alternative to the current complaint model instead of relying on the lengthy development period of privacy tort law.
Privacy scandals and security incidents have always been a prime concern for businesses who worry about reputational damage. However, the direct impact of such scandals and breaches on the financial results and market capitalization of such business has been relatively hypothetical. Recent privacy concerns over certain business models which have triggered a loss in consumer confidence have now confirmed that material loss in market capitalization value is an emerging reality.
For instance, Facebook, which has enjoyed astronomical growth, is now seeing a break in that momentum due to the company’s recent moderation controversies and data privacy scandals. In fact, last week, the company posted earnings for the second quarter of 2018 with revenue and user growth coming in under Wall Street estimates. It is the first time the company’s quarterly sales did not exceed expectations in approximately three years. Its market capitalization decreased by approximately $119 billion as its stock price plummeted by 19 per cent. No company in the history of the U.S. stock market has ever lost $100 billion in market value in just one day.
Facebook’s historic loss in value came a day after the company reported weaker-than-expected revenue for the second quarter as well as disappointing global daily active users, a key metric for Facebook. The company also said it expects its revenue growth rate to slow in the second half of this year.
In addition, last week Twitter reported monthly users dropping by 1 million in the second quarter, and predicted that number will decline further as the company continues to fight against spam, fake accounts and malicious rhetoric on its social network. The shares plunged as much as 20 per cent representing a $6 billion loss in market value. The company expects monthly visitors to fall again, blaming the projected drop on intensified efforts to clean up the platform, stricter privacy rules in Europe and changes to the way its service is used through SMS messaging.
Takeaways for Business
Businesses must be alert to privacy concerns and loss of consumer confidence when assessing their business models and associated risks. In terms of risk management, the days where the worst-case scenario resulting from a privacy complaint was an unresolved finding from the OPC naming the organization are behind us.
Companies have to consider that they may be faced with a class action lawsuit following a security incident or the media reporting a privacy intrusive business practice. They may also be subject to fines of up to $100,000 in Canada starting November 1, 2018 if they contravene the security breach reporting, notification and record-keeping obligations under PIPEDA. The GDPR has raised the bar for the rest of the world with stringent requirements and rigorous enforcement measures, including fines which may amount to the higher of €20 million or 4 per cent of the organization’s total worldwide revenues. The Government of Canada recently expressed its support for aligning PIPEDA with specific provisions of the GDPR. It is therefore reasonable to expect that PIPEDA will be amended in the relatively short term to grant the OPC stronger enforcement powers, such as the power to make orders and impose fines for non-compliance and broad audit powers.
An emerging risk which businesses now have to consider is a loss in market value resulting from privacy concerns and a loss of consumer confidence in how a company is handling their personal information. This risk, which was until recently only hypothetical, is becoming a reality as demonstrated by the recent loss in market capitalization value for some social media giants.