Outsourced Data Handling: Brief Thoughts of Negligent Entrustment Applicability

17 Nov

I find this subject area to be among the most interesting and fluid in IT today, as the area where law meets technology is still being formed in the US. Our system of common law combined with the speed of our legislative process (or lack thereof) compared to that of technological innovation leaves gaps in legal findings that are being tried on a regular basis to develop judicial precedence. Precedence then being the interpretation of a tort, as compared to what a judge may find similar in other cases when combined with the doctrine of Stare Decisis (until opposing legislation is enacted) covers these subjects more than the actual state of the congressional acts or agency regulation. It is an incredibly complicated subject where many educated in law are not technologists, and many technologists have an inadequate education in business law.

Negligent entrustment is covered under state civil codes within the personal injury set of torts (Kionka, 1999). What Rustad and Koenig(2007) detail are what might someday become issues of liability to a US company, not necessarily those that are currently primary liability concerns. It is still an interesting thought exercise and set of items that must be evaluated to form an effective risk profile of outsourcing activities. Also, since an individual is entitled to sue for anything the costs for an organization to protect itself from suit, even in those cases where it is settled or on, could be substantial. In order to reduce these eventualities the due care and due diligence of audit and contract enforcement, validation of contract performance measurements, and adherence to the law of the land the data originates, must be among the foremost concerns of the CIO, CISO and compliance officer. The ways in which courts rule on data in the coming years have the potential to affect the IT and software industry in the US. A finding in favor of suit for negligent entrustment in outsourced data would set dangerous precedent, deeming the data itself a dangerous item. This concept could then easily bleed into many other areas to include software development liability (which is cause for another paper entirely). While there have been attempts to prosecute authors of hacking tools with criminal offenses, to date, it has been upheld as activity covered under the 1st Amendment – but should that protection fall, all users and creators of data would have significant potential liabilities foisted upon them

As pointed out by Rustad and Koenig (2007) the incidence of lawsuits brought for negligent security practices is on the rise, but all cases that have resulted in award have been the result of direct liability. In the US, courts based on the research conducted and literature reviewed, there have yet to be any cases of indirect liability or negligent entrustment decided since negligence itself is specific to failure of due care (in absence of strict liability statutes) and there basis for negligent entrustment when the instrument itself is not directly capable of causing harm (Kionka, 1999). Additionally, when there is a superseding cause that would not have been reasonably foreseeable there would not be an issue of liability. If however, the outsourcing operations fail to include the due diligence and due care of a reasonable man, then the superseding cause argument would fail, and liability would revert to the company as the tortfeasor since reasonable expectation of data breach would likely meet the requirements for a proximate cause liability claim (Clarkson, Miller & Jentz, 2003).

Data breaches are inevitable (Huang, Hu & Behara, 2008), and the California Appellate court found that this claim of inevitability on the part of the claimant, or that evidence of that inevitability could be used to show that the negligence of the defendant, if any, is not a proximate cause on the part of the defendant (Smith v. San Francisco, 1953). While it remains essential to protect data under direct liability scenarios where a failure to exercise due care can be actionable, imagine a world where this was not the case, or where the ability to exclude warranty of merchantability and/or suitability for purpose could not be accomplished through contract. Oracle Corporation might be held liable because their software held a vulnerability that was exploited by a hacker attacking a bank, or Microsoft could be sued if a workstation crashed and lost some personal data. As highlighted by Ferrera, Lichtenstein, Reder, Bird and Schiano (2004) both of these situations can be shown to have actual damages, though the effect of allowing such inevitable actions to fall back to the progenitor of the system would have chilling repercussions for all transactions and systems in the digital world.



Ferrera, L. R. (2004). CyberLaw, Text and Cases 2nd Edition. Thomson Corporation.

Huang, C., Hu, Q., & Behara, R. S. (2008). An economic analysis of the optimal information security investment in the case of a risk-averse firm. International Journal of Production Economics, 114(2), 793–804. doi:10.1016/j.ijpe.2008.04.002

Kionka, Edward J. 1999. Torts in a Nutshell. 3d ed. St. Paul, Minn.: West Group

Rustad, M. L., & Koenig, T. H. (2007). Negligent entrustment liability for outsourced data. Journal of Internet Law, 10(10), 3–6. Retrieved from

Smith v. San Francisco, 117 Cal. App. 2d 749, 256 P.2d 999 (1953)

Clarkson, K. W., Miller, R. L., & Jentz, G. A. (2003). West’s Business Law Text and Cases, 9th . Thompson Learning.

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Posted by on November 17, 2012 in Business, Information Technology


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