Vendor Risk Management: Who’s Liable When a Third-Party Breaches Your Data?

Ramyar Daneshgar

— 3 min read

By Ramyar Daneshgar

Disclaimer: This article is for educational purposes only and does not constitute legal advice. If you require legal guidance specific to your organization, consult with a licensed attorney experienced in cybersecurity and data protection law.

As cybersecurity threats grow in complexity and frequency, organizations increasingly rely on third-party vendors to deliver critical IT services. This reliance brings risk: when a vendor experiences a data breach, it can expose not only its systems but also the sensitive data of its clients. This article explores how courts view liability in such cases, what breach contract clauses typically include, and how companies can better manage vendor cybersecurity risk from a legal standpoint.

Understanding Vendor Risk

Vendor risk refers to the potential for a third-party service provider to cause harm through data exposure, system compromise, or non-compliance with regulations. Common examples include cloud storage providers, managed service providers (MSPs), and SaaS platforms. Since many of these vendors have direct or indirect access to sensitive systems, their security posture becomes your risk surface.

In 2023, a breach at MOVEit, a managed file transfer service, led to data theft impacting multiple government agencies and private firms. Despite not being directly attacked, these organizations had to publicly report breaches and handle incident response because their vendor failed to secure its software.

What Do Breach Clauses Typically Say?

Vendor agreements often include cybersecurity clauses governing breach notification timelines, indemnification, audit rights, and responsibilities for safeguarding data. While specific language varies, some common provisions include:

  • Breach Notification Window: Specifies how quickly a vendor must notify the client of a breach (e.g., within 24–72 hours).
  • Security Standards: Requires adherence to NIST, ISO 27001, or industry-specific frameworks like HIPAA.
  • Audit and Compliance Rights: Allows clients to audit the vendor’s cybersecurity posture or review third-party audits (e.g., SOC 2 Type II reports).
  • Indemnity and Liability Limitations: Determines whether a vendor will cover damages, including legal fees or regulatory penalties.

These clauses can define or limit the financial exposure vendors face. A lack of specificity often leads to litigation after breaches, especially if clients argue that reasonable precautions were not taken.

Courts are increasingly being asked to weigh in on who is at fault when vendor breaches occur. Some trends include:

  • Negligence-Based Claims: Plaintiffs argue that vendors or companies failed to implement “reasonable” cybersecurity controls.
  • Breach of Contract: Courts assess whether specific security terms in the vendor agreement were violated.
  • Third-Party Beneficiary Doctrine: End-users or customers affected by a breach may claim rights under contracts between businesses and their vendors.

In In re Capital One Consumer Data Security Breach Litigation, the court scrutinized Capital One's vendor relationship with AWS, ultimately allowing claims to proceed based on shared responsibility.

Similarly, in Accellion Data Breach Litigation, companies using Accellion's file transfer software were held accountable for failing to patch or replace vulnerable legacy systems, despite Accellion being the initial breach vector.

Best Practices for Managing Vendor Liability

To minimize liability, organizations should take the following actions:

  1. Perform Risk Assessments: Evaluate vendors before onboarding and classify them by data sensitivity and access level.
  2. Demand Cybersecurity Controls: Require encryption, access controls, logging, and vulnerability management in contracts.
  3. Include Specific Legal Terms: Spell out breach notification timelines, audit rights, and indemnification terms.
  4. Use Third-Party Certifications: Mandate that vendors maintain SOC 2, ISO 27001, or relevant certifications.
  5. Monitor Continuously: Use tools and services to monitor vendor performance, patching cadence, and breach disclosures.
  6. Establish Incident Response Protocols: Plan and rehearse coordinated response strategies with critical vendors.

Conclusion

When a vendor breach occurs, the legal and financial impact on your business can be severe. Courts are increasingly looking at the shared responsibility between service providers and clients. Companies must proactively structure vendor agreements to allocate liability clearly, demand high security standards, and enforce compliance through audits and legal recourse.

Resources

Author: Ramyar Daneshgar Security Engineer & Legal Policy Researcher at CybersecurityAttorney.com

This article is provided for informational purposes only and does not constitute legal advice. For legal counsel, please consult a licensed cybersecurity attorney.

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