Mitigating Risk in Cloud Computing Agreements

Cloud computing is the new reality. A 2013 IDC survey reports that 61% of enterprises have at least one cloud-based application and total enterprise investments in cloud-based solutions have gone up more than 10% since 2012.[1]

The result? Proper risk management now demands that companies using cloud-based solutions understand which provisions in cloud agreements demand attention—and good negotiation. And, though individuals may lack the clout to change use-agreements for cloud-based services, increasingly, organizations can. The most critical data terms to address cover: 

  • Security
  • Privacy
  • Availability
  • Portability
  • Ownership

Dealing with these issues proactively at beginning of a cloud service relationship will save money, time and headache if and when problems arise later.

Data security and privacy

Fortunately, the incidence of cloud-based breaches remains fairly low, particularly in relation to security breaches in traditional data systems. [2] Nonetheless, the nature of cloud computing and the confidentiality of data make security and privacy paramount concerns. Organizations contemplating cloud-based solutions can take several affirmative steps to ensure data security and protection.

1. Take time for due diligence
Perform the requisite due diligence—both technical and financial—before entering into an agreement and make sure the agreement allows continuing due diligence assessments on an ongoing basis. Investigate the provider’s: 

  • Security policies
  • Response to government data requests
  • Previous security performance
  • Recent intrusion testing results
  • Financial health, stability, and outlook

And, to ensure continued compliance with regulatory obligations and consistency with established security policies, make sure to contract for comprehensive ongoing audit rights. In addition to providing reassurances about data security, these audits will also provide ongoing snapshots of the cloud provider’s financial health.  

2. Data location
Negotiate contractual terms that clearly define where data geographically resides and identify who can access or manipulate the data. For example, restrict the provider’s ability to store data in off-shore servers or move data to third parties without prior consent. Data location is important because moving data across jurisdictional lines may:

  • Implicate controlling regulations
  • Impact regulatory and contractual obligations
  • Limit remedies in case of breach or failure

3. Notification terms
Insist on timely notice of breach to help mitigate damage, avoid embarrassing disclosure by a third-party, and allow time to address data privacy regulatory obligations. Many provider agreements expressly allow disclosure of customer data in response to subpoena or other legal process. Make sure your organization is notified of these requests.

4. Data Deletion
If data is particularly sensitive and the relationship with the provider untested, consider negotiating terms related to how data will be deleted should it be necessary. Various techniques can be deployed to help ensure a more robust removal of data from stored drives. Providers may be willing to provide confirmation and/or copies of the materials removed from its system when requested.

5. Encryption
Where possible, insist that data be encrypted to provide an additional level of protection.

Data availability

Unavailable data presents significant risk to organizations. One of the most notorious such outages impacted Amazon’s cloud services during the 2012 holiday season. Numerous high-profile web properties including Netflix were impacted.  Several factors—many of which can be negotiated— impact data availability. 

1. Backup and recovery procedures
Fully understand the vendor’s backup and recovery procedures. Often, vendors expect their customers to back up critical data. If so, the organization must take preventative measures or negotiate terms that ensure data is backed up.

2. Service Level Agreement(SLA) terms
Negotiating cloud provider Service Level Agreements is not the norm, but coming to the table with specific and reasonable expectations may open the door to customized SLAs. A customized SLA will better align availability with the desired user experience. Even if the provider refuses to tailor the SLA, take time at the outset to understand a potential provider’s SLA. Doing so will provide a benchmark to compare competing cloud provider offers.

3. Root Cause Analysis (RCA) reporting
To help avoid repeated outages, request root cause analyses when outages happen. The RCAs will allow the organization to maintain a handle on the environment and predict whether outages foreshadow future problems.

4. Provider’s financial health
Data availability may be impacted if the provider falls on hard times. As the competition among cloud providers intensifies, risks increase that certain providers will go bankrupt.[3] As noted earlier, both pre-agreement and ongoing due diligence is essential, particularly when the contract term extends several years. At a minimum, insist on early notification of potential bankruptcies. Also, negotiate terms that clarify data ownership and accessibility in case of bankruptcy. Without such terms, the bankruptcy estate may make removal of data difficult or the organization can be forced to negotiate with creditors over ownership of the data.

Data portability

When and if things go awry, an organization with its data in the cloud must be able to hop to another provider. Data portability provisions and accommodating dispute procedures often provide the key to nimble data transfers. Several methods exist to make those transfers possible.

1. Contract term and termination charges
Seek shorter contract terms with minimal termination charges to allow the organization to move its data quickly, without undue expense, should the relationship not work out.

2. Open standards
The more proprietary the methods to access cloud stored data, the harder it will be to migrate to other providers. Ensure that the provider utilizes open standards in accessing stored information to substantially simplify data transfer should it become necessary.

3. Transition assistance
If termination is necessary for any reason, including provider failure or organizational change, some level of termination assistance will be essential. Often, for example, the provider will guarantee service for a period of time after termination or guarantee assistance moving data to an alternative provider.

4. Disputes resolution
Understand the implications of dispute resolution provisions. Watch out for liability limitations. While no cloud provider will accept unlimited or expansive liability, liability caps shift risk. At a minimum, liability caps can serve as an important data point when comparing cloud service agreements from different providers. By the same token, dispute resolution procedures may significantly impact the complexity and costs associated with disputes. For example, venue and forum restrictions may limit disputes to certain states and types of courts (state or federal) or may require binding arbitration or informal dispute resolution.

Data ownership

Being dependent on a provider’s tools and infrastructure may expose the organization to intellectual property infringement claims. Likewise, continued development by the provider or the organization on the data sets, tools, or architecture may give rise to disputes surrounding ownership of the new works. Addressing these issues the agreement can significantly mitigate disputes.

1. Indemnification
In the event of infringement claims, well-crafted indemnification provisions will help protect an organization merely hosting its data in the cloud.

2. Ownership of derivative works
Rarely will the provider or the customer remain stagnant during the contract term. The customer may make improvements to the cloud interface, the provider may improve tools, or both parties may contribute to improvements in hosted applications. Defining who owns what and when will significantly reduce disputes later should the relationship between the parties change.

Conclusion

While cloud computing opens doors, it possibilities come with risks. To mitigate those risks, carefully investigate, understand, and negotiate cloud computing agreements, particularly those provisions addressing a data’s security, privacy, availability, portability, and ownership. Doing so will allow organization to achieve greater flexibility and efficiencies when hosting data and applications in the cloud. 

[1] IDG Cloud Computing: Key Trends and Future Effects Report (2013), available at: http://www.idgenterprise.com/report/cloud-research-2013.
[2] There have, however,  been some recent high profile breaches of cloud-based storage systems. Organizations hit with data breaches include Expedia, Epsilon Data Management (email marketing systems), and Sony (online entertainment system).
[3] Recently, this played out when the cloud provider Nirvanix—an IBM storage partner—filed for bankruptcy protection.

The articles on our Website include some of the publications and papers authored by our attorneys, both before and after they joined our firm. The content of these articles should not be taken as legal advice.