BCBSA Summit - Cloud Computing Issues (Dec 2012)

Cloud Computing:
Key Issues for Blue Plans to
address before moving to
the Cloud
Joseph E. Kendall
Partner
Pillsbury Winthrop Shaw Pittman

John L. Nicholson
Counsel
Pillsbury Winthrop Shaw Pittman

December 4-7, 2011
Sheraton Chicago Hotel and Towers
Chicago, Illinois
PRESENTATION TITLE

Agenda
• What is the Cloud ?
• Blue Plans and Cloud Computing – Today and the Future
• How secure is data in the Cloud?
• Contracting for Cloud services
• Specific contract issues - Cloud vs Outsourcing Contracts
• e Discovery and Subpoenas in the Cloud
• Best practices for data in the Cloud

CLOUD COMPUTING 2

What is the Cloud?

CLOUD COMPUTING
3

What is the “Cloud”?
• Cloud Computing is:

“a model for enabling convenient, on-demand network access to a
shared pool of configurable computing resources (e.g., networks,
servers, storage, applications, and services) that can be rapidly
provisioned and released with minimal management effort or
service provider interaction.”

- National Institute of Standards and Technology

CLOUD COMPUTING 4

Essential Characteristics
On-demand, Self- Ubiquitous Network
Rapid Elasticity Measured Service service Access Resource Pooling

Elasticity is defined as In a measured service The on-demand and Ubiquitous network Resource pooling allows
the ability to scale aspects of the cloud self-service aspects of access means that the a Cloud Provider to
resources both up service are cloud computing mean Cloud Provider’s serve its consumers via
and down as controlled and that a consumer can capabilities are a multi-tenant model.
Physical and virtual
needed. To the monitored by the use cloud services available over the
resources are assigned
consumer, the cloud Cloud Provider. This is as needed without network and can be and reassigned
appears to be infinite, crucial for billing, any human accessed through according to demand.
and the consumer can access control, interaction with the standard There is a sense of
purchase as much or resource optimization, Cloud Provider. mechanisms by both location independence in
as little computing capacity planning and thick and thin clients that the customer
power as they need. other tasks. generally has no control
or knowledge over the
exact location of the
resources but may be
able to specify location
at a higher level of
abstraction (e.g.,
country, state, or
datacenter).

CLOUD COMPUTING 5

Service Models
Infrastructure as a Service Platform as a Service Software as Service
(IaaS) (PaaS) (SaaS)
The consumer uses ”fundamental The consumer uses a hosting The consumer uses an application but
computing resources" such as environment for their applications. The does not control the operating system,
processing power, storage, networking consumer controls the applications that run hardware or network infrastructure on
components or middleware. The consumer in the environment (and possibly has some which it's running.
can control the operating system, storage, control over the hosting environment), but
deployed applications and possibly does not control the operating system, * Note: Business Process as a Service is
networking components such as firewalls hardware or network infrastructure on the furthest evolution of SaaS Cloud
and load balancers, but not the cloud which they are running. The platform is Services, but is nascent in the marketplace.
infrastructure beneath them. typically an application framework.

Amazon EC2 Bungee Connect Microsoft Office 365
Sun Etelos Oracle SaaS platform
Micrsoft’s Network.com Coghead Salesforce SFA
HP Flex. Computing Svcs. Google App Engine NetSuite
IBM Blue Cloud HP Adaptive IaaS GoogleApps
OpSource Force.com Workday Human Capital Mgmt.
Jamcracker LongJump

Uses:
Ad hoc development / testing Taking custom applications to the cloud Commodity applications (email)
Cover volume fluctuations Developing new, cloud-based apps Non-proprietary business processes

CLOUD COMPUTING 6

Deployment Models
Public Cloud Hybrid Cloud Private Cloud
In simple terms public cloud services A hybrid cloud is a combination In a private cloud-based service,
are characterized as being available of a public and private cloud that data and processes are managed
to clients from a third party interoperates. In this model users within the organization without the
service provider via the Internet. typically outsource non-business- restrictions of network bandwidth,
The term “public” does not always critical information and processing security exposures and legal
mean free, even though it can be to the public cloud, while keeping requirements that using public cloud
free or fairly inexpensive to use. A business-critical services and data services might entail. In addition,
public cloud does not mean that a in their control private cloud services offer the
user’s data is publically visible; public provider and the user greater
cloud vendors typically provide an control of the cloud infrastructure,
access control mechanism for their improving security and resiliency
users. Public clouds provide an because user access and the
elastic, cost effective means to networks used are restricted and
deploy solutions. designated.

Private clouds can be built on a
company's own infrastructure
(“internal clouds”) or on the
backbone of public clouds.

CLOUD COMPUTING 7

Realistic Cloud Deployment

Source - http://www.saasblogs.com/saas/which-part-of-the-public-vs-private-cloud-elephant-are-you-touching/

CLOUD COMPUTING 8

Blue Plans and the Cloud

CLOUD COMPUTING 9

What can the Cloud mean to Blue Plans?
Microsoft’s Office 365 Cloud Service provides the following:
• Word (Word Processing)
• Excel
• Calendar
• Mail (25GB)
• PowerPoint
• SharePoint intranet for co-authoring documents
• Premium antivirus / anti-spam filtering
• Instant Messaging
• Voice Chat (VoIP)
• Online customer support
• Build/host web site

CLOUD COMPUTING 10

Where do Blue Plans stand today with respect to
Cloud Computing?
• Blue CIOs are motivated to look for ways to use the Cloud because:
– Opportunities to reduce cost
– Speed to Deployment
• Blue Plans exploring how to benefit from the Cloud
– Blue Plans exchange info / ideas on Cloud usage
– Use of IaaS to address Resource Spikes (Proof of Concept)
• Some production use
– Blue Plan running proprietary app on SalesForce (PaaS)
– Blue Plan using Microsoft Office 365
– Blue Plan using cloud based solution to access CMS database
• Conclusions:
– Blue Plans are actively looking at how they can benefit from the Cloud
– Preliminary and Limited adoption of Cloud services to date

CLOUD COMPUTING 11

How secure is data in the Cloud?
Cloud Data Centers are easier to secure:
• Software / Patches are up do date
• Limit devices on the network
• Use of repeatable processes and best practices
Perceived risks of Cloud Computing:
• Multi-tenant use of Cloud Resources
– Answer: Data encrypted - only Blue Plan has encryption keys
• Network – data flows over same physical cable
– Answer: Hybrid approach - Combine Cloud computing and VPN to make it more secure
• People - Cloud Staff can access data from multiple companies
– Answer: Run “dark” data centers

CLOUD COMPUTING 12

Survey of 127 Cloud Providers by Ponemon Institute, April 2011
• Most Cloud Providers believe Customers buy Cloud services because of
lower cost and faster access to Cloud resources, and not Security
• Majority of Cloud Providers believe it is their customer’s responsibility
to secure the Cloud and not their responsibility
• Most Cloud Providers do not believe their services substantially protect and
secure confidential information of their customers
• Most Cloud Providers do not have dedicated Security personnel
• But, 1/3 of Cloud Providers considering Security solutions in next 2 years

CLOUD COMPUTING 13

• Summary and Predications:
– Cloud data centers do not have many of the security issues that are
inherent to non-cloud data centers
– Cloud Providers focus on the cost and speed aspects of their services,
not security
– But Security issues are being addressed
– As Cloud solutions mature, Cloud Providers will begin to invest more in
security as way to differentiate themselves from their competitors
– In 2-3 years, Cloud data centers will be as secure as any non-cloud or
Blue Plan Data Center

CLOUD COMPUTING 14

How can you measure/require security in the Cloud?
• ISO 27001 Certification
– Be sure to review the Statement of Applicability
• Check against Cloud Security Alliance Cloud Controls Matrix
– Contract should include rep & warranty that certification will be maintained
• Service Organization Controls (“SOC”) 2 Audit
– Customers used to require SAS 70 Type 2, which has been replaced by SSAE 16
Type 2 (also known as SOC 1)
– SOC 1 tests controls at a service organization relevant to user entities internal
control over financial reporting, but it used to be the only option
– SOC 2 tests controls at a service organization relevant to security, availability,
processing integrity, confidentiality, or privacy

CLOUD COMPUTING 15

The Future of Blue Plans in the Cloud
• Blue Plans will take advantage of Cloud benefits where security is not
a priority and where PHI is not implicated
• If Cloud Providers offer same Security as Blue Plans can achieve, will
Blue Plans place PHI / PII in the Cloud ?
– Limited amounts of PHI / PII – Possibly Yes
• For example, in the Sales area, the sale of a policy might require placing
some health insurance information in the Cloud regarding the purchaser
(name, SS#, address)
• Benefits of a Cloud based solution may outweigh some breach risk
– Substantial amounts of PHI – No
• Blue Plan systems with large amounts of PHI (e.g., Claims and Membership)
will not be placed in the Cloud, even if security at the Cloud Provider is the
same as Blue Plan provides

CLOUD COMPUTING 16

• The potential financial liability from a data breach will prevent
Blue Plans from trusting PHI to most Cloud Providers
– In order for Blue Plan to trust the Cloud Provider with PHI, Cloud
Provider must assume financial responsibility for data breaches
– But Cloud Providers will not agree to substantial liability for data
breaches because they are not getting paid enough to assume that risk
• Breach could wipe out profits, revenue or the Cloud Provider
• Many Cloud Providers are “start-ups” without ability to make Blue Plan whole
– Contrast with Outsourcing Providers, which will agree to substantial
liability provisions because the profit / revenue is sufficient to justify the
risk

CLOUD COMPUTING 17

• Cyber Liability Insurance
– Same party should control both data security and data breach liability
• Alignment of interests will reduce breaches
– Recovery under policies is not guaranteed
• Policies not uniform – wide variance
• Policies very complex / negotiable
• Gaps
– Coverage for “Blue Plan’s breach of duty to maintain privacy of PHI”
– Breach = “unauthorized acquisition, access, use or disclosure of PHI”
• Strongly Recommend legal review of policy
• Do not rely on obligation in contract that Cloud Provider will obtain policy

CLOUD COMPUTING 18

Contracting for Cloud Services

CLOUD COMPUTING 19

Cloud Provider’s Typical Contract Template
This AGREEMENT contains lots of really fine print and we really do not feel like negotiating any of it. This AGREEMENT contains lots of really fine
print and we really do not feel like negotiating any of it. This AGREEMENT contains lots of really fine print and we really do not feel like negotiating
any of it. This AGREEMENT contains lots of really fine print and we really do not feel like negotiating any of it. This AGREEMENT contains lots of
really fine print and we really do not feel like negotiating any of it.
This AGREEMENT contains lots of really fine print and we really do not This AGREEMENT contains lots of really fine print and we really do
feel like negotiating any of it. This AGREEMENT contains lots of really not feel like negotiating any of it. This AGREEMENT contains lots of
fine print and we really do not feel like negotiating any of it. This really fine print and we really do not feel like negotiating any of it.
AGREEMENT contains lots of really fine print and we really do not feel This AGREEMENT contains lots of really fine print and we really do
like negotiating any of it. This AGREEMENT contains lots of really fine not feel like negotiating any of it. This AGREEMENT contains lots of
print and we really do not feel like negotiating any of it. This really fine print and we really do not feel like negotiating any of it.
like negotiating any of it. not feel like negotiating any of it.

This AGREEMENT contains lots of really fine print and we really do not This AGREEMENT contains lots of really fine print and we really do
like negotiating any of it. This AGREEMENT contains lots of really fine not feel like negotiating any of it. This AGREEMENT contains lots of
print and we really do not feel like negotiating any of it. This really fine print and we really do not feel like negotiating any of it.
like negotiating any of it. not feel like negotiating any of it.

This AGREEMENT contains lots of really fine print and we really do not* * * This AGREEMENT contains lots of really fine print and we really do

CLOUD COMPUTING 20

Guiding Principles for Contracting with Cloud
Providers
• Must understand Cloud Provider’s business model
– Standard service to all customers
– Consistent, repeatable processes
• Customers must accept a standard delivery model to take advantage
of the cost savings
• Cloud Providers insist on their own contract template
– They want standardized contracts to match their standardized delivery model
• But there ARE terms to negotiate !

CLOUD COMPUTING 21

Outsourcing vs. Cloud contracting
Topic Outsourcing Cloud Services
Contract Template Use Customer’s template Cloud Providers insist on their contract
documents
Each deal customized

Contract Negotiation Almost everything negotiable Provisions impacting uniformity and
scalability of the cloud service are not
Service delivery solution customized negotiable.
Service delivery solution standardized
Contract Leverage Size of deal matters. Competition matters. Size and competition matter much less

Contract Negotiation Timing 4-8 months, but can be 12 months or more Generally < 3 months and frequently faster

Term 5-7 years, with Renewal Options 1-3 years, with evergreen extension unless
either party terminates 30 days before
anniversary

CLOUD COMPUTING 22

Contract Modification Modified only via written contract Governed by online terms (service
amendment descriptions) or “then current” policies found
on web pages (security and privacy)

Control Over Supplier Key Supplier Positions, background checks, Largest contracts may include one Key
Personnel and ability to remove personnel Supplier Position, but little else

Subcontractors Significant restrictions on use of No restrictions - Subcontractors may be
subcontractors essential to the provider’s ability to deliver
the services

Security Fully negotiable (for a price) Non-negotiable

Governance Detailed, multi-committee governance None
structure

CLOUD COMPUTING 23

Service Levels Customized and numerous Standardized and very few

Service Level Credits Customized. Based on percentage of Can be significant – even up to 100% of
monthly revenue – generally 5-15% monthly charges (but dollars are smaller and
credits tied to the charges for the failed
service)
Data Location Customer knows where its data is Customer does not know where data is
Limits on moving data center Fewer restrictions on data center location
Charges Complex combination of transition Minimal transition cost (if any). Charges
charges, plus ongoing fixed and variable based on simple metric such as “per user” or
charges “per seat” or similar units
Audits Extensive audit rights, particularly in None (although Supplier may agree to
dedicated environments provide SSAE 16)

CLOUD COMPUTING 24

Limit of Liability General 12 months of charges Need to negotiate to make it
mutual
Numerous exceptions to direct and consequential damage
limits – indemnities, breach of confidentiality, wrongful 12 months of charges also, but tied
abandonment, failure to provide disengagement to the particular service causing the
assistance, gross negligence, intentional misconduct damages
Stipulated direct damages – error correction, cost of work- More limited carve-outs, especially
around, overtime, government fines and penalties, cost to for consequential damages
recreate data
Data Breach Liability Separate liability bucket, ranging from 1 – 12 additional Generally none, but if pressed, they
months of charges (may depend on whether data will agree to separate liability
encrypted) bucket, and acknowledge notice
and credit monitoring costs are
Stipulated direct damages - Cost of data breach notices, recoverable
credit monitoring, call center, identity restoration services,
consulting and attorney fees Be wary of commitment to perform
“as required by law”

CLOUD COMPUTING 25

Customer’s Termination Rights Cause, Service Level Failures, Change of For Supplier’s material breach
(cause and other) Control of Customer, Change of Control of
Supplier, Force Majeure Events, Change in
Laws, Increase in Taxes, Supplier’s Liability
Cap, Regulatory Approval, Business
Associate Addendum, Insolvency
Supplier’s Termination Rights Limited to: Failure to pay 2 month’s Starting position is Supplier may terminate or
and Right to Suspend charges and Breach of Confidentiality suspend “for any reason” or for “breach of
Acceptable Use Policy” or if Provider believes
No right to suspend Customer’s use threatens providers network
or ability to provide services
Can limit termination right to “Customer’s
material breach”, and add cure rights
Can limit right to suspend only “to the
extent” necessary to address the breach of
the AUP, or to address the breach

CLOUD COMPUTING 26

Termination for Convenience Yes, but must make Supplier whole Yes, after initial commitment on 30 days
notice without cost
Also, if Supplier changes terms that adversely
affects Customer, without cost
Termination Assistance Requires fairly extensive cooperation Need to negotiate
between customer, existing service
provider and replacement service provider Very limited cooperation required

12-18 months of assistance, with right to Existing Cloud Provider provides a copy of all
acquire hardware, software, contracts and data resident in cloud environment for
people transfer to replacement service provider
No right to acquire assets

CLOUD COMPUTING 27

In sum . . .
By understanding:
(1) where a Cloud Provider can negotiate, and
(2) where the cloud model precludes negotiation,
you can balance your risk reduction efforts against the Cloud
Service benefits, to achieve best results for the Blue Plan.

CLOUD COMPUTING 28

e-Discovery and Subpoenas in the Cloud

CLOUD COMPUTING 29

Access to Cloud Data
• Subpoenas for data in the US
– Not a lot of case law directly addressing discovery of corporate email held by Cloud Providers
– Instructive analogs found in:
• Cases involving 3rd-party email providers under Stored Communications Act ("SCA") and
• Cases addressing the concept of "control" under US Federal regulations
• US Civil Subpoenas
– Basic test under FRCP: “possession, custody, or control”
– U.S. courts construe “control” broadly
• Party often deemed to have control if it has the legal right, authority or practical ability to obtain the
materials sought upon demand
– However, courts generally presume 3rd parties cannot be compelled to disclose electronic
communications pursuant to a civil subpoena
– Courts tend to focus on whether email account holders who are parties in the underlying
litigation can be ordered to authorize access to their email accounts, despite the SCA

CLOUD COMPUTING 30

Stored Communications Act Cases
Thayer v. Chiczewski (N.D. Ill. Sept. 11, 2009)
• Civil rights suit against Chicago
• City served a subpoena on AOL seeking production of several of plaintiff's
emails
• Contrary to general practice, the court granted the motion over the objections
of both the plaintiff and AOL.
• Court first acknowledged SCA usually prevents enforcement of civil
subpoenas against 3rd parties:
– "The Court agrees that, although decisions analyzing the SCA have defined its
parameters in sometimes competing ways, most courts have concluded that third
parties cannot be compelled to disclose electronic communications pursuant to a
civil-as opposed to criminal-discovery subpoena."

CLOUD COMPUTING 31

Stored Communications Act Cases (cont.)
Thayer v. Chiczewski (N.D. Ill. Sept. 11, 2009) - continued
• Court stated that because plaintiff would be required to produce relevant
emails if he were in possession of them, and AOL would be obliged to
produce the emails at plaintiff's request, the emails were under the plaintiff's
"control" for discovery purposes
• Court noted that plaintiff authorized production of at least one email and had
put his mental state at time of relevant events at issue (which arguably would
be shown by contemporaneous emails), thus, court assumed that plaintiff
had authorized disclosure

CLOUD COMPUTING 32

Stored Communications Act Cases (cont.)
Chasten v. Franklin (No. C10-80205 MISC JW (HRL), 2010 WL
4065606 (N.D. Cal. Oct. 14, 2010))
•Defendant in civil rights case served subpoena on Yahoo seeking plaintiff's
emails
•Plaintiff argued SCA prohibited Yahoo from disclosing his emails
•Court agreed and quashed subpoena stating:
– "Because no exception applies, compliance with the [third-party] subpoena would
be an invasion of the specific interests that the SCA seeks to protect."
•Unlike Thayer, Chasten court did not examine whether plaintiff could/should be
ordered to consent to Yahoo producing emails
•Court's failure to discuss whether account holder could be forced to consent to
disclosure was unique
CLOUD COMPUTING 33

Discovery Obligation Comes Back to You
• The fact that court does not force a Cloud Provider to turn over
your information simply brings the issue to your doorstep
• U.S. discovery system encourages extensive production of
information
• Having data held by a Cloud Provider can make compliance
with discovery obligations more challenging

CLOUD COMPUTING 34

Inadvertent Loss/Destruction
• What happens if a Cloud Provider loses / inadvertently deletes your
information?
• Currently uncommon for a cloud agreement to reference e-discovery type
requirements
– Difficult to claim Cloud Provider is responsible if there’s nothing in the contract on point
• Legal analysis for a “spoilation claim” normally focuses on “possession,
custody or control” over the data, which would generally point back to you –
even for hosted services
– Cloud Provider is not (normally) party to the litigation; court will typically focus its efforts on the
parties appearing in court
• If court finds you responsible (i.e., it did not produce information in its
possession, custody or control) then court can order sanctions
– Sanctions can range from fines to a terminating order that ends the case in the other party’s
favor

CLOUD COMPUTING 35

Inadvertent Loss/Destruction
• If the data was lost due to the Cloud Provider’s actions (or inactions), you will
need to argue that you were not at fault
– Trying to establish this fact would likely require going far beyond merely establishing who
deleted the data
– You need to show you acted diligently in selecting Cloud Provider, negotiating terms, putting
controls in place and notifying the provider in a timely manner — and that despite all of those
efforts, data was lost through no fault of yours
– Even so, minimal (if any) case law guidance on whether this argument would be adequate
– More likely, if the other party has been prejudiced by the loss of data, a sanction of some type
is likely to balance the playing field
• Recovery of fines from Cloud Provider unlikely
– Based on standard limitation of liability approaches in most cloud contracts, you may not be
able to recover damages from Cloud Provider

CLOUD COMPUTING 36

The “Democratization” Wrinkle
• Employees may be using cloud services without the knowledge of the
company (e.g., Google docs, Dropbox) or social media (e.g., Facebook)
• When employees leave, Plans may lose access to those password
protected accounts
• BUT, if you end up in litigation you may have had a duty to preserve
that information and/or produce it
– Cloud Providers may not store information in easily accessible, legally compliant
(i.e., “reasonably usable”) format
– Facebook and other social media services are not e-discovery friendly
– Obtaining information without employee’s password/cooperation may require
litigation against that Cloud Provider

CLOUD COMPUTING 37

The International Wrinkle
• What happens if a lawsuit is in the US but the other party’s headquarters is in another
country? Or what if the data is in a country where the rules are different?
• U.S. Supreme Court has held that U.S. courts may order production of documents
governed by foreign blocking laws
• Violation of French blocking statute to deliver documents in the U.S. has resulted in
criminal sanctions in France
• AccessData Corp. v. ALSTE Technologies GMBH, 2010 WL 318477 (D. Utah Jan. 21,
2010)
– ALSTE argued German privacy laws prevented collection of company emails located in Germany
– U.S. court held German law did not bar disclosure of information relevant to the litigation
– U.S. court required ALSTE to proceed with e-discovery
– Failure to produce the data after the court’s ruling would likely result in severe sanctions
– However, German Data Protection authorities have sanctioning powers, as well
• Companies with data spread across different jurisdictions may have to make difficult
choices if cloud-based data is implicated in litigation

CLOUD COMPUTING 38

Best Practices for Data in the Cloud

CLOUD COMPUTING 39

When drafting your RFP / evaluating potential Cloud Providers /
negotiating with the selected Cloud Provider
1. Know where Blue Plan data is/will be stored
- Request data center locations and consider including in contract
- Request geographic limits (e.g., “stored in the US”)
2. Protect Blue Plan data
- ISO 27001 certification, SOC 2, Cloud Security Alliance Cloud Controls Matrix
3. Ensure Blue Plan can use its data
- Make sure Blue Plan has right to access its data at all times (and the Cloud
Provider cannot hold your data “hostage” in a dispute)
- Make sure that Blue Plan can export it in a useable format
- Cloud Provider should be obligated to provide Disengagement Assistance

CLOUD COMPUTING 40

4. Determine if Cloud Provider can comply with Blue Plan data
retention/destruction policies
- Including litigation holds
5. Subpoena / e-Discovery Requirements
- Require notice of subpoenas received by Cloud Provider that could impact your data
- Ensure that Cloud Provider will assist with e-Discovery efforts and specify costs
6. Ensure there is financial responsibility for data breaches
- Separate liability bucket
- Do not accept “as required by law” language
- Costs of notice, credit monitoring, call center should be recoverable (not consequential)
- Cyber Liability Insurance - Legal review is important !

CLOUD COMPUTING 41

Questions & Answers / Thank you!

Joseph Kendall
Partner
Pillsbury Winthrop Shaw Pittman LLP
+1 202.663.8350
joseph.kendall@pillsburylaw.com

John Nicholson
Counsel
Pillsbury Winthrop Shaw Pittman LLP
+1 202.663.8269
john.nicholson@pillsburylaw.com

CLOUD COMPUTING 42

BCBSA Summit - Cloud Computing Issues (Dec 2012)

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