2012 was a challenging year for the Food and Beverage (F&B) industry. In addition to increased government regulation, rising food prices and relatively slow growth trends, the industry once again was a favorite target of cybercriminals. According to the 2013 Trustwave Global Security Report, cyberattacks on F&B enterprises comprised 24% of attacks in 2012, second only to retail merchants (45%).  A franchisor’s lack of corporate control over franchisees coupled with interconnectivity among franchisees adds to the risk.

The cost of a data breach can be devastating. ANX Corporation reports that the average direct cost of a credit card breach to a restaurant is $80,000. Perhaps more importantly, a shocking 70% of restaurants that suffer a breach go out of business within one year of the attack, according to ANX. Immediately after a breach is identified, the business must stop taking credit cards and remediate the breach. The business then would be required to be inspection by a Qualified Security Assessor (QSA) for the Payment Card Industry (PCI) on a yearly basis for three years or until the credit cards brands at issue agree to drop the reporting requirement.

ANX identified eight key security gaps that affect food service organizations: outdated firewalls, insecure remote access, weak security configurations, operating system flaws, lack of staff training, flaw security policies, negligence and poor change control procedures.

Zaxby’s 567-location franchise restaurant chain is a recent victim of a computer system and point-of-sale (POS) breach. Zaxby’s initiated a forensic investigation after a number of its locations had been identified as common points of potentially fraudulent charges. The investigation revealed that computer systems in 108 locations stored suspicious files and were infected with malware designed to collect and transmit payment card information. Although there is no evidence that third parties obtained that information, Zaxby’s required all of its licensees “to engage an industry leading provider of PCI compliance services to provide enhanced firewalls, system monitoring and PCI compliance services.”

Despite the inherent risks facing every company that processes confidential data as well as the additional and unique risks encountered by franchised enterprises, some relatively simple steps can be taken to reduce the risk of a data breach and to mitigate the effects if a data breach takes place.

Risk Management

An internal risk management program, including the establishment of strong policies and procedures, training and insurance can reduce the chances of a data breach and mitigate the damages if a breach occurs. Businesses should:

  • Review their internal policies and procedures and make sure they’re up to date. The statutory and regulatory framework governing confidential information is constantly evolving and must be incorporated by your organization. The 46 state laws seem to always change with respect to notification and security requirements. If your organization conducts business outside of the US, requirements of foreign laws must be incorporated into your policies and procedures. Remember, having a policy your company does not follow is worse than not having a policy at all; therefore, ensure that your policies are distributed to, and followed by, employees.
  • Review your incident response plan regularly and ensure that the team members are prepared to jump in when an incident occurs.
  • Hire a consultant to conduct a yearly security risk assessment to identify any vulnerability in your processes and procedures for handling confidential data. Some laws, such as HIPAA, require periodic risk assessments. And, it is good practice as organizational risks change with changing practices.
  • Education of employees is critical to the success of any compliance program. Make sure all employees are educated and trained concerning those policies and procedures and any laws and regulations that apply to your business. There are laws, such as the Massachusetts Data Protection Law 201 CMR 17.00, that mandate these types of training programs.
  • Work closely with your business partners to ensure that they are properly handling your confidential data. Vendors are the cause of at least 1/3 of all data security incidents.
  • Do not forget to compare your data collection and sharing practices to what your privacy policy says. Regulators, such as the Federal Trade Commission, are watching closely.

Cyber insurance can help organizations respond to and mitigate the harmful consequences of a data breach. Most cyber insurance policies provide invaluable assistance to help the insured respond to a breach, including first party coverage for an attorney breach coach, forensic technicians, notification providers, credit monitoring services and crisis management professionals, as well as third party liability coverage for legal defense costs and fines. Further reading: Why Risk Data Breaches? Subscription required.

The Franchise Agreement

Franchise agreements should address several important data security concerns, PCI compliance, breach notification and cyber insurance.

PCI Compliance

Every business that accepts credit or debit cards must comply with the PCI’s Data Security Standard (PCI DSS). Broadly stated, the PCI DSS requires the business to:

  • build and maintain a secure network, including installation and maintenance of a firewall and use of appropriate passwords
  • protect cardholder data, avoiding storage of such data if possible
  • maintain a vulnerability management program, including use of current antivirus programs
  • implement strong access control measures limited to those with a need-to know
  • monitor and test networks regularly
  • maintain and disseminate an updated information security policy

Although the PCI mandates compliance with its DSS, the Franchise Agreement nevertheless should specifically address data security and require franchisees to comply with the PCI DSS. Any third party vendors should be contractually obligated to comply with those requirements, and contractual indemnity should be considered.  The franchisee may ultimately end up being financially responsible for PCI DSS compliance. Potentially devastating financial repercussions include fines of up to $50,000 per incident, liability for losses relating to the compromised account information and re-issuance of cards and possible suspension of merchant accounts.

Breach Notification

The franchisee should be required to promptly notify the franchisor of all breaches in security and immediate notify the franchisor of all breaches of sensitive information. The franchisor must control the response to the security breach including the decision as to whether public disclosure is required. The franchisor must also be afforded the opportunity to investigate the breach with its own resources either on-site or remotely through the franchisee’s computing resources.

The franchisor may also want to consider being notified of any impermissible uses or disclosures, not just those that rise to the level of a breach. First, this allows the franchisor to monitor the practices of the franchisee to determine if it wants to continue the relationship. And, it also provides the franchisor with control over what it considers to be a breach, which is important since it is the franchisor’s reputation that is typically on the line despite who caused the breach.

Cyber Insurance

Franchise agreements also should require franchisees to purchase a specified amount of cyber insurance coverage in the event of a data breach.  The protections provided by cyber insurance literally can provide a lifeline to F&B businesses that are victimized by cyber criminals.