United States: Clear Skies or Stormy Weather for Cloud Computing: Key Issues in Contracting for Cloud Computing Services

Originally published September 2010

Keywords: cloud computing, key issues, private cloud, public cloud, hybrid cloud, contracting

Cloud computing has been with us for years through technology outsourcing, online service models and application service providers. But an entirely new crop of providers and service offerings has changed the way customers are contracting for cloud computing services. This article addresses cloud computing benefits, risks and regulatory challenges, with suggestions for overcoming or mitigating those challenges.

What Is Cloud Computing?

While there is no universally accepted definition of cloud computing, most agree that there are three service models, each with its own distinct features: software as a service (SaaS); platform as a service (PaaS); and infrastructure as a service (IaaS). There are also different delivery methods: a "private cloud," where the resources used to provide the services are dedicated to one specific customer; a "public cloud," where the resources are shared generally with the provider's other customers; and a "hybrid cloud," where multiple clouds (of the same or different types) are interconnected—for example, the majority of an entity's processing may be performed in a private cloud but it may access data shared on an application in a public cloud.

While the definition of cloud computing may vary, there is agreement on its benefits. There are technical advantages: the user gets on-demand computing services; computing resources such as storage, processing, memory, network and bandwidth are pooled across multiple users; and fluctuations in demand are more easily met. There are also time- and money-saving advantages as customers do not have to invest in the hardware, software and network infrastructure needed to provide the same service. Cloud computing also increases the opportunity for collaboration and knowledge sharing, as all files are available to designated users in a consistent format. Also, cloud computing services are available over a network, so they can be accessed from many locations.

The Current State of Cloud Computing Contracting

Currently, the standard contracts offered by cloud computing providers are one-sided and service provider-friendly, with little opportunity to change terms. Few offer meaningful service levels or assume any responsibility for legal compliance, security or data protection. Many permit suspension of service or unilateral termination, and disclaim all or most of the provider's potential liability. In addition, some cloud computing providers emphasize low cost offerings, which leave little room for robust contractual commitments or customer requirements. When contracting for these services, it is critical for a business to analyze its data, applications and business needs. Routine, non-sensitive data may allow use of a standardized, low-cost cloud computing service with few contractual protections. However, mission critical data and applications require more robust service and contractual protections, which may increase the price of the service.

In those situations where standardized services and terms are not appropriate, where can business lawyers look for appropriate contractual protections? While there is no single form agreement that properly addresses all contractual needs, there are some good starting points. Traditional outsourcing and software licensing terms may be useful in creating an appropriate set of contractual clauses. These terms will need to address the regulatory and compliance challenges discussed below.

Potential Operating Risks of Cloud Computing

On the operational side, cloud computing relies heavily on network connectivity. If network connections are down, or slowed, the resources and data in the cloud can become unavailable. This risk is heightened with public and hybrid clouds where resources are shared, not dedicated. Depending on the nature of the cloud, resources that are supposedly abundant may in fact be heavily used and, therefore, less available. Another operational risk exists because of the lack of standards in cloud computing: there may be compatibility issues between the cloud and data and resources in a different cloud, or elsewhere in the customer's enterprise .

As with traditional outsourcing, a number of risks center on the fact that the business is giving up control. This lack of control can undermine many of the benefits sought from cloud computing as well as pose other risks to the business. The customer may need a change in the service to accommodate a new customer regulatory requirement. The cloud provider may not be willing to make the change if it costs money or changes a standard service. Gaining control of these issues in the contract with a cloud provider can increase the cost of the solution, and may reduce some of the cost benefits of using a cloud computing solution.

Regulatory and Compliance Challenges

There are a number of regulatory challenges for cloud computing users and providers. This article gives a few examples, but does not address every regulatory concern. For example, businesses involved in government contracting often have obligations to classify and protect data. Restrictions on data disclosure and access, even on the location of data storage, will have to be considered in the context of any cloud computing solution.

The free movement of data among networks, data centers and storage devices may raise issues under a country's import/export control regulations. For example, a company using cloud computing services may not be aware that its export-controlled software is being exported through its use of the distributed cloud computing system.

Data retention and disposal requirements can also be challenging. For example, in the United States, when litigation is pending, threatened or anticipated, a party must preserve potentially responsive data in the form in which it was created by the company. Such data may have to be made available to the opposing party or the court as required by electronic discovery rules. It could be challenging to isolate and provide data in the cloud given the distributed and disbursed nature of cloud computing.

Privacy and Security Issues: The Largest Of The Regulatory Challenges

Regulated personal information presents one of the largest challenges for cloud computing users and providers. Numerous industry sector specific privacy laws exist that must be addressed in cloud computing contracts. These include, for example, the Gramm-Leach-Bliley Act ("GLB") for privacy financial information, and the Health Insurance Portability and Accountability Act and implementing regulations (collectively, "HIPAA") for health and medical information. The Federal Trade Commission ("FTC") has devoted significant attention to privacy issues, and security and prevention of identity theft have become a particular focus. The States have also taken notice of privacy and security issues, and have begun enforcement of such issues.

Many states have statutes and regulations that mirror the requirements of GLB and protect personal health information like HIPAA. Additionally, many states have passed data breach notification laws. As of April, 2009, the majority of states, the District of Columbia, Puerto Rico and the Virgin Islands had enacted some form of database breach notification act protecting personal information. Additional state laws are presenting issues for cloud computing regulatory compliance as well. In 2008, Massachusetts issued comprehensive regulations requiring that personal information be encrypted when transmitted wirelessly or over a public network. The regulations also require a "written, comprehensive information security program." The security program must be reasonably consistent with industry standards and contain administrative, technical and physical safeguards to ensure the security and confidentiality of records containing personal information.

Finally, there are industry specific standards that many businesses must follow, such as the Payment Card Industry (PCI) Security Standards. Companies that put cardholder data in the cloud will have to ensure that cloud providers also comply with PCI standards.

Europe and other parts of the world have stringent privacy regulations that in many cases have been in place much longer than those in the U.S. In many countries, personal data cannot be processed without the consent of the data subject. Additional requirements include limiting the use of the data to the reason for which is was collected (and the consent granted), allowing the data subject access to his or her personal data and allowing the data subject to correct personal data.

In addition, some countries regulate the transfer of personal data (e.g., the European Union Directive 95/46/EC, as implemented through Member State legislation, relating to collection, use, processing and free movement of personal data). Failure to comply can lead to fines, penalties, interruption of business and, in some cases, imprisonment.

Regulatory and Compliance Issues with Cloud Computing: Managing the Risk Through Contracting

To manage privacy risks with service providers, a company must have regulatory, security and privacy processes in place with specific requirements pertaining to service providers. At a high level, these steps include: appropriate service provider diligence and selection; implementing regulatory, security standards and privacy requirements through appropriate operational requirements and contractual clauses; and monitoring performance and adherence to the standards and process.

Businesses that use cloud computing solutions where personal information will be collected, processed, accessed, stored or transferred must perform due diligence on the service provider at the contracting stage, as well as continue meaningful oversight during the term of the contract.

And, while you cannot outsource responsibility for your compliance obligations, you should ensure that you and your provider understand the following topics (and have documented such understanding in the contract):

  • The specific regulatory requirements to be performed by your service provider (with respect to privacy, for example, including how the service provider may and may not use personal information, confidentiality terms, how the provider should dispose of personal information, where data may be processed, stored and transferred, etc.);
  • Your compliance and security requirements and the service provider's security practices to monitor and prevent compliance and security breaches and to protect your business;
  • The process for reviewing any process or system changes that may impact compliance, security or privacy issues;
  • Your reporting requirements for regulatory compliance;
  • Your audit requirements;
  • Your rights to approve any subcontracting by your primary service provider and requirements that subcontractors of all tiers agree to the same compliance terms;
  • What you will do if your service provider suffers a security/privacy breach or lapse in compliance, including business continuity and disaster recovery plans;
  • Responsibility for monitoring changes in applicable laws and regulations, and adjusting service requirements to meet such changes;
  • Liability for breaches of laws, regulation and/or contractual compliance requirements; and
  • Of the regulatory compliance requirements, which parts will be provided as part of the services, and which requirements may result in extra charges by the service provider.

Conclusion

Cloud computing offers benefits as well as risks. As cloud computing is a variation of outsourcing, it should not be surprising that many of the risks are the same as or similar to those in more traditional IT outsourcing. Many of the risks are mitigated the same way: appropriate due diligence up front, strong contractual protections that account for higher risk data and applications, and continued vigilant governance. While businesses may discover many beneficial uses of cloud computing, they will also have to determine which applications and data types are not appropriate for cloud computing unless the provider can modify the solution to meet the business' regulatory and other requirements.

Learn more about our Privacy & Security practice.

Visit us at www.mayerbrown.com.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions