When States Attack, Retailers Relax

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This column was written by Evan Schuman, the editor of, a site that tracks retail technology, e-commerce and security issues. Retail Realities will appear each Friday. Evan can be reached at e-mail and on Twitter.

When a business owner gets a call from that state's attorney general's office, saying that a probe is about to be launched investigating that business, panic is a typical response. But when that call came to the offices of TJX, the $19 billion owner of retail chains Marshalls, T.J. Maxx, HomeGoods, A.J. Wright and others, panic was not necessary.

Indeed, the state AG probe was not one state for them, but almost all of them. To be precise, it was a group of 41 state attorneys general, all investigating the nation's largest credit card breach ever, which TJX enabled.

When those states finally took action in June-after a 30 month-long probe-the intent was to send a message to retailers that they must take the task of protecting consumer information seriously. Unfortunately, the message sent was quite the opposite.
When the group of 41 U.S. states announced their settlement with TJX, it was supposed to be a punishment for the retail chain that, in the words of one state attorney general, treated sensitive payment card information "like trash."

The deal (see our full coverage of the terms of the settlement) consisted of three elements: Payment; new security rules; the need to report back to the states. How painful were any of those elements for the retail giant, with thousands of stores in the U.S., Canada and Europe? Let's take a look at each.

The $9.75 Million Payment

At a glance, a payment of almost $10 million sounds like a lot, until you delve deeper. None of the dollars were punitive per se. The smallest slice--$1.75 million-went to reimburse the legal and administrative costs of the states investigating the breach and negotiating this settlement for two-and-a-half years.

Two ways of looking at that. The happy way: For 41 states to be involved for 2-and-a-half years, $1.75 million isn't bad.

The unhappy way: What the heck took 30 months? If TJX was as cooperative as the AGs said it was (why wouldn't they be? They got their own state AG's office-Massachusetts-to head up the probe. You don't score political points by beating up one of your state's largest employers), how many weeks could it have taken to have established this report? (As a colleague used to say when covering federal prosecutors, "Justice delayed is Justice Department.")

The conclusions in the report included no information that was not widely known-and widely reported-within a few weeks of the January announcement of the breach. Assuming their probe went beyond reading the local newspaper, the evidence wasn't demonstrated in the published settlement. And if the quality of the evidence gathered is hinted at by the lopsided TJX-friendly settlement, TJX may want to audit that $1.75 million figure.

Let's get back to the money. Another $8 million seems to be for funding state programs to pay ways the states can investigate such actions in the future. Specifically, that breaks down to $2.5 million that "will fund a Data Security Trust Fund to be used by the state Attorneys General to advance enforcement efforts and policy development in the field of data security and protecting consumers' personal information" and $5.5 million for general "data protection and consumer protection efforts by the states."

How much is this going to hurt TJX? Well, TJX itself pointed out "the cost for this settlement is already reflected in the reserve that TJX established in 2007." In other words, when TJX set aside some $216 million for breach-related costs in 2007, they could have handled this payment then-more than 22 times over, in fact. Heck, the initial insurance check that TJX received alone would have covered this settlement, with $9.25 million left over. To be fair, TJX had other court costs and security upgrades to deal with, but given that it won both class-action lawsuits and that the reserves were so large, it's clear that this invoice won't exactly bring them down to their point-of-sale knees.

The New Security Rules

At a glance, the settlement appears to impose quite a few security rules on TJX, which seems worthwhile. That's true until you look closely at the rules and realize, "Wait a second. Aren't virtually all of those rules already mandated by the credit card industry, under their Payment Card Industry Data Security Standard (PCI-DSS, familiarly known in retail circles as just PCI, along with some less-friendly descriptions)?"

And hasn't TJX-as one of the largest retailers, known in PCI parlance as a level one merchant-already agreed to abide by those rules? Indeed, aren't these 'punitive' new rules the exact same requirements that tons of large retailers-who, by the way, have not been breached to the tune of 100 million payment cards-also have to live by? Isn't this akin to punishing drunk drivers who kill groups of children by saying that they must now pay federal, state and municipal taxes and also abide by posted speed limits?"

The few instances where the settlement tiptoed beyond PCI mandates, it didn't seem to tiptoe very far. PCI guidelines do not mandate network segmentation, but it does recommend it, for example. The settlement has TJX having agreed to segment its network.

PCI guidelines do not currently take a firm position on so-called end-to-end encryption (by defining it as "from PIN pad to acquiring bank," it's more like middle-to-near-the-end encryption) but then again, neither does the settlement. It merely requires TJX "to encourage the development of new technologies" such as end-to-end encryption. Let's call this the Attaboy mandate.

Ongoing Reports Back To The States

This would have more teeth in it were TJX not already making such reports back, courtesy of PCI. The difference, though, is the state reports are going to public organizations, rather than private industry players. Fear not, though, as TJX's lawyers made sure that wouldn't be problematic.

How? By insisting that the settlement include this line, which was somehow missing from the various state news releases that went out proclaiming the deal: the states agree that they "shall treat such documents as exempt from disclosure under the relevant public records laws."

One might conclude from all of this that it would be wise to avoid getting into Poker games with TJX executives. But it's not necessarily that they'd be such superb poker players. It truly helps to be able to use your own deck of cards and to be able to choose the dealer.

By Evan Schuman
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