Are marketplaces liable for privacy breaches caused by third-party payment gateways?

Online marketplaces often rely on third-party payment gateways (like PayPal, Stripe, Razorpay, etc.) to process financial transactions. While these third-party services provide essential infrastructure for facilitating payments, they also carry the responsibility of protecting consumer data. However, if a privacy breach occurs in the payment processing system, the question arises: can the marketplace be held liable for the data breach even though it’s the third-party payment gateway that caused it?

Legal Responsibilities of Marketplaces Regarding Privacy Breaches:

• General Liability Principles: Even though third-party payment gateways are responsible for processing payments, marketplaces may still be held liable for privacy breaches depending on the nature of the contractual agreements between the two parties and the data protection laws in place.

Marketplace Responsibility for Consumer Data:

• Under various data protection laws (like the General Data Protection Regulation or GDPR in the EU, and the Data Protection Act, 2019 in India), marketplaces are typically considered data controllers when they collect and store consumer data. This means they are responsible for ensuring the security and privacy of that data, even if it is processed by a third-party payment gateway.
• Third-Party Vendors and Data Processors: A third-party payment processor is generally classified as a data processor (not a data controller). This means the marketplace, as the data controller, remains ultimately responsible for consumer data, and they must ensure that any third-party processors they use comply with privacy and security requirements.

GDPR and Consumer Data Protection Laws:

• Under the GDPR (which applies to EU citizens) and similar privacy laws in other regions (like India’s DPDP Act), marketplaces have strict obligations regarding the protection and processing of consumer data.
• Data Controller Responsibility: If a marketplace uses a third-party payment gateway, the marketplace is still held responsible for ensuring that consumer data is handled securely and in compliance with the law. The marketplace must have a data processing agreement (DPA) in place with the payment gateway, which outlines the security measures the third-party must take to protect consumer data.
• Failure to Ensure Data Protection: If a data breach occurs due to a failure on the part of the payment gateway, and the marketplace has not taken adequate steps to ensure data protection, the marketplace could still face legal action or penalties under the GDPR and other applicable laws.

Risk of Data Breach and Consumer Harm:

• A data breach at the payment gateway could potentially lead to the exposure of sensitive personal information such as credit card details, addresses, and other payment information. If this data is exposed, the marketplace might face:
• Consumer Lawsuits: Consumers could file lawsuits against the marketplace for failing to ensure that their personal information was securely handled. Even if the breach happened due to the payment gateway’s fault, the marketplace can be sued for negligence in ensuring that proper data security measures were in place.
• Reputational Damage: In addition to potential legal claims, a breach of consumer data can lead to loss of consumer trust, which can have a long-term impact on the marketplace’s reputation and customer loyalty.

Contractual Obligations with Third-Party Payment Gateways:

• Marketplaces generally enter into contracts with third-party payment processors. These contracts usually include service level agreements (SLAs) that define the roles, responsibilities, and obligations of the payment gateway, including their duty to maintain data security.
• Indemnification Clauses: Many contracts have indemnification clauses that protect the marketplace in the event of a breach caused by the third-party payment gateway. However, this may not always absolve the marketplace from consumer claims or regulatory penalties if the marketplace did not adequately vet the security practices of the payment provider.
• Due Diligence: It is the responsibility of the marketplace to conduct due diligence when selecting a third-party payment gateway. If the payment processor fails to protect data and a breach occurs, the marketplace may face legal action if they are found to have neglected their duty to ensure the processor was up to standard.

Regulatory Penalties for Data Breaches:

• Privacy laws in many regions impose heavy penalties for businesses that fail to protect consumer data. If a breach occurs due to a third-party payment gateway, and the marketplace is found to have failed to take adequate precautions to protect personal data, the marketplace could face:
• Fines: Under the GDPR, organizations can be fined up to €20 million or 4% of their annual global turnover, whichever is higher. Other jurisdictions, such as India, also have penalties for non-compliance with data protection laws.
• Compensation for Affected Consumers: Consumers whose data was compromised may be entitled to compensation for the breach, and marketplaces may be held vicariously liable for the actions of their third-party processors.

When Could Marketplaces Be Liable?

• Failure to Vet Payment Gateway Security: If a marketplace fails to ensure that the third-party payment gateway complies with necessary data security protocols (e.g., encryption, two-factor authentication, PCI DSS compliance), the marketplace may be held responsible for any resulting data breach.
• Lack of Data Processing Agreements: If the marketplace has not signed a data processing agreement (DPA) with the third-party payment processor, it could be seen as failing to establish the necessary safeguards for consumer data, resulting in liability.
• Inadequate Consumer Notification: If a data breach occurs and the marketplace does not notify affected users promptly or fails to take immediate action to mitigate the damage, it could face legal repercussions for not adhering to privacy laws.

Example:

• Suppose a consumer makes a purchase on an online marketplace, and the payment is processed via a third-party payment gateway. Due to a security flaw in the gateway, the consumer's credit card details are compromised in a data breach.

Marketplaces’ Liability:

• Failure to Vet Security: If the marketplace had not ensured that the payment gateway was secure or compliant with data protection standards like PCI DSS, the marketplace could be held liable for the breach.
• Consumer Action: The consumer may sue the marketplace for negligence in handling their personal data, leading to financial losses or identity theft.
• Regulatory Penalties: The marketplace could face penalties under privacy laws for failing to ensure that the third-party payment gateway met security requirements.

Conclusion:

• Yes, marketplaces can be held liable for privacy breaches caused by third-party payment gateways if they have failed to take reasonable steps to ensure the security and privacy of consumer data. This can include failing to conduct proper due diligence when selecting payment gateways, not having proper data processing agreements in place, or neglecting to act swiftly when a breach occurs. Even though the payment gateway is responsible for processing payments, the marketplace may still be held accountable due to its role as the data controller and its obligation to protect consumer data under privacy laws.