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The Importance of SAFETY Act Protections for the Electric Power Industry

Issue 3 and Volume 87.

by Brian Finch and Larry Eisenstat, Dickstein Shapiro

Recent press reports have significantly raised public awareness of the vulnerability to cyberattacks of our nation’s energy infrastructure. These reports quickly captured the attention of legislators and regulators in Washington, D.C., and throughout the nation. Many have since proposed through draft legislation increased security requirements for numerous energy companies, particularly those that own or operate electric transmission lines.

If a cyberattack on the nation’s energy infrastructure were to occur, its owners and operators could face staggering losses and possibly even greater liability now that the potentially catastrophic consequences of such an attack are better understood. The liability threat arising from a terrorist attack is too real: airplane manufacturers, security companies and even companies whose own buildings were destroyed already have had to pay millions of dollars in damages.

Companies in the electric power sector, in particular, must understand that although the North American Energy Reliability Corp. (NERC) has established new cybersecurity reliability standards, compliance with those standards will not automatically immunize them from liability were a cyberattack to occur. By applying for certain protections available under a little-known federal law—the Support Anti-terrorism by Fostering Effective Technologies Act of 2002, or SAFETY Act—their exposure could be significantly reduced if not completely eliminated.

The SAFETY Act was enacted after the Sept. 11, 2001, terrorist attacks to assure eligible companies that, should another terrorist attack occur, they would not be exposed to uncapped legal liability. The SAFETY Act provides companies with an opportunity to apply to the Department of Homeland Security (DHS) for certain tort liability protections in connection with the manufacture or furnishing of products or services that can be used to detect, defend against or respond to acts of terrorism.

Two tiers of protection are available under the act. If a product or service receives SAFETY Act certification, then the owner, seller and/or provider of such product or service presumptively would be entitled to immunity from all tort claims for damages arising out of an act of terrorism and associated with such product or service. If, however, the product or service only were to receive SAFETY Act designation, the applicant’s potential tort liability would be limited to the amount of insurance that DHS determines the applicant should maintain in connection with such losses. In either case, tort claims cases may be brought only in federal court.

Companies also can take advantage of the SAFETY Act by purchasing SAFETY Act-approved products and services. Under the act, only sellers of SAFETY Act-approved products or services potentially could be liable for damages in connection with such products or services. By contrast, mere purchasers of SAFETY Act-approved products or services face no liability. A range of products and services have received SAFETY Act protections, and DHS is actively encouraging the submission of cybersecurity-related applications.

SAFETY Act protection should be sought, or at least evaluated on its costs and benefits, for any measure undertaken by a company to detect, defend against or respond to cyberattacks and other terrorist acts resulting in damage to the electrical system that would occur, for example, if multiple plants were to trip off line as a result of a terrorist-planted computer bug and the lights were to go off for many hours. Because certain terrorist attacks were determined to have been reasonably foreseeable, it is more critical that those energy companies at greatest risk of terrorist attacks implement appropriate measures to prevent such attacks and apply to have such measures certified or designated under by the SAFETY Act to limit their potential liability as best they can.

Finally, imagine that a company with a reasonable exposure to a terrorist act fails to consider whether it should spend whatever money is necessary for it to receive SAFETY Act protections; and then a terrorist act occurs. This would lead to a bad outcome. Why subject one’s management to a hefty derivative action for breach of fiduciary duty as well?

Author

Brian Finch is head of Dickstein Shapiro LLP’s Homeland Security Practice. For more information on how to take advantage of the SAFETY Act, e-mail him at [email protected] or call 202-420-4823.

Larry Eisenstat is head of Dickstein Shapiro’s Energy Practice. E-mail him at [email protected] or call 202-420-2224 to learn more about the SAFETY Act.