The Hidden Legal Risks in External Data Usage Restrictions: Why Companies Need to Act Now

Companies today are spending billions of dollars on external data to fuel their business operations. From financial filings to customer behavior analytics, data has become the backbone of decision-making and innovation. However, with this increased reliance on external data comes a significant but often overlooked risk: non-compliance with data usage restrictions. Many companies are unknowingly violating their data license agreements, opening themselves up to severe legal, financial, and reputational consequences.

The Growing Risk of Data Misuse

Consider a generalized example. A company licenses millions of dollars’ worth of financial data, including earnings call transcripts and regulatory filings. The contract clearly states that the data cannot be used to train artificial intelligence models for external-facing services. However, due to a lack of proper communication between the legal and compliance teams and the technical teams using the data, this restriction is overlooked. Months or even years later, the company deploys an AI-driven product based on this data, inadvertently violating their agreement. The fallout could include cease-and-desist letters, legal actions, or demands for substantial financial penalties.

These scenarios are not uncommon. Data contracts are typically locked away in procurement systems, accessible only to a select group of individuals. Over time, institutional knowledge about the restrictions erodes, leaving the company vulnerable. Restrictions around creating derivative works, training AI models, or publishing research based on the data often go uncommunicated to those actually using the datasets.

Why the Problem Persists

The disconnect between legal departments and data users is one of the primary reasons this issue persists. Legal teams often negotiate and file contracts without creating systems to disseminate the usage restrictions to other departments. As more people and teams interact with the data—many of whom had no involvement in the original contracting process—awareness of restrictions diminishes. This lack of visibility increases over time, making companies more likely to inadvertently breach their agreements.

Additionally, the rise of AI and machine learning has introduced new complexities. AI allows companies to extract insights from data and embed that knowledge into products and services. This blurs the line between direct data usage and derivative works, making compliance more challenging. As the number of restrictions in contracts grows, alongside the expanding use cases for data, the need for systematized management becomes critical.

The Role of Nomad Data's Data Relationship Manager

The best way to avoid these pitfalls is by adopting a robust data management system, such as Nomad Data's Data Relationship Manager (DRM). Unlike traditional procurement systems, the DRM provides an accessible repository where restrictions on data usage are clearly documented and easily searchable. Here are some of its key features:

• Centralized Visibility: All data usage restrictions are centralized, ensuring that anyone working with a dataset can quickly understand its permitted uses.
• Audit Trails: The DRM enables users to log how data is being used, creating a comprehensive record that simplifies compliance checks and internal audits.
• Integration with Workflows: By integrating with existing business processes, the DRM ensures that restrictions are considered at every step, from data procurement to product development.
• Proactive Compliance: The system helps identify and prevent potential compliance issues before they escalate, protecting companies from costly legal disputes.

The Cost of Ignorance

When companies discover they have been misusing data, their first reaction is often panic. Legal teams scramble to understand the extent of the violation: who has accessed the data, how it has been used, and what products or services might be implicated. This reactive approach is both costly and inefficient. A more effective strategy is to proactively track and communicate data usage restrictions from the outset.

Data vendors are increasingly vigilant about enforcing their agreements. Cease-and-desist letters and legal actions are becoming more common, and the financial penalties can be staggering. In the worst cases, companies may have to withdraw products from the market, forfeiting revenue and damaging their reputation.

Why Companies Must Act Now

Despite the growing risks, many companies remain unaware of the scale of the problem. It is only when they face external scrutiny—whether from data vendors, customers conducting due diligence, or regulatory bodies—that they realize the need for better compliance systems. At that point, the damage is often already done.

Implementing a system like Nomad Data’s DRM is not just about avoiding legal trouble; it’s about building a culture of accountability and transparency around data usage. With data playing an increasingly central role in business operations, companies can no longer afford to neglect this critical aspect of compliance.

Conclusion

The risks associated with data misuse are too significant to ignore. By failing to disseminate and track data usage restrictions, companies are exposing themselves to potential legal action and financial losses. Nomad Data’s Data Relationship Manager offers a practical, scalable solution to this problem, enabling companies to manage their data assets responsibly and securely.

In an era where data is king, ensuring compliance is not just a legal obligation—it’s a business imperative.