United States: Reasonable Doubt: Data Privacy, Cybersecurity, And The FTC

Last Updated: September 22 2014
Article by Richard Martinez

Today's cybersecurity environment demands that every business establish effective corporate data privacy and consumer information security systems and practices. But, unfortunately, no single cybersecurity law exits to provide the clarity and guidance companies need. Instead, a complex, topic-driven web of federal laws and regulations make up our current privacy and data security framework.1

While Congress has proposed a solution to this situation, it does not look like any of the pending legislation will come to fruition anytime soon. In the meantime, businesses must look to other regulatory bodies—and specifically the FTC— for assistance. The FTC has acted where Congress hasn't and has promised to fill and police the current cybersecurity void. What's more, the FTC has gained legal authority in this arena, as a court recently recognized its power to regulate cybersecurity.

So far, however, the guidance the FTC has offered so far has been confusing at best. In short, while the agency's guidance is valuable, it may be a challenge to implement proactively. According to FTC Chairwoman Edith Ramirez, "Companies should take reasonable steps to secure sensitive consumer information. When they do not, it is not only appropriate, but critical, that the FTC take action on behalf of consumers." Thus, failure to take "reasonable" steps could lead to your business facing disastrous consequences.

So what guidance does the FTC provide? What regulatory scheme, industry standard, or ten-step program does it require? Has it laid out a guiding maxim to aid businesses in setting policy? This article assesses the core of the FTC's power, the regulations it has created, and the vast gaps that continue to exist in this area.

The root of the FTC's power: Unfair or deceptive acts or practices

The FTC has asserted its authority to regulate the handling of consumers' sensitive personal information under the "unfair or deceptive acts or practices" prong of Section 5 of the FTC Act. Under Section 5, an act or practice is unfair if "it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or competition."2 An act or practice is deceptive "if there is a misrepresentation, omission, or other practice, that misleads the consumer acting reasonably in the circumstances, to the consumer's detriment."3 The FTC has asserted its authority under each of these prongs—(1) unfair and (2) deceptive—both separately and collectively.

Wyndham Hotels: The FTC's power reinforced

The FTC gained court approval for its ability to protect consumers from harmful, substandard data security practices in a case against Wyndham Hotels. In this case, Russian criminals hacked into the hotel chain's reservation system. The hackers obtained customers' credit card and other personally identifiable information. The FTC sued Wyndham over the breach.

The agency alleged that hotel guests suffered more than $10 million in fraudulent charges and other identity theft and credit harms. In the suit, the FTC sought a permanent injunction requiring Wyndham to secure its computer systems. Specifically, the agency asserted arguments under both prongs of Section 5. The FTC argued:

  • Wyndham's failure to protect customers' personally identifiable information was an unfair business practice; and
  • Wyndham's privacy policy was deceptive, as it made cybersecurity promises it didn't keep.

Wyndham challenged the FTC's authority, stating that the FTC had exceeded its enforcement authority by pursuing its lawsuit. The chain also argued that the consumer protection statute doesn't cover security in cyberspace. In the first ruling of its kind, the court sided with the FTC. The court refused to "carve out a data-security exception to the FTC's authority." While the court noted that its ruling "does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked," it also set no specific limits on that authority.

Fandango and Credit Karma: "Reasonableness" in action

The FTC's "reasonable" steps standard appears clearly in two similar cases: one against Fandango, the other against Credit Karma. According to the FTC, these companies failed to secure the transmission of consumers' personal information through their mobile apps. The Fandango Movies app allows users to view show times, trailers, and reviews, as well as buy tickets. Credit Karma's mobile app allows users to monitor their credit and financial status. In both cases the FTC alleged the same error; when they designed their mobile apps, Fandango and Credit Karma both disabled Secure Sockets Layer (SSL) certificate validation.

Mobile operating systems, such as Apple's iOS and Google's Android, provide tools to implement the industry-standard SSL so as to secure sensitive transactions. Properly implemented, SSL secures an app's communications and keeps an attacker from intercepting sensitive personal information submitted by consumers. By disabling SSL, both companies allegedly left their apps vulnerable to "man-in-the-middle" attacks. These attacks allow a third party to intercept any of the information the apps sent or received. The FTC alleged that this type of attack is particularly dangerous on unsecured public Wi-Fi networks. These networks, often found at coffee shops, airports and shopping centers, are where consumers commonly use these apps.

The FTC alleged that by overriding the default validation process, Fandango undermined the security of ticket purchases made through its iOS app. This exposed sensitive information, including credit card numbers and security codes, zip codes, expiration dates, email addresses and passwords. Credit Karma's apps exposed consumers' Social Security numbers, names, birthdates, home and email addresses, phone numbers, passwords, credit scores, and more.

The complaints also alleged that the Fandango app assured consumers during checkout that the app securely stored and transmitted their information. Similarly, the FTC accused Credit Karma of assuring its customers that it followed industry-leading security precautions. But such precautions would include the use of SSL to secure customer data.

In the end, the FTC asserted that both companies failed to perform basic and widely available security checks that would have caught the problem. Further, the FTC alleged that each company could have prevented such vulnerability. In essence, the FTC argued that Fandango and Credit Karma failed to take reasonable steps. Both companies agreed to settle their claims prior to trial.

Be "reasonable:" 5 benefits of working with a cybersecurity lawyer

The few cases highlighted above serve as just a sample of the steady stream of FTC-driven data security and privacy suits. Until Congress takes further action to standardize the area of cybersecurity regulation, this kind of FTC action is sure to continue.

Creating a comprehensive data security practices policy can help protect your business from becoming the subject of an FTC enforcement action. Integrating legal counsel into the creation and ongoing review of that policy provides additional strategic benefits. For example, counsel can:

  • Act as an objective sounding board to IT staff tasked with designing, implementing, and reviewing data practices.
  • Mediate between business-driven design decisions and IT-driven security concerns, assisting in the balance of power between both sides.
  • Engage outside consultants to check practices against industry standards, bringing an added level of objectivity, and also protecting the attorney client privilege.
  • Review privacy policies, and test representations made to consumers, and evaluate how outsiders might exploit those representations in court.
  • Serve a critical role in litigation-testing the "reasonableness" of security practices.

Legal counsel is to cybersecurity policies as IT is to data practices—you really should not have one without the other. After all, the testing of how reasonable your practices are will ultimately happen in a courtroom, not a boardroom.

Conclusion

The cybersecurity and data privacy regulatory field has grown out of a patchwork of laws from a variety of government agencies, including the FTC. As the FTC continues to gain authoritative ground in pursuit of lawsuits on behalf of wronged consumers, companies must take great care to create strong cybersecurity policies. These policies must specifically address the FTC's "reasonable" steps guideline. Your best chance of meeting that standard—and staying out of trouble with FTC—requires that you work closely with an experienced data privacy and cybersecurity lawyer when creating and updating your data privacy and security policies.

Footnotes

1 For example, the Health Insurance Portability and Accountability Act (HIPAA) protects sensitive health information; the Gramm-Leach-Bliley Act (GLB Act) regulates financial information; the Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act (FACTA) cover information used in credit, insurance and employment decisions; and the Children's Online Privacy Protection Act (COPPA) regulates personal information obtained online from children under the age of 13.

2 15 U.S.C. § 45(n)

3 Fed. Trade Comm'n, Policy Statement on Deception, reprinted at 103 F.T.C. 174-5 (1984)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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