United States: FTC Issues Landmark Report On Internet Of Things

The FTC has released its much anticipated report on the Internet of Things ("IoT") – a topic that has been top-of-mind for many companies. The FTC's report, "Internet of Things: Privacy & Security in a Connected World" (the "Report"), discusses the benefits and risks associated with IoT, and addresses the privacy and data security measures the FTC recommends for consumer-facing IoT products and services [The FTC's discussion of IoT within the report, consistent with the FTC's jurisdiction, is limited to such devices that are sold to or used by consumers, and not devices sold in a business-to-business context or broader machine-to-machine communications]. While the Report is not legally binding, it provides a strong and valuable indication of the positions that the FTC may take in enforcement actions related to IoT.

WHAT IS THE INTERNET OF THINGS?

According to the FTC, IoT refers to "'things' such as devices or sensors – other than computers, smartphones, or tablets – that connect, communicate or transmit information with or between each other through the Internet."

FTC RECOGNIZES BENEFITS AND RISKS OF IOT

The Report acknowledges that Internet-connected devices offer numerous benefits, many of which remain untapped. In the health arena, connected medical devices allow patients to more efficiently communicate with their physicians to manage their medical conditions. In the home, smart meters enable energy providers to analyze consumer energy use, identify issues with home appliances, and enable consumers to be more energy-conscious. On the road, sensors on a car can notify drivers of dangerous road conditions, and software updates can occur wirelessly. And these applications are just the beginning.

On the flip side, however, the FTC cautions that IoT may present a variety of potential security vulnerabilities that could be exploited to harm consumers. First, as with computers, a lack of security could enable unauthorized access and misuse of personal information. This risk is heightened in the IoT world by the plethora of devices to be connected and secured. Second, security vulnerabilities in a particular device may facilitate attacks on the consumer's network to which it is connected, or enable attacks on other systems. Third, the FTC notes that IoT may present a heightened risk of harm to personal safety. For example, the Report describes an account of how it may be possible to hack remotely into a connected medical device and change its settings, impeding its therapeutic function.

According to the FTC, these risks are exacerbated by the fact that companies entering the IoT market may not have experience in dealing with security issues, or may be creating inexpensive devices for which it may be difficult or impossible to apply a patch for a security bug.

SECURITY

In light of these increased risks, the FTC asserts that "inadequate security presents the greatest risk of actual consumer harm in the Internet of Things." As such, it recommends that companies focus on security when developing connected devices. The FTC acknowledged that what constitutes reasonable security for a given device will depend on a number of factors, including the amount and sensitivity of data collected, and the costs of remedying the security vulnerabilities. However, the staff did offer approaches that it encourages companies to adopt when developing their products:

  • Building security into their devices at the outset, by conducting an initial privacy or security risk assessment, considering how to minimize the data collected and retained, and testing security measures before launching the product.
  • Training all employees about good security, and ensuring that security issues are addressed at the appropriate level of responsibility within the organization.
  • Retaining service providers that are capable of maintaining reasonable security and providing reasonable oversight.
  • Implementing a defense-in-depth approach for systems that involve significant risks, considering security measures at several levels.
  • Imposing reasonable access control measures to limit the ability of an unauthorized person to access a consumer's device, data, or network.
  • Continuing to monitor products throughout the life cycle and, to the extent possible, patch known vulnerabilities.

In sum, devices that collect sensitive information, present physical security or safety risks (such as door locks, ovens, or medical devices), or connect to other devices or networks in a manner that would enable unauthorized access to those devices, may require heightened consideration of security measures.

DATA MINIMIZATION

The Report emphasizes the FTC's view that companies should reasonably limit their collection and retention of consumer data, including in the IoT context. The FTC believes that these practices, known as data minimization, will help guard against two privacy-related risks: first, larger data stores present a more attractive target for data thieves; and second, if a company collects and retains large amounts of data, there is an increased risk that the data will be used in a way that departs from consumers' reasonable expectations.

At the same time, the Report acknowledges concerns that data minimization requirements may curtail innovative uses of data. Accordingly, the FTC proposes a "flexible" approach to data minimization that gives companies a variety of options: they can decide not to collect data at all, collect only the fields of data necessary to the product or service being offered, collect data that is less sensitive, or de-identify the data they collect. The FTC also suggests that if none of these options work, a company can seek consumers' consent for collecting additional, unexpected data.

NOTICE AND CHOICE

The FTC acknowledges that notifying consumers of privacy principles and offering them a way to meaningfully choose privacy settings may be more difficult in the context of connected devices, which may not have a screen with which to communicate with consumers. However, the report makes clear that the FTC does not believe it will be sufficient for IoT companies to simply have a privacy policy available on their website, and expect consumers to find that policy. Rather, the FTC recommends that a company find ways to present meaningful privacy notices and choices to the consumer, including in the set-up or purchase of the product itself. The Report suggests creative solutions to this issue, including:

  • Offering video tutorials to guide consumers through privacy settings.
  • Affixing a QR code that, when scanned, would take the consumer to a website with information about privacy practices.
  • Offering a set-up wizard that provides information about privacy practices.
  • Allowing users to configure devices, such as home appliances, so that they receive information through emails or texts.
  • Creating a user experience "hub" that stores data locally and learns a consumer's privacy preferences based on prior behavior.

Companies may also want to consider using a combination of approaches. Of course, whatever approach a company decides to take, the FTC expects the privacy choices to be clear and prominent, and not buried within lengthy documents.

LEGISLATION

Last but not least, the FTC reiterated its recommendation for Congress to enact strong, flexible, and technology-neutral legislation to strengthen the Commission's existing data security enforcement tools, and require companies to notify consumers when there is a security breach.

CONCLUSION

As the FTC describes, "in the future, the Internet of Things is likely to meld the virtual and physical worlds together in ways that are currently difficult to comprehend." As a result, companies should consider guidance offered by the FTC and other regulators, and evaluate what steps they can take to mitigate those risks in the privacy and data security context.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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