United States: FCC Settles First Data Security Enforcement Action

Last Updated: August 26 2015
Article by Samuel Goldstick

On July 9, 2015, the Federal Communications Commission settled its first data security case with two related telecommunications carriers – TerraCom, Inc. and YourTel America, Inc. – for $3.5 million. The settlement resolves the FCC's investigation into whether the carriers violated the federal Communications Act of 1934, 47 U.S.C. section 151 et. seq. (the "Act") by failing to protect the confidentiality of personal information they received from more than 300,000 consumers.

TerraCom and its affiliate YourTel collected sensitive data on consumers in order to establish eligibility for the Lifeline program, a government-sponsored program that provides discounted phone services to low-income individuals. To prove their eligibility, potential customers were asked for personal information, including their names, addresses, Social Security numbers, dates of birth, and driver's license numbers. In their privacy policies, the companies claimed to have in place "technology and security features to safeguard the privacy of your customer specific information from unauthorized access."

However, despite their pledge, the carriers' third-party vendor inadvertently stored the personal information of more than 300,000 customers in "clear, readable text" on unprotected Internet servers that "anyone in the world could access with a search engine and basic manipulation." From September 2012 through April 2013, the information had been stored on the third-party vendor's servers, in two publicly accessible folders that lacked any password protection or encryption, according to the FCC. After being put on notice of the security lapse, TerraCom and YourTel failed to notify all potentially affected customers, depriving those individuals of the opportunity to protect their personal information.

Last October, the FCC found that the "carriers' failure to reasonably secure their customers' personal information violate[d] the companies' statutory duty under [section 222 of] the Communications Act to protect that information, and also constitute[d] an unjust and unreasonable practice in violation of [section 201 of] the Act..." Consequently, and by a sharply divided vote of 3-2, the FCC issued a Notice of Apparent Liability proposing a $10 million forfeiture penalty on the carriers.

Section 222(a) of the Act imposes a duty on every telecommunications carrier "to protect the confidentiality of [customers'] proprietary information." Notably, this section has previously only been applied in the context of protecting a specific category of customer data known as "customer proprietary network information," or CPNI (generally defined as phone-call-related data, such as the phone numbers called and the frequency, duration and timing of such calls).

In this case, however, the FCC took a significant step to require the protection of information beyond CPNI, holding that the Act's protections extend to "all types of information that should not be exposed widely to the public, whether because that information is sensitive for economic reasons or for reasons of personal privacy"—a breathtakingly broad standard. The FCC further stated that section 222(a)'s protection of proprietary information should be read to include "privileged information, trade secrets, and personally identifiable information (PII)—information that can be used on its own or with other information to identify, contact, or locate a single person, or to identify an individual in context." Applying this definition, the FCC determined that all of the information submitted by applicants to TerraCom and YourTel constituted proprietary information and, in doing so, asserted its authority over information that has no bearing upon the call-specific information that served as the genesis of section 222. Consequently, the FCC has greatly expanded the extent of personal information that telecommunications companies must now protect.

Section 201(b) of the Act bars telecommunications carriers from engaging in any "unjust and unreasonable" practice. In this case, the FCC broadly interpreted its authority to regulate "unjust and unreasonable" practices to cover a telecommunication carrier's data security practices under section 201 of the Act. Specifically, the Commission concluded that the carriers engaged in such practices by: (1) lacking basic security measures to protect the confidentiality of consumers' proprietary information (e.g., password protection or encryption), (2) misrepresenting their security practices to consumers, and (3) failing to notify all affected consumers who could have been breached by the carriers' lax security practices.

The FCC's action is also notable because it marks the first time the FCC has determined that a failure to employ reasonable data security practices to protect customer data constitutes an "unjust and unreasonable" practice in violation of section 201(b) of the Communications Act. In doing so, the FCC appears be following the FTC's and other regulators' lead in requiring companies to take industry-appropriate steps to protect certain types of sensitive customer data.

Although this action marked the FCC's first foray into data security, it did not come without controversy as Commissioners Ajit Pai and Michael O'Rielly dissented in separate statements, available here and here, saying the Commission lacked the legal basis to act on the matter and that its action likely would not stand up under judicial scrutiny. They criticized their colleagues' interpretation of the Act as imposing a duty to protect PII, and disputed the notion that section 222 extends to anything beyond CPNI as defined in the statute. They also took exception to the majority's issuance of a fine in the absence of "prior fair warning." As Commissioner Pai noted in his dissent, "[t]he Commission has never interpreted the Act to impose an enforceable duty on carriers to 'employ reasonable data security practices to protect' PII." However, the validity of those objections will not be tested in this case, as the Consent Decree reiterates the FCC's interpretation of sections 201 and 222 of the Act and, for purposes of this settlement, TerraCom and YourTel had admitted that their actions violated those provisions.

In addition to paying the $3.5 million civil penalty, the carriers will have to notify all consumers whose information was subject to unauthorized access and provide complimentary credit monitoring to all affected individuals. The companies have also agreed to take several steps to improve their security practices, such as by implementing both a written information security plan and a data breach response plan, and maintaining stricter oversight of vendors. With respect to the latter requirement, the Consent Decree requires the carriers to exercise up-front due diligence and care in selecting vendors – which, the FCC noted, was completely absent in this case – and also requires clear communications to the carriers' vendor(s) regarding information security expectations through contractual provisions and by sharing the carriers' required compliance manual. In addition, the Consent Decree requires both TerraCom and YourTel to demand that its vendors (and the vendors' employees) participate in the carriers' compliance training program. All of this must be accompanied by continuous monitoring and enforcement of vendors. Although the FCC's opinion neither defines the contractual relationship between the carriers and their third-party vendor nor identifies the vendor's duties and obligations thereunder, the above-listed requirements provide useful guidance on how companies can potentially avoid liability by establishing an appropriate level of oversight with their third-party vendors.

The TerraCom and YourTel Consent Decree reflects an emerging trend in the FCC's approach to privacy and data security enforcement actions. The terms of the compliance plan are very similar to the terms of a recent $25 million AT&T Consent Decree over compromised personal information and CPNI. In both instances, the FCC found the companies liable for insufficient data security practices by citing alleged violations of sections 222 and 201 of the Act. Collectively, these two consent decrees appear to provide a roadmap of the FCC's expectations in the area of data security going forward.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions