United States: Third Circuit Holds FTC Has Authority To Regulate Cybersecurity Under Unfairness Prong Of 15 U.S.C. § 45(A)

The Third Circuit recently issued its highly anticipated ruling in the Federal Trade Commission v. Wyndham Worldwide Corp., Case. No. 14-3514, holding that the FTC has authority to regulate the cybersecurity practices of companies under the "unfair" prong of section 5 of the FTC Act. In a ruling that is likely to frustrate companies, the court held that Wyndham was "not entitled to know with ascertainable certainty the cybersecurity standards by which the FTC expected it to conform." Which means that companies must not only consider the many laws, rules and regulations that impact data privacy and security but also attempt to anticipate regulators' "state of mind" when creating and implementing cybersecurity programs. However, there are several "takeaways" from the recent ruling.

Background

Between 2008 and 2009, hackers accessed Wyndham's systems on three separate occasions, stealing the personal and financial information for hundreds of thousands of consumers, leading to more than $10.6 million in fraudulent charges. In the wake of these breaches, the FTC filed suit against Wyndham and related subsidiaries under the caption FTC v. Wyndham Worldwide Corp., Case. No. 13-cv-01887, which was eventually venued in the U.S. District Court for the District of New Jersey. The complaint alleged that Wyndham's lax cybersecurity policies constituted unfair business practices and that the company's privacy policy was deceptive in violation of the FTC's prohibition on "unfair or deceptive acts or practices in or affecting commerce" as codified in 15 U.S.C. § 45(a).

The FTC alleged that the following, "taken together, unreasonably and unnecessarily exposed consumers' personal data to unauthorized access and theft." Specifically, Wyndham:

  • Allowed its hotels to store payment card information in clear, readable text.
  • Allowed the use of simple passwords to remotely access hotel systems.
  • Failed to use readily available security measures, such as firewalls, to limit access to hotels' systems, the corporate network and the Internet.
  • Allowed hotels to connect to its network without ensuring that the hotels had adequate information security policies and procedures, without ensuring the hotels had up-to-date operating system and security updates, and without maintaining an adequate inventory of computers connected to the Wyndham network to manage the devices.
  • Failed to adequately restrict the access, either in time or IP (Internet protocol) address, of third-party vendors to its network and the servers of its hotels.
  • Failed to employ reasonable measures to detect and prevent unauthorized access to its computer network or to conduct security investigations.
  • Failed to follow proper incident response procedures, such that although the hackers used similar methods in each attack, Wyndham failed to monitor its network for malware used in the previous intrusions.

Wyndham filed a motion to dismiss, arguing that the FTC did not have the authority to regulate cybersecurity under the unfairness prong of section 45(a) and that, even if it did, Wyndham did not have fair notice that its specific cybersecurity practices could fall short of that provision. The District Court denied the motion in its entirety.

On appeal, Wyndham argued three major points:

  • The alleged conduct falls outside the plain meaning of "unfair."
  • Legislative history shows that cybersecurity is not covered by section 45(a).
  • Section 45(a) does not provide fair notice of the specific cybersecurity standards the company was required to follow, and thus violates due process.

The Third Circuit affirmed the lower court's decision, issuing an extensive memorandum opinion.

The Third Circuit's Rationale

Wyndham's Argument that the Alleged Conduct Falls Outside the Plain Meaning of "Unfair"
The Third Circuit began its analysis by discussing the FTC's historical issuance of policy statements defining what could be regulated as an "unfair method of competition," and the construction and treatment thereof by courts and Congress.

In 1994, Congress codified the FTC's current policy statement on unfair competition in 15 USC § 45(n):

"The [Federal Trade Commission] shall have no authority under this section ... to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice 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 to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination."

Wyndham argued that while the three requirements found in section 45(n) (i.e., the harm causes or is likely to cause substantial injury to consumers, the practice is not reasonably avoidable by consumers, and the harm is not outweighed by countervailing benefits to consumers or competition) are necessary components of an "unfair practice," alone they are not sufficient to trigger FTC regulation under section 45(a). The court was unmoved by Wyndham's first proposal that an unfair practice must be unscrupulous or unethical, citing FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 239–40 (1972), in which the Supreme Court specifically rejected that requirement. The court was similarly not persuaded by Wyndham's argument that, per one dictionary definition of unfair, the practice must be "not equitable" or "marked by injustice, partiality, or deception" in order to be unfair. The court stated that "a company does not act equitably when it publishes a privacy policy to attract customers who are concerned about data privacy, fails to make good on that promise ... exposes it [sic] unsuspecting customers to substantial financial injury, and retains the profits of their business."

The court then discussed the interplay between the "reasonably avoidable" requirement and a finding of unfair conduct. The court adopted the FTC's argument that consumers could not reasonably avoid the injury, i.e., Wyndham's retention of consumers' personal and financial information in an unsafe manner, because Wyndham had published a misleading privacy policy that overstated its cybersecurity measures. The court stated that even if the misleading privacy policy only partially satisfies the "reasonably avoidable" requirement, "then the policy is directly relevant to whether Wyndham's conduct was unfair."

Wyndham's argument that a business "does not treat its customers in an 'unfair' manner when the business itself is victimized by criminals" was also unsuccessful. The court stated that section 45(n) expressly contemplates the possibility that conduct can be unfair before actual injury occurs, explaining that the unfairness did not arise from the compromise of the consumer information, but rather the deception leading to the consumer providing the information to Wyndham. The court further noted that just because Wyndham was not the most proximate cause of the fraudulent charges, that fact alone does not immunize Wyndham from liability for foreseeable harms. Wyndham did not argue that the attacks were unforeseeable.

On these bases, the court held that Wyndham's alleged conduct did not fall outside of the meaning of "unfair."

Wyndham's Argument that Legislative History Excludes Cybersecurity from Regulation under Section 45(a)
Wyndham argued that recent legislative acts – directing the FTC to develop regulations for the proper disposal of consumer data; to establish standards for financial institutions to protect consumers' personal information; and to promulgate regulations requiring children's websites to provide notice about the collection, use and disclosure of information – would be inexplicable if the FTC already had general authority over cybersecurity under section 45(a). The court found this argument unpersuasive, as legislative action must be incompatible with agency regulation for it to preclude agency involvement, which was not the case here.

Similarly unsuccessful was Wyndham's argument that the FTC's interpretation of section 45(a) is inconsistent with its repeated efforts to obtain from Congress "the very authority it purports to wield here," which the court dismissed as lacking persuasive authority.

Wyndham's Argument that Section 45(a) Does Not Provide Fair Notice
Focusing on the argument most frequently espoused by companies, Wyndham argued that it did not have "fair notice" of the cybersecurity standards it was required to follow. Where, as here, a court is tasked with interpreting a statute in the first instance without deferring to any agency interpretation of the statute, ordinary statutory construction applies. Thus the court framed the relevant question as "not whether Wyndham had fair notice of the FTC's interpretation of the statute, but whether Wyndham had fair notice of what the statute itself requires."

The court pointed out that the standards for fair notice are "especially lax" for civil statutes regulating economic activities. Under such statutes, "a party lacks fair notice when the relevant standard is so vague as to be no rule or standard at all." The court stated that fair notice would be satisfied in this case so long as Wyndham "can reasonably foresee that a court could construe its conduct as falling within the meaning of the statute."

While acknowledging that section 45 was "far from precise," the court held that the statute provided sufficient notice that the "relevant inquiry here is a cost-benefit analysis ... that considers a number of relevant factors, including the probability and expected size of reasonably unavoidable harms to consumers given a certain level of cybersecurity and the costs to consumers that would arise from investment in stronger cybersecurity." The court stated that "[a]t least after the second attack it should have been painfully clear to Wyndham that a court could find its conduct failed the cost-benefit analysis," particularly in light of the fact that an FTC guidebook on sound data security practices and numerous FTC complaints and consent decrees related to corporate cybersecurity had been published prior to the attacks.

Analysis

The Third Circuit's decision clarifies that the FTC has the authority to regulate consumer-facing corporate cybersecurity measures, without regard for whether a breach has occurred. Unlike many other cyber-related regulations, however, section 45 does not provide metrics by which organizations can measure their compliance. The court even conceded that focusing on the consent orders was "of little use ... in trying to understand the specific requirements imposed by §45(a)." However, a company would be advised to examine cybersecurity-related FTC complaints, determine the alleged acts that triggered the FTC complaint, draw analogies to its own cybersecurity practices, and analyze whether it conducts itself in a similar or analogous way such that the organization is at risk for litigation under section 45(a). This case being the first of its kind, organizations should be advised to review the list of Wyndham's alleged bad acts above and ensure that it is not – at a minimum – committing the same sins.

To help mitigate the somewhat uncertain environment this decision has created, organizations are advised to have an up-to-date information governance plan, review published privacy policies against actual cybersecurity measures in place, continually test their systems, and have and test an incident response plan that includes remediation measures in the event their systems are compromised. And if their systems are breached, organizations should implement – and document – the remediation steps taken to prevent a similar event in the future. While specific cybersecurity requirements under section 45(a) may be unclear, one thing is certain: ignoring obligations to protect consumers' information may land an organization in the crosshairs of the FTC.

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.

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
Cadwalader, Wickersham & Taft LLP
Orrick
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Orrick
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