United States: FTC V. Wyndham: The Third Circuit Recognizes FTC Authority To Regulate Commercial Cyber Security Practices

In 2014, the United States Court of Appeals for the Third Circuit ruling in FTC v. Wyndham Worldwide Corporation agreed to hear an immediate appeal on two issues: "whether the FTC has authority to regulate cybersecurity under the unfairness prong of § 45(a); and, if so, whether Wyndham had fair notice its specific cybersecurity practices could fall short of that provision." On August 24, 2015 the Third Circuit affirmed the decision of the District Court and denied Wyndham's motion to dismiss the complaint.

Factual Background

In 2012, after a two-year investigation into Wyndham's data security practices, the FTC filed suit against the hospitality company alleging that Wyndham had engaged in "unfair ... acts or practices" in violation of the Federal Trade Commission Act 15 U.S.C. § 45(a), by failing to take "reasonable and appropriate" measures to adequately secure hotel guests' personal information. Specifically, the FTC alleged that between 2008 and January 2010, hackers gained access on three separate occasions to Wyndham's computer network and that Wyndham engaged in a number of practices that "unreasonably and unnecessarily exposed consumers' personal data to unauthorized access and theft" including the following:

  1. the storage of credit card information in clear, unencrypted text;
  2. failure to require employees to use complex user IDs and passwords to access company servers;
  3. failure to use readily available security measures, such as firewalls to limit access between the corporate network and the Internet;
  4. failure to implement reasonable information security procedures prior to connecting local computer networks to corporate-level networks;
  5. failure to "adequately restrict" the access of third-party vendors to its networks;
  6. failure to employ reasonable measures to detect and prevent unauthorized access to its computer network or to conduct security investigations; and
  7. failure to follow proper incident response procedures.

The FTC's complaint alleged that Wyndham's deficient security practices led and "the compromise of more than 619,000 consumer payment card account numbers, the exportation of many of those account numbers to a domain registered in Russia, fraudulent charges on many consumers' accounts, and more than $10.6 million in fraud loss."

Wyndham moved before the United States District Court for the District of New Jersey to dismiss the FTC's complaint arguing that the FTC did not have the authority to regulate bring on unfairness claim involving data security under of §45(a) of the FTC Act. Second, if FTC authorization did in fact exist, the FTC must formerly promulgate regulations before bringing a fairness claim. Wyndham also claimed it did not have fair notice that its specific cybersecurity practices could fall short of that provision. In April 2014, after Wyndham's motion was denied by the District Court, it sought and received an interlocutory appeal from the Third Circuit to settle the matter of authority and notice.

The Third Circuit's Holding: The FTC Had Authority and Wyndham Had Notice

Premised largely on the broad authority granted to the FTC under the FTC Act law to protect consumers from unfair and deceptive trade practices, the Third Circuit held that Wyndham failed to show that its alleged conduct "falls outside the plain meaning of 'unfair.'" The Court rejected Wyndham's arguments that extending the FTC's unfairness authority to cybersecurity was tantamount to permitting the FTC to sue grocery stores that are "sloppy about sweeping up banana peels." In response, the Third Circuit observed that were a supermarket to leave "so many banana peels all over the place that 619,000 customers fall hardly suggests it should be immune from liability under 45(a)." Accordingly, the Court ruled that the District Court's and FTC's interpretation of Section 45(a) was both consistent with the FTC's prior practice and statutory authority.

Furthermore, rejecting Wyndham's request to apply the plain meaning of the word "unfair" to mean "not equitable" or "marked by injustice, partiality, or deception," the Third Circuit reasoned that although unfairness claims usually involve actual harm, the FTC may also bring actions based upon "likely" rather than actual injury. As the Court explained, the FTC Act generally prohibits unfair methods of competition in commerce and, that under the amendments to the Act, the FTC could deem a practice unfair "if the 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." 15 U.S.C. § 45(n). The Third Circuit noted that when a company "publishes a privacy policy to attract customers who are concerned about data privacy, fails to make good on that promise by investing inadequate resources in cybersecurity, exposes its unsuspecting customers to substantial financial injury, and retains the profits of the business" unfairness is present. In relation to the personally identifiable information stolen from Wyndham's computer network, the Court held that consumers could not have reasonably avoided the injury because Wyndham's published privacy policy misled consumers by overstating its cybersecurity practices.

The Third Circuit also rejected Wyndham's argument that it was not properly notified of what the FTC expected of Wyndham in terms of "proper" data security. Wyndham argued that the FTC cannot bring an enforcement action without first publishing rules and regulations and did not provide sufficient notice of what the FTC considered reasonable data security methods, thereby denying Wyndham proper due process. The Third Circuit rejected this argument observing that, at this stage of the proceedings, "the relevant question is 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." Fair notice, the Court noted, is met if a company could "reasonably foresee that a court could construe [a company's] conduct as falling within the meaning of the statute."  Besides, Wyndham was entitled only to a low level of statutory notice here because application of Section 45(a) does not implicate any constitutional rights: (i) the statute is civil not criminal statute; and (ii) statutes regulating economic activity receive a "less strict" test because businesses can be expected to consult relevant legislation in advance of action. Thus, by way of example, Wyndham's lack of "any" firewalls, encryption for certain customer files, weak password requirements, combined with a series of three security breaches, demonstrated that Wyndham knew or should have been on notice of the possibility that a court could find its practices fell short of the fairness requirement of § 45(a). Adding to that calculus, the Third Circuit pointed out that the FTC's 2007 guidebook, Protecting Personal Information: A Guide for Businesses, sets forth a checklist of practices that form a "sound data security plan," and noted that other public enforcement actions brought by the FTC should have given Wyndham notice that its repeated alleged failures to protect consumer data could have been considered an unfair practice under the FTC Act.

What Wyndham Means – The Takeaways

In case there were any looming questions as to whether there are legal risks associated with lax cybersecurity, the Wyndham decision should provide a definitive affirmative answer. All web‑facing companies which collect personally identifiable information are on notice that they routinely must maintain the integrity and security of such consumer data. Companies also must make sure that their privacy policies are accurate and not deceptive. This means ensuring familiarity with and awareness of evolving industry standard security practices and the FTC guidelines derived through the latest security settlements and consent orders posted on the FTC website. If a company does not keep up with industry standards and developments, as recognized by FTC Chairwoman Edith Ramirez, it will be the FTC's responsibility "to hold companies accountable for failing to safeguard consumer data. It is not only appropriate, but critical, that the FTC has the ability to take action on behalf of consumers when companies fail to take reasonable steps to secure sensitive consumer information." The Wyndham decision serves to emphasize a significant problem facing all commercial companies — the protection of the consumer data they collect and hold. Whether one considers that data is intellectual property, private/personal communications, or consumer information, companies need to ensure they are following proper, necessary, and "reasonable" cybersecurity protocols. The challenge, of course, is that "reasonableness" is a moving target driven by technology, hackers, and the industry within which each company operates. As such, it is recommended that companies take cybersecurity precautions that align with industry standards and the NIST Framework and perhaps examine what the federal government is requiring in terms of cybersecurity from its contractors (see NIST SP 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations). While such efforts may never stop cyber -breaches, they should ensure that one avoids scrutiny from the FTC and the potential liability that might result from burying one's head in the sand.

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.

Events from this Firm
26 Sep 2018, Seminar, San Francisco, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series.

28 Sep 2018, Other, Los Angeles, United States

Leaders today don't just have to worry about nefarious cybercriminals getting "inside" their firewalls; there's an entire ecosystem of SAAS partners, third party vendors and suppliers, and all the hardware from switches to POS terminals that need to be monitored.

9 Oct 2018, Other, Los Angeles, United States

Sheppard, Mullin, Richter & Hampton LLP has opened for business in Dallas to proudly serve the Texas business community.

Similar Articles
Relevancy Powered by MondaqAI
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Lowndes, Drosdick, Doster, Kantor & Reed, P.A.
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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