United States: High Stakes Cyber

Last Updated: March 14 2016
Article by Adam S. Lurie, Keith M. Gerver and Peter Carey

Most Read Contributor in United States, September 2017

Companies and regulators have been waiting since 2012 on the outcome of one cybersecurity-related court case: Federal Trade Commission (FTC) v. Wyndham Worldwide Corp. 

Late in 2015, the U.S. Court of Appeals for the Third Circuit gave executives and watchdogs their answer. For the first time, a federal appeals court endorsed the FTC's ownership of cybersecurity enforcement in the private sector, ruling that the commission can hold companies liable for failing to maintain adequate cybersecurity, even though the commission has not defined minimum cybersecurity standards through rules or regulations.​

The Initial Challenge

The FTC initiated its first administrative enforcement actions in 2005 against companies whose allegedly insufficient cybersecurity failed to protect consumer data. The FTC has broad statutory authority to bring enforcement actions, challenging a wide range of allegedly fraudulent, deceptive, or unfair business practices. For an act or practice to be unfair under the law, the resulting consumer injury must be substantial, not reasonably avoidable by consumers, and not outweighed by benefits to consumers or the company's efforts to remain competitive.

The FTC has articulated its cybersecurity authority in public statements and settlements. But the commission's decision to bring inadequate cybersecurity practices within its purview largely escaped judicial scrutiny because companies agreed to consent decrees and settlements. 

Between 2008 and 2009, Wyndham Worldwide Corporation—a global hotel company—suffered three separate cybersecurity breaches where hackers allegedly obtained payment card information from more than 619,000 consumers, resulting in at least $10.6 million in losses due to fraud.

The FTC filed an amended complaint in August 2012 in federal district court against Wyndham, alleging that it had engaged in unfair and deceptive practices that, "taken together, unreasonably and unnecessarily exposed customers' personal data to unauthorized access and theft," according to the filing.

The complaint went on to list 10 unfair practices the FTC accused Wyndham of engaging in, including failing to use firewalls to limit access to its networks, storing payment card information in clear readable text, failing to ensure that its hotels implemented adequate data security policies and practices before connecting to its network, failing to use reasonable measures to detect and prevent intrusions or to conduct security investigations, and failing to follow proper incident response procedures after the first cyberattack in April 2008.

The FTC's complaint alleged that Wyndham's statements about its cybersecurity practices were deceptive and that its inadequate cybersecurity practices were an unfair trade practice.

In response, Wyndham moved to have the case dismissed, focusing on the argument that the FTC does not have the authority to apply the prohibition against unfair trade practices to data security.

However, Judge Esther Salas of the U.S. District Court for the District of New Jersey rejected Wyndham's motion, holding that the FTC had the authority to regulate companies' failure to maintain reasonable and appropriate data security. Wyndham appealed to the Third Circuit, arguing that the lower court erred in holding that inadequate data security can be an unfair trade practice.

Wyndham contended that even if the court found that inadequate cybersecurity could be an unfair trade practice, it should not be held liable because it did not have fair notice that the meaning of prohibited unfair trade practices could include inadequate data security practices.​

The Ruling

Wyndham advanced several arguments for the proposition that inadequate data security practices cannot be "unfair" acts or practices under the law. Among these, Wyndham argued that a "practice is only 'unfair' if it is 'not equitable' or is 'marked by injustice, partiality, or deception.'"

However, the Third Circuit reasoned in its ruling that even if these were requirements of an unfairness claim, 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 by investing inadequate resources in cybersecurity, exposes its unsuspecting customers to substantial financial injury, and retains the profits of their business."

Even though the FTC's complaint included claims for both deceptive and unfair practices related to Wyndham's allegedly misleading privacy policy and inadequate cybersecurity practices, only the FTC's unfairness claim was before the Third Circuit on appeal. The court acknowledged that the "facts relevant to unfairness and deception claims frequently overlap," and the two theories could not be "completely disentangled."

Instead, the court found that the allegedly deceptive privacy policy was relevant to the unfairness analysis, specifically whether the alleged consumer injury was unavoidable. The court ruled that the injury allegedly caused by Wyndham's conduct was not reasonably avoidable, in part, because its privacy policy deceived customers by claiming the company had reasonable security practices.

Wyndham also argued that it was not treating customers unfairly when it was victimized by hackers. But the court discounted this argument as well, reasoning that even though the hackers were the most proximate cause of consumers' injury, the cybersecurity intrusions were reasonably foreseeable and facilitated by Wyndham's allegedly inadequate data security practices.

Wyndham finally argued that even if cybersecurity currently fits under the FTC's jurisdiction, subsequent legislation should be interpreted to exclude cybersecurity from FTC jurisdiction. Wyndham pointed to a 2003 amendment to the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and the Children's Online Privacy Protection Act, arguing that there was no reason for Congress to enact these laws if the FTC could already regulate cybersecurity.

The court, however, rejected this argument as well, finding that Congress had independent reasons to enact each of these pieces of legislation, which were not inconsistent with the FTC's authority to regulate cybersecurity.

Notably, though, the court did not decide whether Wyndham's data security practices were unfair. The court's ruling was limited only to whether inadequate data security practices could be unfair, and it left open the possibility that a lower court would determine whether Wyndham's allegedly inadequate data security constituted an unfair practice.

However, a lower court will never answer that question because Wyndham reached a settlement with the FTC in December 2015. Under the terms of the settlement—which did not include financial penalties or require an admission of liability—Wyndham is required to establish and maintain a comprehensive information security program that conforms to the Payment Card Industry Data Security Standard. It also must undergo annual audits of its data security program.​

The Lessons

The FTC's win in the Third Circuit in Wyndham was an endorsement of the commission's emergence as the nation's leading private sector cybersecurity regulator. The ruling confirmed that all businesses subject to the FTC's general consumer protection jurisdiction are also subject to its cybersecurity regulation.

While the court did not articulate a minimum cybersecurity standard, it did tell businesses where to look: the FTC guidebook—Protecting Personal Information: A Guide for Business—and the FTC's consent decrees in administrative cases raising unfairness claims based on inadequate corporate cybersecurity.

The Third Circuit commented that these sources of guidance—such as the guidebook's specific recommendations to encrypt sensitive information, use firewalls, require strong passwords, and implement a breach response plan—"could certainly" help "determine in advance" what conduct might constitute an unfair practice.

The FTC guidance on these topics is found in its guidebook and a second publication, Start with Security: A Guide for Business, in which the commission attempts to synthesize the lessons learned from the more than 50 FTC data security settlements into 10 key takeaways.

While the FTC does not explore the nuances of various encryption technologies or firewall applications, its public guidance can be an important tool to facilitate critical discussions with senior management about the cybersecurity policies and procedures all businesses should consider.

Firewalls. The FTC alleged that Wyndham's failure to use firewalls to segment and limit access to its networks was an unfair trade practice. A firewall can be a simple, yet effective, way to protect computers and networks from hacker attacks. 

Companies should consider whether to install a "border" firewall to separate their networks from the Internet and set access controls to allow only trusted employees with a legitimate business need to access the network, according to the FTC guidebook. 

The "protection a firewall provides is only as effective as its access controls," the guidebook explains, and thus those controls should be reviewed regularly to ensure access is granted only to appropriate personnel.

Passwords. In addition to firewalls, the FTC also alleged that Wyndham failed to effectively use another basic security precaution: secure passwords. Specifically, the FTC charged that Wyndham allowed servers using well-known default user IDs and passwords to connect to Wyndham's network and failed to require the use of complex passwords.

The FTC has outlined, in some detail, what it describes as "sensible password hygiene." In its guidebook, the commission explains that strong passwords are long and include a mix of letters, numbers, and characters—not common dictionary words. 

Furthermore, businesses should require that passwords be changed frequently, be new each time, and be different from user names. Default passwords should be immediately changed, and employees should be prohibited from posting passwords near their workstations or sharing passwords with anyone, especially via unencrypted e-mail.

While these best practices may seem like common sense, they are frequently ignored. For example, in a 2011 case against Twitter, the FTC alleged, according to Start with Security, that the "company let employees use common dictionary words as administrative passwords, as well as passwords they were already using for other accounts."

These lax practices left "Twitter's system vulnerable to hackers who used password-guessing tools, or tried passwords stolen from other services in the hope that Twitter employees used the same password to access the company's system," the guidance explained.

Data transmission. The FTC's complaint against Wyndham alleged that it improperly stored payment card information in clear, readable text. Sensitive information, like payment card data, stored on a computer network, on disks, or on portable storage devices should be encrypted.

Furthermore, when a business receives or transmits credit card information or other sensitive financial data, it should consider using Transport Layer Security/Secure Sockets Layer (TLS/SSL) or another secure connection that protects the information while in transit. Data must be secured not only when traveling between a business and third parties, but also when it is being e-mailed or stored within the company's network. 

In the 2005 Superior Mortgage Corporation case, for example, the FTC said that "the company used SSL encryption to secure the transmission of sensitive personal information between the customer's Web browser and the business's website server," according to Start with Security. "But once the information reached the server, the company's service provider decrypted it and e-mailed it in clear, readable text to the company's headquarters and branch offices."

The FTC has said that businesses should use industry-tested and -accepted methods of securing sensitive data. In a 2008 complaint against ValueClick, the FTC alleged that "the company stored sensitive customer information collected through its e-commerce sites in a database that used a non-standard, proprietary form of encryption," according to Start with Security.

"Unlike widely accepted encryption algorithms that are extensively tested, the complaint charged that ValueClick's method used a simple alphabetic substation system subject to significant vulnerabilities," the FTC explained. "The company could have avoided these weaknesses by using tried-and-true industry-tested and accepted methods for securing data."

Access. The FTC complaint against Wyndham also alleged that it failed to properly restrict third-party vendors' access to its network. While business needs may dictate that a company provide vendors and other third parties access to its network, policies and procedures must be in place to ensure that third-party access is secure and restricted to appropriate parties.

The FTC has brought several enforcement actions against companies that, even if they adequately secured their own networks, failed to ensure that vendor access to those networks had appropriate security.

For example, in a 2008 case, Premier Capital Lending allegedly activated a remote login account for a client without first assessing the client's security, which was later exploited to access and take personal information from the business's system. 

Similarly, in a 2011 case against Settlement One, the company allegedly permitted clients to access information through the business's online portal without first ensuring that the clients had basic security measures, like firewalls and updated antivirus software.

Not only should businesses demand that their service providers maintain reasonable security measures, but that commitment should also be written into contracts.

Planning. The FTC also alleged that Wyndham failed to use reasonable measures to detect and prevent intrusions into its network or to conduct security investigations. Moreover, Wyndham allegedly failed to follow proper incident response procedures after it fell victim to the first of its three cyberattacks.

While there is no one-size-fits-all approach to data security, the FTC has outlined the critical elements of a plan for responding to security incidents. A senior staff member should be designated to coordinate and implement response to a cybersecurity incident. When an incident occurs, there should be no question regarding who is spearheading the response.

Even if a business outsources the technical aspects of investigating and remediating a cybersecurity incident, the business should consider in advance which parties it will notify in the event of an incident. 

As the FTC guidebook notes, a business may need to notify consumers, law enforcement, regulatory agencies, customers, credit bureaus, and other affected businesses. It is far easier to develop a plan to meet these notification obligations before an incident occurs than to scramble to figure out who must be notified when the response to a cybersecurity incident is already under way.

Even though FTC guidance, complaints, and consent decrees are "neither regulations nor adjudications on the merits," as the court noted in Wyndham, they nevertheless put businesses on notice that the FTC will pursue unfairness claims based on certain inadequate cybersecurity practices. 

Cybersecurity professionals already comb through these documents trying to ascertain the specific data security practices that may be required. The court's endorsement of these sources of guidance makes reference to these materials all the more important and, in the absence of relevant rules or regulations, will likely give the FTC significant influence in defining minimum cybersecurity standards for American businesses.​

The Industry Impact

The Third Circuit's endorsement of the FTC's cybersecurity authority provides an important opportunity for U.S. businesses to evaluate their own cybersecurity policies and practices.

While such an evaluation is especially important for businesses already subject to the FTC's general consumer protection jurisdiction, it is wise for all businesses to become familiar with what may become the private sector's de facto cybersecurity standard.

The FTC's ability post-Wyndham to bring cybersecurity enforcement actions for deception and unfairness means that it can initiate an enforcement action against any business, subject to its jurisdiction, whose cybersecurity practices it has reason to believe are unfair, even if the company's statements about those practices are accurate.

Taking the allegedly unfair practices in Wyndham as an example, the FTC could bring an enforcement action for unfair trade practices solely on the basis of data security deficiencies, such as failing to employ firewalls, encrypt payment card information, or require strong passwords.

Because the FTC has not promulgated a rule or regulation defining fair cybersecurity standards, businesses are left to sift through the materials pointed to in Wyndham—including the FTC's various guidance documents and consent decrees—to figure out what cybersecurity policies and practices they must have in place to avoid a potential FTC enforcement action alleging inadequate cybersecurity. 

The commission's statement marking its 50th data security settlement offer also conveys, in general terms, its expectations. 

"The touchstone of the commission's approach to data security is reasonableness: a company's data security measures must be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities," the FTC said in a press release. "Through its settlements, testimony, and public statements, the commission has made clear that it does not require perfect security; reasonable and appropriate security is a continuous process of assessing and addressing risks; there is no one-size-fits-all data security program; and the mere fact that a breach occurred does not mean that a company has violated the law."

Post-Wyndham, the stakes for implementing adequate cybersecurity practices are higher than ever. In the absence of other private sector cybersecurity standards, the minimum standard articulated in FTC consent decrees is likely to become the de facto cybersecurity standard applied in other areas, including shareholder lawsuits, enforcement actions by state attorneys general and other regulators, and cybersecurity insurance providers.

Amid rising cybersecurity risk and increased attention from a variety of regulators, the Wyndham court's reliance on FTC guidance and consent decrees as the source of a minimum cybersecurity standard suggests that businesses should be looking closely at how their own cybersecurity policies and practices measure up.

Originally published by Security Management, a publication of ASIS International

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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.