United States: LabMD Opinion Reverses ALJ Decision; Articulates Standard For "Substantial Injury" Under The Unfairness Prong Of The FTC Act For FTC Data Security Actions

In a widely anticipated move, the Federal Trade Commission (FTC) has overruled a decision by its own Administrative Law Judge (ALJ) that had dismissed a case against a medical testing laboratory accused of unreasonable data security practices. The 37 page opinion continues the ongoing litigation between the FTC and the LabMD that began three years ago when the FTC alleged that LabMD's inadequate data security had allowed a patient insurance file to spread unprotected across a peer-to-peer file-sharing network. Last November, an ALJ held that the FTC had failed to prove that LabMD's lax security practices had actually harmed any consumers, but in Friday's opinion by Chairwoman Edith Ramirez, the FTC's commissioners unanimously concluded that the ALJ had applied the incorrect legal standard for unfairness under Section 5 of the FTC Act.

Describing LabMD's data security practices, the FTC's opinion explained how LabMD had failed to: (1) take reasonable steps to protect its computer network; (2) provide data security training to employees; or (3) adequately restrict or monitor its employees' use of its computer network. The opinion suggested that the problematic file-sharing network either never would have been installed on network computer or would never have "sat on the billing manager's computer for approximately three years," exposing the sensitive health records of 9,300 consumers, had proper security protocols been in place.

The FTC opinion provides considerable analysis into how the FTC evaluates unfairness in the context of data security. It explains how a business's poor data security practices often cannot be reasonably avoided by consumers and that the failure to have basic security in place cannot be outweighed by any countervailing benefits. However, the heart of the opinion is the Commission's discussion of what may constitute a "substantial injury" under Section 5 and, further, how a business's data security practices could be "likely to cause" such an injury.

Defining "Substantial Injury" Under Section 5

The FTC opinion fundamentally disagrees with the ALJ's holding that "privacy harms . . . unaccompanied by any tangible injury such as monetary harm or health and safety risks" may not constitute a "substantial injury" within the meaning of Section 5(n). Instead, the FTC found that the unauthorized disclosure of sensitive health information was "in and of itself" a substantial injury.

The FTC opinion reiterated that the disclosure of sensitive information could cause "additional harms that are neither economic nor physical in nature but are nonetheless real and substantial and thus cognizable under Section 5(n)." The opinion notes that there is "broad recognition" in federal and state law that the disclosure of health information is inherently harmful, and it also highlights the FTC's first data security case against Eli Lilly as an example of where lax security resulted in the inadvertent disclosure of the email addresses of Prozac users.

Activities "Likely to Cause" Substantial Injury

In addition to holding that disclosure of sensitive information is a substantial injury, the FTC opinion also addressed whether the unauthorized exposure of records could also be "likely to cause substantial injury" under Section 5(n). The FTC's initial allegation that the exposure of LabMD's patient file on a filesharing network for more than eleven months was likely to meet this test, but the ALJ interpreted "likely to cause" as requiring a showing that a substantial injury was "probable" and not merely "possible." The FTC opinion rejects this analysis entirely.

First, the FTC opinion argues that both congressional intent and prior FTC enforcement actions demonstrate that the concept of risk is key to any analysis. Practices may be unfair even if the likelihood of an injury occurring is low if the magnitude of the potential injury is large. The opinion highlights the FTC's action against International Harvester—"the quintessential unfairness case"—as standing for the proposition that a failure to warn of a "less than .001 percent" risk could be unfair where the resulting injuries might result in death or disfigurement. Describing both the sensitivity of information disclosed by LabMD and its attractiveness to identity thieves, the FTC held that there was significant risk of substantial injury in this case.

Moreover, the FTC opinion highlights the recent Wyndham decision by the Third Circuit Court of Appeals to support the notion that a risk analysis should inform whether a practice is likely to cause harm. While the Third Circuit held that defendants were liable for practices that were likely to cause substantial injury where customer harm was "foreseeable," the FTC opinion notes that the Third Circuit's analysis looked at both the "probability and expected size" of the potential harm when evaluating this. The Third Circuit concluded that unfair conduct can occur without an actual injury, and that Section 5 requires companies "to assess the risks that its actions could cause harm . . . and to implement reasonable measures to prevent or minimize such foreseeable harm." According to the FTC opinion, LabMD's activities were lacking in this regard.

Finally, the FTC opinion cautions that the ALJ's reasoning has the critical defect of reading the term "likely" out of the FTC's statutory authority. The ALJ had been critical of the FTC staff's failure to identify "even one consumer that suffered any harm" from LabMD's action, but the FTC opinion explained that the FTC judges harmfulness not on the basis of actual future outcomes but the likelihood that a practice may be harmful at the time it occurs. "This is particularly true in the data security context," the opinion concludes.

What's Next?

The FTC opinion explores the how and why of LabMD's data security failings, and it reiterates the FTC's now standard expectations about reasonable data security. Interestingly, the FTC has also imposed a breach notification requirement in its order, requiring LabMD to notify affected individuals. The opinion is a powerful restatement of existing FTC thinking in the wake of Wyndham, but the case may yet be far from over. LabMD has sixty days to appeal the decision in a federal appellate court, and considering the course of the case thus far, it is likely that appeal will come soon.

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.