United States: FTC Holds That Disclosure Of Sensitive Medical Information Due To Lax Security Violates The FTC Act

Last week, three commissioners from the Federal Trade Commission (FTC) held in In the Matter of LabMD, Inc. that a company's failure to implement reasonable security measures to protect sensitive consumer information on its network constituted an unfair business practice in violation of Section 5 of the Federal Trade Commission Act (FTC Act). In doing so, the Commission, which had authorized an investigation of the company, overturned a senior administrative law judge's earlier finding that the Commission had not proved consumer harm and dismissal of the Commission's administrative complaint against the company.

Federal Trade Commission Act

The FTC Act empowers the FTC prevent "unfair methods of competition" and "unfair or deceptive acts or practices in or affecting commerce[.]" See 15 U.S.C. § 45(a)(1), (a)(2). However, the FTC "shall have no authority... 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 competition." 15 U.S.C. § 45(n). The FTC may seek to bring enforcement actions for violation of the FTC Act either in a United States District Court or in an administrative complaint before an Administrative Law Judge ("ALJ"). ALJ rulings can be reviewed by the Commissioners of the FTC, which may then issue a final opinion and order. Orders from both the Commission and from a U.S. District Court may be appealed to a U.S. Court of Appeal.

Background and Decision of Administrative Law Judge

On August 28, 2013, the FTC filed an administrative complaint against LabMD, Inc., a clinic testing laboratory, alleging that LabMD failed to provide "reasonable and appropriate" security for personal information maintained on LabMD's computer network and that this conduct "caused or is likely to cause" substantial consumer injury, in violation of section 5 of the FTC Act.

The Complaint was based on two alleged security incidents. The first incident occurred in May 2008 when a third party informed LabMD that one of LabMD's insurance aging reports,containing the personal information of approximately 9,300 patients of LabMD's physician clients, was discovered on a peer-to-peer file-sharing network. A LabMD billing manager installed the file-sharing program LimeWire on his work computer and inadvertently shared the report. The second incident occurred in October 2012, when the Sacramento police discovered 40 LabMD transaction reports containing the personal information of 600 consumers, nine copied checks and one money order payable to LabMD in possession of individuals who eventually pled nolo contendere to identity theft charges.

On November 13, 2015, an ALJ dismissed the Complaint, finding that the FTC had failed to prove that LabMD's alleged conduct caused or was likely to cause substantial injury to consumers. See In the Matter of LabMD, Inc., Docket No. 9357, Initial Decision (Nov. 13, 2015). The ALJ found that, due to the FTC's failure to produce evidence that any consumer had suffered actual harm in the seven years since the incident, the exposure of the insurance aging report did not, and was not likely to, result in any identity theft-related harm. See id., at 57-67. Moreover, the ALJ found that there was no evidence of embarrassment or similar emotional harm resulting from the exposure of the insurance aging report and, even if there were, such harm did not constitute a "substantial injury" within the meaning of Section 5(n). See id., at 68-69.

The ALJ also found that the FTC failed to prove a causal connection between the exposure of the transaction reports, checks and money order and LabMD's purportedly lax network security practices, as there was no evidence that these documents were maintained on, or taken from, LabMD's computer network. See id., at 71-74. Finally, the ALJ expressly rejected the FTC's argument that identity theft-related harm was likely for all consumers whose personal information was stored on LabMD's network because that network was "at risk" of a future data breach. See id., at 80-87. Specifically, the ALJ found that although the FTC may, at best, have shown the "possibility" of harm with a future data breach, it did not meet its burden of proving the "probability" or "likelihood" of harm required by the statute. See id., at 14.

Decision of FTC Commissioners

Three FTC Commissioners (two of the five FTC Commissioner seats are currently vacant) vacated the ALJ'S Initial Decision, holding that, in determining whether a practice is "likely to cause substantial injury" under the unfairness standard, the FTC "look[s] to the likelihood or probability of the injury occurring and the magnitude or seriousness of the injury it does occur" and that "a practice may be unfair if the magnitude of the potential injury is large, even if the likelihood of the injury occurring is low." See In the Matter of LabMD, Inc., Docket No. 9357, Opinion of the Commission, at 10 (July 29, 2016). The Commissioners examined LabMD's data security practices and found that they were unreasonable in that LabMD failed to implement "basic" risk management measures, specifically automated intrusion detection systems, file integrity monitoring software, or penetration testing; monitor firewall traffic; provide data security training to its employees; and adequately limit or monitor access to patients' sensitive information or restrict employee downloads. See id., at 12-16. They also found that LabMD's inadequate data security practices led to the disclosure of the insurance aging report and that "the privacy harm resulting from the unauthorized disclosure of [such] sensitive health or medical information is in and of itself a substantial injury [.]" Id., at 19. In making this finding, the Commissioners concluded that "the disclosure of sensitive health or medical information causes additional harms that are neither economic nor physical in nature but are nonetheless real and substantial and thus cognizable under Section 5(n)." Id., at 19.

Moreover, the Commissioners found the unauthorized exposure of the insurance aging report was "likely to cause substantial injury." See id., at 20. They expressly rejected the ALJ's reliance on the lack of actual harm in the case, holding that, in evaluating a practice, the FTC judges "the likelihood that the practice will cause harm at the time the practice occurred, not on the basis of actual future outcomes." Id., at 23. The Commissioners described Section 5 as having a "prophylactic purpose" that authorized the FTC to take "preemptive action" and "not wait for consumers to suffer known harm at the hands of identity thieves." Id. Accordingly, the Commissioners held that LabMD's data security practices constituted unfair acts or practices within the meaning of Section 5 of the FTC Act.1

The Commissioners issued a Final Order requiring LabMD to establish, implement, and maintain a comprehensive information security program "reasonably designed to protect the security and confidentiality of consumers' personal information" and "obtain initial and then biennial assessments and reports regarding its implementation of the information security program." Id., at 34. The Final Order also requires LabMD to notify individuals "whose personal information LabMD has reason to believe was or could have been exposed about the authorized disclosure of their personal information" and "the health insurance companies for these individuals of the information disclosure." Id., at 35.


The LabMD decision expands the authority of the FTC by broadening the standard for what constitutes a substantial injury or what is likely to cause a substantial injury under Section 5 of the FTC Act. It establishes that the exposure or disclosure of sensitive personal information by itself is sufficient to satisfy the injury requirement in the unfairness test and enables the FTC to declare the data security practices of a company as unfair acts or practices under Section 5 of the FTC Act, even in the absence of actual harm to any consumers. In doing so, the LabMD decision validates the growing number of FTC investigations and enforcement actions under Section 5 of the FTC Act for lax data security practices. Whether LabMd seeks appellate review of the Final Order by a U.S. Court of Appeal remains to be seen.

The LabMD decision does provide some guidance as to what constitutes minimally reasonable data security practices. Companies should employ intrusion detection systems, file integrity monitoring software, and penetration testing to assess the risks on their networks. They should also constantly update their antivirus programs, run and review scans, and monitor traffic coming across their firewalls. Even if such systems and programs are in place, companies should still provide extensive data security training to its employees. Finally, companies should limit access to sensitive personal information to only those employees who need the information to perform their jobs and monitor and restrict what employees are downloading onto their work computers. The presence of these measures does not guarantee that the FTC will not initiate an action against a company in the event of a security incident. But, their absence increases the probability that such an action will be brought and the likely success of that action.


1 The Commissioners, however, did agree with ALJ's decision concerning the LabMD transaction reports, copied checks and money order, concluding that there was no evidence that LabMD's computer security practices (which were the sole focus of the Administrative Complaint) caused the exposure of these documents. See id., at 25.

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
25 Oct 2017, Conference, California, United States

CALOBA is excited to bring you our General Counsel (GC) roundtable event. Our distinguished panel of top legal counsel will share their experiences at the helm of some of the top technology companies.

30 Oct 2017, Seminar, California, United States

This program will address some of the hottest legal and policy topics that online platforms have brought to the fore: free speech, hate speech, fake news, privacy and surveillance, artificial intelligence, augmented reality, changing notions of “ownership” of information and software-enabled consumer products, and the perennial issue of copyright.

8 Nov 2017, Conference, California, United States

Fenwick & West is proud to be participating in PLI’s 49th Annual Institute on Securities Regulation scheduled for November 8-10, 2017 at The Roosevelt Hotel in New York City. The Institute is considered the premier conference, as well as one of the longest running, in the securities law field.

In association with
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
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.


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.


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.


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.


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.


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.


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.