United States: Cybersecurity 2017 – The Year In Preview: Changes Afoot In Federal Enforcement?

Last Updated: January 5 2017
Article by Christopher Escobedo Hart

Editor's note: This is the sixth and last in our end-of-year series. See our previous posts on trade secrets, state regulation and law enforcement, HIPAA compliance, emerging threats, and energy. See you in 2017!

Fragmentation in U.S. data privacy and cybersecurity law is both peril and promise. The peril? Businesses must contend with uncertainty and the costs associated with pleasing many regulatory masters. The promise? Various regulatory bodies can compete for the most effective way of approaching cybersecurity, setting a path forward for others to emulate.

At the federal level, the primary enforcement actor has been, for some time, the Federal Trade Commission. Indeed, since the Third Circuit's decision in FTC v. Wyndham, the FTC's authority in this space has been largely affirmed (and generally unquestioned). Other federal agencies have also started to more forcefully enter the cybersecurity enforcement arena, including the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and the Federal Communications Commission. Up until November 8, it seemed like those agencies would be competing in a would-be Clinton administration over enforcement turf. But after the unexpected election of Donald Trump, all bets appear to be off. Fragmentation and uncertainty might very well be the norm for years to come, and the potential for a Trump administration to emphasize de-regulation could have unexpected consequences. Let's take a look at where we've been and where we might be going.

A Look Back: Two Steps Forward?

2016 saw the FTC's self-defined increase in cybersecurity enforcement authority and the full-throated entry of the CFPB and SEC (as well as continued actions by the FCC) into the cybersecurity enforcement mix.

If one thing is clear, it's that the FTC has carved out an important and significant space in the field of data privacy, and everyone else is playing catch-up. Because of its broad power under federal statute (its "Section 5" authority in which the FTC is empowered to enforce against unfair and deceptive trade practices), the FTC has been uniquely positioned to alter the behavior of private market actors in the data privacy space, creating clearly-discernable parameters in how a company should act reasonably in its handling of personal consumer data and in its response to a breach event.

The FTC was not, however, content in 2016 to rest on its laurels. On July 29, the Commission published an order in the FTC v. LabMD case, articulating a much broader view of its powers than the Third Circuit had articulated in Wyndham. The Commission's decision overturned the decision of the Administrative Law Judge holding in LabMD's favor; the ALJ reasoned that the harm claimed by the FTC was both speculative and unlikely. (For our take on the ALJ's opinion, read our blog entry here.) The Commission made two principle holdings: first, that "privacy harm resulting from the unauthorized disclosure of sensitive health or medical information is in and of itself substantial injury under Section 5(n)," (emphasis supplied) even though as the ALJ had found there was no "tangible injury such as monetary harm or health and safety risk." In other words, the Commission found that disclosure of sensitive private information was an inherent harm over which the FTC had plenary enforcement authority.

In addition to this holding — that mere disclosure was an inherent harm – the Commission also determined that mere exposure of sensitive information (without evidence of disclosure to an unauthorized third party) was "likely to cause substantial injury," holding that "significant risk" of harm would be sufficient to meet this standard (in contrast to the ALJ's holding that this language required a "high probability" of harm, and thus that mere exposure was insufficient to invoke the FTC's Section 5 authority). Both of these holdings present the possibility of significant expansion of FTC power, giving the FTC enforcement authority even where no tangible injury has taken place or is even likely to take place.

Compared to the FTC, every other agency has been and continues to be in a distant second place. However, activity in 2016 suggested that there was movement afoot. The SEC has been in possession of law enforcement authority over data security since 2011 (through Rule 30(a) of Regulation S-P, also known as the "Safeguards Rule,"), and began exercising that authority in 2015, when it brought and ultimately settled an action against R.T. Jones. This year, it settled with Morgan Stanley to pay a $1 million penalty relating to a data breach. But its enforcement activity is only now getting off the ground, and no federal court has defined the reach of the SEC's authority in this space.

The CFPB, a creature of the Dodd-Frank financial industry reform legislation, also jumped in to the enforcement arena, ordering online payment platform Dwolla to pay a $100,000 penalty and to change its data security practices, after the agency investigated the company and found that although Dwolla communicated to its customers that its data privacy standards exceeded industry standards, the company in fact (according to the CFPB) failed to maintain adequate standards. Importantly, the CFPB ordered this penalty and action even though Dwolla did not suffer a data breach.

Finally, the FCC joined in investigative efforts with the FTC on mobile device security updates. Although the FCC does not have the same kind of investigative authority as the FCC, it nevertheless requested from telecommunications carriers information regarding security updates, and called its investigation a "partnership" with the FTC, signaling its efforts to work with other agencies in cybersecurity efforts.

In all, these actions suggest continued and in some cases significant expansion of federal enforcement and regulation of cybersecurity and data privacy.

A Look Ahead: Three Steps Back?

But will that continued and significant expansion continue? Many signs point to "maybe not," including the following:

  • Currently, LabMD has a pending appeal before the 11th Circuit; that court stayed enforcement of the FTC's order, discussed above, stating that "there are compelling reasons why the FTC's interpretation may not be reasonable." A decision is expected in 2017, and as of now there is reason to think that the 11th Circuit will balk at the FTC's interpretation of its own power.
  • Additionally, the FTC will have two commission spots for President Trump to fill, and the Commission will have a 3-2 Republican majority for the first time in more than a decade.
  • With Republicans in control of all three branches, both Dodd-Frank and the CFPB appear to be in danger. Aggressive pre-breach enforcement action like that taken by the CFPB in the Dwolla case might be unlikely in 2017.
  • SEC Chair Mary Jo White will be stepping down, and President Trump will be appointing her replacement, signaling a potentially significant shift for agency enforcement priorities.
  • In general, there are strong signs that Trump's administration, based on his cabinet picks, will be decidedly de-regulatory.

What does this all mean? To quote Yogi Berra, predictions are hard, especially about the future. But there are strong signs that the FTC's authority will be cabined by the 11th Circuit; that the CFPB will have at least some of its powers taken away, and that the SEC will not play a larger role if in fact de-regulatory impulses win the day.

But this does not necessarily mean that regulations will slacken. As we have noted in this space, states appear ready to pick up the leadership mantle and recraft their regulations in favor of consumers. And let's not count out the possibility that regulations concerning cybersecurity might be viewed differently, even by a pro-deregulation administration, than other kinds of regulations, especially given the end-of-year tumult brought by revelations of Russian attempts to meddle in the U.S. election through hacking and the disclosure by Yahoo! that up to 1 billion customer accounts were compromised in a hack that occurred years ago.

Perhaps the next year will be a year of pausing federal enforcement action in the cybersecurity realm, but expect that vacuum to be filled by other actors.

[NB: This post has been updated since its initial publication to expand on the FTC's LabMD decision.]

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