United States: Deception And Unfair Practices Come Preinstalled

Lenovo, a manufacturer of personal computers, recently agreed, among other things, to implement a software security program in a settlement with the Federal Trade Commission (FTC) over issues with third-party software preinstalled on some laptops. The software was later found to have significant security vulnerabilities that put consumers' personal information at risk.

The software created pop-up advertisements tailored to the consumer's browsing. For example, if the consumer were shopping for an owl-shaped pendant, the software would generate advertisements for other owl-shaped pendants. The software acted as a "man-in-the-middle", reviewing website information before passing it on to the browser – much like a person reading mail before delivering it with advertisements tailored to preferences indicated in the mail.

The software, however, allegedly had significant flaws. It did not apparently verify the authenticity of the digital certificates of websites that the user visited before replacing them with its own certificate, which, by default, would be trusted by the browser. This bypassed the browser's normal protections against imposter sites. As if that vulnerability were not enough, the software also is alleged to have used an easily cracked password that was the same for each laptop. These vulnerabilities could allow attackers to intercept sensitive information.

When the vulnerabilities came to light, the FTC filed a complaint against Lenovo alleging deceptive failure to disclose, and unfair pre-installation of "man-in-the-middle" software and inadequate security practices. The complaint alleged that Lenovo's disclosures regarding the third-party software were inadequate and that it failed to implement reasonable security reviews of the software.

The settlement requires, among other things, that Lenovo establish and implement a software security program to address software security risks related to the development and management of new and existing application software and to protect the security, confidentiality and integrity of personal information. The settlement is reflected in a 20-year consent order that requires that the following be included in Lenovo's software security program:

  • Designation of an employee or employees to coordinate and be responsible for the software security program.
  • Identification of internal and external risks to security, confidentiality or integrity of personal information.
  • Design and implementation of safeguards to control risks, including regular testing.
  • Development and use of reasonable steps to select software or service providers capable of maintaining security practices consistent with the order and to require vendors by contract to implement and maintain appropriate safeguards.
  • Evaluation and adjustment of the software security program in light of testing and monitoring.

The settlement also required software security assessments be performed by a third party every two years, in addition to the usual FTC audits. While these requirements are what is known as "fencing in" and are technically merely private negotiated settlement terms between the government and Lenovo, the FTC intends consent orders to be road signs to industry as to what is required to avoid deception and unfairness. They are, even if not common law with precedential value, at least an expression of best practices to which the software, digital advertising and IoT industries should look.

The two commissioners made additional statements on the matter. These statements conflicted as to what should be considered a deceptive omission. Commissioner Terrell McSweeny argued that the complaint did not go far enough. He found fault in the manufacturer's disclosures because they did not disclose that pop-up ads would be injected every time consumers visited a shopping website, or the disruption the program caused to web browsing by reducing download speeds by 25 percent and upload speeds by 125 percent. He argued omitting these facts from the disclosures was deceptive. Acting Chairman Maureen Ohlhausen, however, disagreed. Ohlhausen cited previous FTC cases to argue a more limited approach to deceptive omission. For every product, copious amount of information could be disclosed, but that would be impractical, unhelpful and perhaps even harmful. She also pointed out that an omission is misleading only if the consumers' ordinary fundamental expectations about the product were violated. The example given was a car that, while appearing normal, could not go faster than 35 miles per hour. A consumer would expect a normal car to reach highway speeds, and thus not disclosing that information would be a misleading omission. As for this case, the disclosure did say advertising would be injected, although it could have been clearer. This exchange reflects the ongoing historical differences between Democrats and Republicans and is suggestive of where the soon-to-be Republican majority (following Trump's filling of open seats) will head.

Regardless of exactly where the Commission will land on materiality as it relates to adequate disclosures, this case serves as a warning to organizations that disclosure of unexpected circumstances that would likely affect a purchase decision are important – and that includes advertising and consumer privacy. Further, the need for adequate security is without controversy. Organizations that include installed software, including growing numbers of Internet-of-Things (IoT) device manufacturers, must take reasonable steps to ensure consumers understand what the products do and the associated risks and limitations, and that consumer information is kept reasonably safe.

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.

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