United States: Toying With Children's Data: Lessons From The FTC's First Connected Toys Settlement Action

Every year, especially around the holidays, more and more products that connect to the internet hit the market. For adults, connected home devices that act like personal domestic assistants have become increasingly popular. Children have been adding connected toys, some of which have the intelligence and programming to become a child's best friend, to their holiday gift lists. Although the holidays have passed, connected toys are still finding themselves on lists, such as birthday lists, but more importantly, on the investigation lists of the Federal Trade Commission (FTC) and its Canadian counterpart. On Jan. 8, 2018, the FTC – in cooperation with the Office of the Privacy Commissioner of Canada (OPC), which issued its own report finding violations of Canadian law – settled its first-ever connected toy privacy case with Hong Kong-based VTech Electronics, Ltd., (VTech), resulting in a $650,000 penalty. This case is also notable because it illustrates the effectiveness of the application of the U.S. SAFE WEB ACT, which facilitates FTC cooperation with other nations' data protection authorities (DPAs), and indicates that the multi-DPA task force known as the Global Privacy Network (which includes the FTC and the OPC) can be effective in helping address international consumer privacy harms. In sum, the case arises out of a December 2015 data security breach that compromised the personal data of approximately 6 million children and 5 million adults worldwide. Both the OPC and the FTC concluded that the incident arose out of VTech's failure to reasonably protect the data.

The case is also significant for a number of other reasons. First, it demonstrates the power of the U.S. Children's Online Privacy Protection Act (COPPA) to enforce reasonable data security obligations. The FTC has no authority to issue fines or penalties for failure to maintain reasonable security under its general data protection authority under Section 5 of the FTC Act, and must rely on equitable and injunctive relief. However, Congress gave the FTC the authority to issue fines for violation of COPPA, and COPPA includes specific data security obligations with respect to children's personal information. Accordingly, the potential repercussions in the U.S. for failing to adequately secure children's personal information can be significant, and the FTC has now shown a willingness to use the power of COPPA to enforce reasonable data security standards. COPPA also has specific "long arm" jurisdiction and gives the FTC authority over non-U.S. entities that collect personal information from U.S. children. Toy, game, entertainment and other companies that market to children worldwide should take heed.

The case also shows the FTC's growing concern about the internet of things (IoT), especially as applied to children. For years, it had not been entirely clear whether COPPA's application to "online services" included connected toys until the FTC updated its COPPA compliance guidance to explicitly include connected toys in June 2017. Up until now, however, there had been no enforcement taken against connected toy companies that could act as demonstrative examples to those in the industry of what may happen if they are not careful. COPPA requires companies collecting personal information from children under age 13 via online means to take certain privacy and security steps to ensure compliance with the regulation. Some of these steps include providing direct privacy notices, obtaining verifiable parental consent before collection, and taking reasonable security measures. Last autumn the FTC addressed connected toys by issuing an enforcement policy statement on the collection of voice recordings by connected toys. We previously discussed that here.

The investigation of VTech began in 2015, Thomas Pahl, the Acting Director of the FTC's Bureau of Consumer Protection, told reporters on Jan. 8. The investigation entailed VTech's Kid Connect app, accessible through some VTech toys, that allows children to chat with other children or adults, with parental permission. The FTC found that VTech violated COPPA by collecting personal information from children without proper notice or verifiable parental consent and by failing to take reasonable security measures to protect the data it collected. VTech will be paying $650,000 as part of its settlement as well as complying with certain requirements such as establishing a privacy notice for parents and children users, adopting security policies that would undergo biennial assessments for 20 years, and maintaining records and contact with the FTC on changes to the company for 10 years.

Although this case is likely the first of many more connected toy investigations to come to light, it presents many lessons companies can use to bolster safeguards and minimize possible FTC settlement and enforcement actions. Companies should remember that privacy and security by design can aid at every step of production, from manufacturing to point of sale.

A comprehensive privacy notice can go a long way toward demonstrating to parents, children, and regulators that children's privacy is being taken seriously. Such a notice should be clearly written and accessible from multiple points of play. For example, especially in the case of connected toys, placing a link to a privacy notice on the box that the toy comes in allows parents to access the notice in-store, before even purchasing the product. A quick FAQ on privacy policies can also be implemented either on the box, in the instructions placed inside the box, or in a link that pops up on an app connected to the toy. It is important to make sure that notices correctly reflect a company's policies; otherwise, companies risk enforcement, not just under COPPA, but also under Section 5 of the FTC Act. Moreover, children's privacy policies and parental notices must meet specific and detailed requirements under COPPA, which presents other hurdles companies must overcome in order to ensure their notices are on par with regulations.

Providing proper direct notice makes obtaining verifiable parental consent, which is a complex process under COPPA, more easily accomplished. Obtaining COPPA-compliant verifiable parental consent, while challenging, can be accomplished in a number of ways, and thinking outside the box may prove useful when designing a toy with privacy in mind. Unlike other online children's products that are subject to COPPA, connected toys provide a unique physical interface by which consent may potentially be obtained. Although COPPA-compliant verifiable parental consent is traditionally obtained via an online portal, it may be possible to find new ways via an app connected to the physical toy or via the toy itself. What matters is how the company verifies the parent's consent, which can be done through several FTC-approved methods, though some exceptions to the requirement may apply.

Additionally, reasonable security measures such as encryption, at minimum, should be implemented to safeguard children's data. While connected toys may offer unique avenues for obtaining personal information, they also pose more points of risk than a simple online website does. Companies should consider security by design and take note of what security risks are involved when using Bluetooth versus Wi-Fi to connect a toy to an app or to the internet directly. Both types of signals can be artificially boosted and, depending on setup, can be detectable to third parties. Connected toys can be taken virtually anywhere, such as the park, a friend's house, school, or the mall. Implementing proper security to prevent unauthorized access to the toy itself, to the login credentials of the app, and to other points of access will not only protect the company from data breaches, but will also show compliance with COPPA. Connected device makers also need to think about the life span of the product and how they will be able to provide security patches and updates well after the product is sold. For guidance on IoT device security best practices, see the Institute of Electrical and Electronics Engineers 2017 IoT device security white paper here. Guidance, including a compilation of white papers, presentations and other resources, can also be found on Online Trust Alliance's IoT webpage, here.

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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