United States: July 2019 Privacy And Cybersecurity Enforcement: Lessons For Management And Directors

In late July 2019, U.S. federal and state regulators announced three headline‑grabbing data privacy and cybersecurity enforcement actions against Equifax and Facebook. Although coverage of these cases has focused largely on their striking financial penalties, as important are the terms the settlements imposed on the companies' operations as well as their officers, directors, and compliance professionals—and what they signal about potential future enforcement activity to come.

The July 2019 Enforcement Actions

On July 22, the U.S. Federal Trade Commission ("FTC" or "Commission"), U.S. Consumer Financial Protection Bureau ("CFPB"), New York Department of Financial Services ("NYDFS"), and attorneys general from 48 states, D.C., and Puerto Rico announced proposed settlements totaling up to $700 million with Equifax Inc. related to a 2017 data breach that exposed sensitive personal information of more than 147 million consumers. These settlements resolve numerous claims, including unfair and deceptive trade practices and violation of the Gramm-Leach-Bliley Act Safeguards Rule, brought by these federal and state regulators.[1]

Just two days later, on July 24, the FTC announced a long-foreshadowed $5 billion settlement with Facebook, Inc., for violations of Section 5(a) of the FTC Act, prohibiting unfair or deceptive trade practices, and a 2012 FTC settlement order.[2] According to the related U.S. Department of Justice ("DOJ") complaint filed the same day, Facebook violated its 2012 consent order by providing users with deceptive privacy disclosures and settings; sharing users' personal information with third-party applications used by those users' Facebook friends; and misrepresenting the extent to which users had to opt-in before being subjected to certain facial recognition technology.[3] The complaint also alleged that Facebook failed to implement the privacy program mandated by the 2012 consent order and violated Section 5(a) of the FTC Act by using users' phone numbers, ostensibly collected for security purposes and to locate friends, for targeting advertisements.[4]

Finally, on July 25, the U.S. Securities and Exchange Commission ("SEC") announced a $100 million settlement with Facebook resolving claims that the company's public filings contained misleading statements about the misuse of user data.[5] According to the SEC's complaint, Facebook told investors that misuse of customer data posed a merely hypothetical investment risk, when in fact the company had known for more than two years that a third-party application developer associated with Cambridge Analytica had actually misused such data.[6] In addition to the financial penalty, the settlement enjoined Facebook from committing additional violations of the securities laws.[7]

Impact on Business Operations, Management, and Boards

In addition to the penalties, the enforcement actions imposed significant ongoing obligations on the companies' business operations, boards of directors, corporate officers, and compliance professionals. While these terms are targeted at remediating the alleged conduct at issue in these cases, they likely signal the developing (and increasingly onerous) privacy and cybersecurity expectations of regulators.

Mandated Privacy Programs

Both the Equifax and FTC Facebook settlement orders require the settling companies to institute robust privacy and information security programs to remediate the alleged practices and vulnerabilities described above.

In the case of Facebook, required features of the FTC settlement-imposed privacy program include an annual assessment of the privacy risks affecting users' personal information; certification by, and annual monitoring of, third-parties for compliance with policies for accessing users' personal information; enforcement criteria for violations of those policies; employee privacy training; extensive written documentation of the program; and biennial third‑party assessments of the program.[8] Facebook must also provide specific privacy protections for new product offerings. These include undertaking a documented privacy assessment of any new or modified products prior to release and making a written report of the personal information the product will collect, risks the product poses to the confidentiality of such information, safeguards in place to mitigate those risks, and the notices that will be provided to users.[9]

The government settlements with Equifax similarly require Equifax to implement a robust and documented information security program that includes risk-based assessments, safeguards, and qualified third-party evaluations, as well as specific security measures such as password encryption, multi-factor authentication, limits on user access privileges, and periodic penetration testing.[10] The state attorneys general settlements further mandate that Equifax conduct biannual incident response (i.e., tabletop) exercises and weekly vulnerability scans of network systems, as well as begin remediating any "critical" security vulnerabilities within 24 hours.[11]

Disclosure to Consumers and Investors

In addition to mandating changes to privacy and security operations, the Facebook and Equifax settlements demonstrate that U.S. regulators are continuing to enforce companies' obligations to make accurate and complete disclosures to users regarding privacy practices and cybersecurity risks. For example, the FTC's Facebook order directs the social networking company to clearly and conspicuously disclose to users the categories of personal information the company shares with third parties along with the categories or identities of those third parties. It also prohibits Facebook from making misrepresentations to users about collection, use, or disclosure of their personal information, including users' control over the privacy of such information.[12] The state attorneys general settlement with Equifax also expressly prohibits the company from making misleading statements or omissions regarding the extent to which it protects the privacy, security, confidentiality, or integrity of consumers' personal information.[13]

The SEC's settlement with Facebook further makes clear that the SEC is continuing to enforce public companies' obligation to disclose to investors known material risks in the area of privacy and cybersecurity. In February of 2018, the SEC released interpretive guidance regarding public disclosure of cyber-related incidents. Two months later, the SEC announced its [14] In the Yahoo matter, the SEC found that disclosure of the risk of a future data breach was inadequate when the company knew a "massive" data breach had already occurred.[15] Here, similarly, the SEC found Facebook filed misleading annual reports and registration statements when it used "hypothetical phrasing" to describe the risks associated with misuse of customer data which "created the false impression that Facebook had not suffered a significant episode of misuse of user data by a developer," as it had with Cambridge Analytica.[16]

Management and Compliance Responsibilities

July's enforcement actions also place specific, enumerated privacy and data security obligations on management and compliance personnel. Most notable among these is the requirement that Facebook's principal executive officer, i.e., CEO Mark Zuckerberg, and designated Facebook compliance officer(s) must make certain certifications to the FTC under penalty of perjury. Specifically, the CEO and compliance officers must certify quarterly that Facebook has established and maintained the privacy program required under the order.[17] FTC Commissioner Noah Joshua Phillips has characterized these certifications as a privacy equivalent to Sarbanes-Oxley, for the personal liability they place on Mr. Zuckerberg.[18]

Similarly, Equifax's board of directors, a relevant committee thereof, or a "a senior officer" "responsible for [the] Information Security Program" must annually certify under penalty of perjury that, among other things, Equifax has established the required information security program, that Equifax is cooperating with the required third-party assessor evaluating the information security program, and that they are not aware of any material non-compliance with the federal orders.[19]

The settlements also require Equifax and Facebook to identify specific compliance officers or other employees who will be responsible for overseeing the privacy and information security programs mandated in the order.[20] While the requirements for these roles vary by settlement, collectively they provide that the designated individuals must have qualifying educational and professional backgrounds; be appointed and removed only by specified board committees comprised of similarly qualified individuals; and make periodic reports to the CEO or relevant board committees regarding the state of the company's privacy or information security program, privacy decisions regarding new or modified products, and risks to the privacy, confidentiality, security, or integrity of consumers' personal information.[21] While these particular obligations are understandably aimed at remediating the conduct at issue in these matters, more generally they signal an expectation by U.S. regulators that compliance personnel and management should play increasingly active roles in privacy and cybersecurity oversight.

Board Oversight

In addition to the responsibilities placed on management and compliance, July's settlements also mandate key privacy and cybersecurity oversight roles for boards of directors. Within 120 days of the July 24 order, Facebook must create two new board committees: an Independent Privacy Committee and Independent Nominating Committee. The Independent Privacy Committee will be comprised of independent directors demonstrating certain minimum privacy and data protection capabilities. It will be responsible for meeting at least quarterly with other independent directors and a third-party privacy assessor mandated by the order to discuss privacy issues and risks and compliance with the order, among other things. The committee must also approve any effort to remove or appoint an assessor.[22] The Independent Nominating Committee will, in turn, recommend and approve the appointment or removal of members of the Independent Privacy Committee, including determining whether members of that committee have the required privacy expertise.[23]

Lessons Learned and What Lies Ahead

These July settlements provide important guidance for companies and their officers and directors concerning future enforcement in the rapidly changing fields of privacy and cybersecurity. As an initial matter, the settlements remove any doubt as to whether the U.S. authorities would join those in Europe in taking privacy and cybersecurity violations seriously, and enforcing them aggressively, even without a direct equivalent to the European Union's General Data Protection Regulation ("GDPR"). [24] The enforcement actions also make clear that U.S. regulators are looking for more than large fines in the event of a violation and instead may also mandate a broad range of undertakings, including privacy and cybersecurity risk assessments, documentation requirements, third-party monitoring, disclosure language, specified director and officer roles, and changes to board composition. Notably, however, the U.S. and state regulators were willing to accept privacy and cybersecurity settlements on a no admit, no deny basis.[25]

With regard to specific regulators, the SEC enforcement action against Facebook signals that the agency intends to continue its 2018 focus on public company disclosure of material cybersecurity risks—and that consequences for failing to make such adequate disclosures to investors could be increasingly significant. The Equifax settlements demonstrate how state attorneys general are increasingly important enforcers of privacy laws, at times willing to go further than the federal agencies in setting the terms for changes in corporate privacy and information security practices.

Finally, the settlements provide valuable guidance for ongoing business operations outside the enforcement context. They send a clear signal that the FTC and other federal and state regulators expect officers and directors to provide meaningful and knowledgeable oversight of a company's privacy and data security practices. And they counsel that corporate privacy and security safeguards are expected to evolve in parallel to product offerings. In other words, while privacy and cybersecurity remain rapidly changing fields, the recent enforcement actions make clear that businesses, management, and board members increasingly will be expected to keep up with those changes.

Footnotes

[1] FTC Press Release, Equifax to Pay $575 Million as Part of Settlement with FTC, CFPB, and States Related to 2017 Data Breach (Jul. 22, 2018), https://www.ftc.gov/news-events/press-releases/2019/07/equifax-pay-575-million-part-settlement-ftc-cfpb-states-related; Equifax NYDFS Consent Order para. 60. The settlement is divided between fines to federal agencies and state attorney generals, and restitution to consumers: $300 million to a credit-monitoring fund for consumers affected by the breach and up to an additional $125 million if the initial sum is not enough to compensate; $175 million to 48 states, DC, and Puerto Rico; $100 million to the CFPB; and $10 million to NYDFS. See ids. In parallel with the resolution of these government enforcement actions, Equifax also reached a settlement with class action plaintiffs in the multi-district litigation regarding the 2017 breach. As we have discussed, Equifax last year reached a settlement with various state banking regulators regarding the 2017 breach.

[2] United States vs. Facebook, Inc., No. 1:19-cv-02184 (D.D.C. Jul. 24, 2019), ECF No. 1, para. 1 (citing In re Facebook, Inc., C-4365, 2012 FTC LEXIS 135 (F.T.C. Jul. 27, 2012)), ECF No. 2-1 at 1.

[3] Facebook DOJ Complaint paras. 155-75, 183-86; https://www.ftc.gov/news-events/press-releases/2019/07/ftc-imposes-5-billion-penalty-sweeping-new-privacy-restrictions.

[4] Facebook DOJ Complaint paras. 176-80, 187-90.

[5] https://www.sec.gov/news/press-release/2019-140.

[6] Facebook SEC Complaint, at 1.

[7] https://www.sec.gov/news/press-release/2019-140.

[8] Facebook FTC Order, at 6-13.

[9] Id., at 10-11.

[10] See, e.g., Equifax FTC Order paras. 12-22.

[11] Equifax AG Consent Decree paras. 22, 31.

[12] Facebook FTC Order, at 5.

[13] Equifax AG Consent Decree para. 10.

[14] https://www.clearycyberwatch.com/2018/04/yahoos-successor-settles-first-ever-case-involving-sec-charges-failing-disclose-cybersecurity-incident/.

[15] Id.

[16] Facebook SEC Complaint paras. 39, 44.

[17] Facebook FTC Order, at 16-17, 19.

[18] FTC Press Conference on Facebook Settlement (Jul. 24, 2019). Not all agree these certifications are so onerous. FTC Commissioner Chopra, who dissented from the FTC order on the basis that, in his view, its undertakings were not sufficient to curtail the alleged violations, challenged this characterization, noting that "Sarbanes-Oxley certifications are tied to a measurable benchmark – accurate financial reporting pursuant to a known standard, e.g. GAAP." Dissenting Statement of Commissioner Rohit Chopra (Jul. 24, 2019), at 14 n.45.

[19] Equifax CFPB Order, at 25, 66; Equifax FTC Order, at 25, 57.

[20] Facebook FTC Order, at 8; Equifax CFPB Order, at 14.

[21] Facebook FTC Order, at 8, 10-11, 15; Equifax CFPB Order, at 14; Equifax AG Consent Decree paras. 16-17.

[22] Facebook FTC Order, at 4, 14-15.

[23] Id., at 15-16.

[24] On July 8, the U.K. Information Commissioner's Office ("ICO") gave notice that it intended to fine British Airways £183.4 million for violations of the GDPR stemming from a cybersecurity incident in which a hacker directed British Airways website users to a fraudulent site and obtained personal information of approximately 500,000 customers. The next day, the ICO announced intent to fine Marriott International, Inc., £99 million for GDPR violations arising out of a cybersecurity vulnerability affecting the guest reservation database of Starwood hotels group (which Marriott acquired in 2016). As we discussed in our coverage of those notices, if levied, the British Airways and Marriott fines will be the largest penalties issued under the GDPR since it took effect in May 2018.

[25] Facebook FTC Order, at 2; Equifax CFPB Order, at 2; Equifax FTC Order, at 2; Equifax AG Consent Decree para. 69.

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