On June 12, 2019, the Federal Trade Commission (FTC) announced it had reached a proposed settlement with LightYear Dealer Technologies, LLC (doing business as "DealerBuilt") over allegations that the automobile software provider's inadequate data security practices had resulted in a data breach in 2016.1
This consent order deserves a close read because the FTC has imposed data security obligations on DealerBuilt that go further than any previous settlement, and the FTC is likely to seek to impose these requirements in future settlements.2 Specifically, the FTC has mandated DealerBuilt to implement an information security program with more detailed specifications than appear in earlier settlements. These modifications are consistent with the FTC's recent proposed amendments to the Safeguards Rule (a rule that guides FTC implementation of the Gramm-Leach-Bliley Act (GLBA)).3 The FTC has also imposed more specific requirements with regards to third-party security assessments.
DealerBuilt's 2016 security incident can be traced back to an allegedly poorly configured storage device that an employee installed in April 2015 to expand the company's capacity to store backups of customer data. According to the FTC's complaint, the device left open a port through which anyone could extract sensitive information about the company's customers and employees, including Social Security numbers, driver's license numbers, birthdates, and financial information. Security researchers discovered the vulnerability 18 months later and accessed plaintext data of 12.5 million consumers across 130 car dealerships relying on DealerBuilt software.4 DealerBuilt allegedly first learned of the vulnerability and incident when a customer complained that their customer data had become publicly available.
The FTC alleged that DealerBuilt failed to develop, implement, or maintain a written organizational information security policy, failed to implement employee training regarding safeguarding personal information, failed to conduct risk assessments or use readily available security measures to periodically monitor its systems and assets to identify data security events, failed to impose reasonable data access controls, stored consumers' personal information on its network in clear text, and failed to have a process to secure and inventory devices with access to personal information. Accordingly, the FTC levied two counts against DealerBuilt in its complaint: 1) that the company's failure to provide reasonable security to personal information belonging to its customers and employees amounted to an unfair practice under Section 5 of the FTC Act; and 2) that the company's lack of an information security program violated the FTC's Safeguards Rule under the GLBA.5
Key Takeaway #1: The Proposed Order Furthers the Recent Trend of the FTC to Provide Greater Specificity on Requisite Information Security Programs
In the past, the FTC has allowed companies a degree of flexibility in implementing reasonable security practices, including entering into settlements that left room for companies to develop controls and procedures tailored to their unique risks. In 2018, the Eleventh Circuit vacated an FTC order imposed on the medical laboratory LabMD after finding the order to be unenforceable because it "does not enjoin a specific act or practice. Instead, it mandates a complete overhaul of LabMD's data-security program and says precious little about how this is to be accomplished."6 In our June 2018 WSGR Alert regarding the U.S. Court of Appeals for the Eleventh Circuit's decision in LabMD v. FTC, we anticipated that the FTC might respond to the decision by enjoining specific acts or practices in future security and privacy orders. The DealerBuilt settlement, along with two similar but somewhat less specific data security settlements announced in April of this year,7 suggests this day has arrived.
Specifically, the DealerBuilt settlement demonstrates the FTC is moving in the direction of providing more detailed specifications for how companies should implement information security programs both under Section 5 of the FTC Act and the FTC's Safeguards Rule under the GLBA. Commissioners and stakeholders have been split on the issue of specificity in recent years, and when the FTC issued a notice of proposed rulemaking (NPRM) in April 2019 to amend the Safeguards Rule to include more specific requirements for information security programs, it reopened this debate. Proponents of increased specifications point to the benefits of having more "guidance and certainty" in designing information security programs.8 On the other side, opponents argue that too much prescription removes the flexibility needed to design industry-specific solutions.9 While the FTC voted 3-2 to publish the Safeguards Rule NPRM in March 2019, Commissioners Noah Phillips and Christine Wilson released a dissenting statement expressing concern that adding more specifications "trades flexibility for a more prescriptive approach" and tries to answer questions "firms are in a better position to evaluate than federal regulators."10 The FTC vote to issue the proposed administrative complaint and to accept the consent agreement with DealerBuilt, however, was a unanimous 5-0.
In the meantime, in its settlement with DealerBuilt, the FTC has pulled from proposed amendments to the Safeguards Rule in its NPRM and has gone further than ever before in specifying particular controls DealerBuilt must implement in its information security program. Below is a list of specifications imposed on DealerBuilt that the FTC appears to have taken from the still-pending Safeguards Rule NPRM:
Providing a written copy of the information security program and annual updates to the board of directors or governing body.
Encrypting all Social Security numbers and financial account information.
Establishing policies and procedures to ensure devices with access to Personal Information are securely installed and inventoried at least once per year.
Implementing data access controls for all databases storing Personal Information.
Conducting vulnerability testing of the network at least every four months and penetration testing at least once per year.
The DealerBuilt settlement builds on more specific obligations that were first required in two data security settlements that the FTC announced in April 2019.11 Unlike prior FTC data security consent orders, the DealerBuilt and April 2019 orders mandate that, at least once every 12 months and promptly following certain incidents affecting consumer information, businesses are required to perform security risk assessments and to update their safeguards and security programs. In addition, the DealerBuilt and April 2019 settlements require senior management to provide annual compliance certifications to the FTC, require the company to submit covered incident reports to the FTC within 10 days after notifying other government entities of certain incidents affecting consumer information, and prohibit the company from misrepresenting any material facts to their information security program assessor.
Businesses can expect to see similar types of specific data security requirements in FTC consent orders going forward.
Key Takeaway #2: The Proposed Order Adds New Requirements for Third-Party Assessments
The proposed order also includes never-before-seen requirements for third-party assessments that go a step further than the requirements the FTC included in the two settlements announced in April 2019.
In the April 2019 settlements, the FTC required either that the assessor be qualified via various certifications such as CISSP and CISA or that the assessor be approved by the associate director for enforcement for the bureau of consumer protection at the FTC. The DealerBuilt consent order, however, removes all guidance on recommended certifications, instead leaving it to the "sole discretion" of the associate director for enforcement at the FTC to approve the assessor chosen by the company. Additionally, the order goes further to require that the assessor:
State and sign that it has conducted an independent review of the information security program.
Identify specific evidence, including, but not limited to, documents reviewed, sampling and testing performed, and interviews conducted to make determinations.
Retain all documents relevant to the assessment for five years after its completion and make these materials available to the FTC within 10 days of receiving a request to do so.
Explain why the evidence examined is sufficient to justify the findings.
Not rely solely on assertions or attestations by management to come to any finding of in the assessment.
Not withhold documents from the FTC on the basis of a claim of confidentiality, proprietary or trade secrets, work product protection, attorney client privilege, statutory exemption, or any similar claim.
These assessor obligations are interesting because they seem to impose specific consent order obligations on an unnamed entity that is not a party to the order. In particular, the specific obligations to refrain from relying solely on assertions or attestations by management, and not to withhold documents from the FTC under established protections, may run counter to another requirement of the consent order, that the assessor use "procedures and standards generally accepted in the profession." As a result, it may be difficult for DealerBuilt and future businesses, if they agree to similar consent orders, to find competent assessors who are able to comply with these obligations imposed by the FTC.
Finally, for the first time in the DealerBuilt settlement, the FTC expressly requires the responding company to cooperate with the third-party assessor by disclosing all material facts to it, adding a new layer on top of previously seen requirements not to misrepresent any material facts to the assessor in the course of the investigation.
The FTC's consent order with DealerBuilt sheds light on the direction in which the agency is likely headed—towards imposing more specific information security requirements and increasing oversight of third-party assessments and the assessors themselves. The consent order provides helpful insight into the FTC's conception of "reasonable security," which may include access controls for sensitive information, device security and device inventorying, and penetration and vulnerability testing. The consent order also makes clear that the FTC will now hold companies and assessors more accountable for third-party assessments by exercising control over who qualifies as an appropriate assessor and by requesting evidence of the assessment after completion. Nevertheless, it remains to be seen how these new requirements will play out in practice as DealerBuilt—and future businesses put under similar orders—attempt to operationalize them (and in particular attempt to find appropriate assessors).