FTC Found to Have Authority Over Standard for Consumer Data Security by NJ District Court

by Saul Ewing Arnstein & Lehr LLP
Contact

Summary

In a first of its kind opinion, a New Jersey district court holds that the FTC has the authority to set a standard for consumer data security and that it can sue for breach of that standard under its authority to bring enforcement actions and seek civil penalties for “unfair” and/or “deceptive” practices.

On April 7, 2014, Judge Salas of the District of New Jersey issued a highly anticipated opinion allowing an FTC complaint against Wyndham Worldwide Corporation to move forward. The court rejected the hotel chain’s argument that it “carve out a data security exception to the FTC’s authority and that the FTC publish regulations before filing an unfairness claim in federal court.” While the forty-two page decision only addresses a denial of a motion to dismiss, it is the first decision holding that the FTC has authority to set a standard for consumer data security and that the FTC can sue for breach of that standard under its authority to bring enforcement actions and seek civil penalties for “unfair” and/or “deceptive” practices.

The suit stems from the FTC’s allegations that Wyndham failed to maintain “reasonable and appropriate data security for consumers’ sensitive personal information.” Between 2008 and 2010, the FTC alleged that three separate data breaches occurred at Wyndham exposing more than 619,000 consumer payment card account numbers and resulting in over $10.6 million in fraud losses. The FTC’s allegations focused in particular on the fact that “similar techniques” were used during all three breaches and Wyndham failed to implement “reasonable and appropriate security measures” after the first breach occurred.

Wyndham moved to dismiss the suit on three main grounds, each of which was rejected by the court. First, Judge Salas rejected Wyndham’s argument that the FTC lacked authority to assert an unfairness claim in a data-security context, and held that this case was different from Food and Drug Administration v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). In Brown & Williamson, the critical premise was that Congress had directly spoken to the issue and “precluded the FDA’s jurisdiction to regulate tobacco products.” Judge Salas explained that the Wyndham case was different in that “subsequent data-security legislation seems to complement — not preclude — the FTC’s authority.”

Next, Judge Salas rejected Wyndham’s argument that it would violate principles of fair notice and due process to permit the FTC to bring its unfairness claim without formally promulgating regulations. Judge Salas explained that accepting this argument could lead to an untenable consequence: “the FTC would have to cease bringing all unfairness actions without first proscribing particularized prohibitions — a result that is in direct contradiction with the flexibility necessarily inherent in Section 5 of the FTC Act.” Further, Wyndham’s lack of fair notice argument was not credible because of “the FTC’s many public complaints and consent agreements, as well as its public statements and business guidance brochure” and Wyndham’s “own references to ‘industry standard practices’ and ‘commercially reasonable efforts’ in its privacy policy.”

Finally, Judge Salas held that the FTC adequately pleaded its allegations to support an unfairness or deception claim against Wyndham because “[t]he FTC’s allegations also permit the Court to reasonably infer that [Wyndham’s] data-security practices caused theft of personal data, which ultimately caused substantial injury to consumers.”

The court was careful to note, however, that this decision was simply a ruling on a motion to dismiss and that a liability determination was “for another day.” The court also explained that “this decision does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked.”

There are a few key takeaways from FTC v. Wyndham for those who maintain consumer data in a digital/electronic format:

  • If your company suffers a data security breach, it is important to prevent a similar breach from occurring again or risk a claim that your company acted unfairly and deceptively by failing to take reasonable measures to prevent another breach.
  • Vigilantly monitor FTC publicly available documents (such as complaints and consent agreements) to decipher what direction the FTC is heading in terms of which data breaches warrant enforcement actions.
  • Wyndham will pave the way for the FTC to investigate data breaches and bring similar enforcement actions against those companies it finds have failed to live up to its standard.
  • As it now stands, Wyndham may set the stage for other agencies such as the Consumer Financial Protection Bureau, which has concurrent authority with the FTC over consumer protection, to begin investigating and charging consumer services companies with unfair, deceptive or abusive practices when they have not been able to prevent their systems from being hacked.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Saul Ewing Arnstein & Lehr LLP | Attorney Advertising

Written by:

Saul Ewing Arnstein & Lehr LLP
Contact
more
less

Saul Ewing Arnstein & Lehr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.