FTC Uses Its "Unfair Acts" Power to Go After PHI Security Breach

by Foley & Lardner LLP

As if HIPAA Weren’t Enough…

The Federal Trade Commission (FTC) is moving forward with an administrative action against a small medical laboratory that suffered two data security breaches, resulting in its patients’ protected health information falling into the hands of identity thieves. The facts of this case are unremarkable: a small facility suffered a data breach, and now faces the administrative consequences. Rather, what’s unique about this case is the nature of the administrative consequences the facility has to face. For far from facing a HIPAA investigation by HHS’s Office for Civil Rights, the facility instead finds itself facing charges by the Federal Trade Commission that it has violated a 100-year-old consumer protection and antitrust law that prohibits “unfair or deceptive acts or practices in or affecting commerce.”

The FTC’s action serves as a frightening reminder that companies that handle PHI are subject to more laws than just HIPAA.

Facts of the Case

LabMD is an independent medical laboratory based in Atlanta, which (until recently winding down) focused on cancer detection services. According to the papers filed in the case, LabMD was notified some time in 2008 that a copy of its insurance aging file—which contained detailed private information about thousands of its patients—had been accessed by an unauthorized third party. Based on a subsequent investigation, LabMD learned that the third party was a cybersecurity firm who was supporting federally funded research on health care information security. LabMD also learned that this third party had accessed the insurance aging file through a peer-to-peer file-sharing application that an employee had downloaded on his computer; upon learning this, LabMD promptly removed the file-sharing software.

Four years later, on the opposite side of the country, the Sacramento Police Department arrested a group of identity thieves and found in the thieves’ possession copies of various LabMD “day sheets,” which contained names and Social Security numbers of several hundred patients. It remains unclear to this day how these identity thieves came to possess these documents.

Status of the Litigation

Based on LabMD’s failures to safeguard patient information, the FTC filed administrative charges for breach of Section 5 of the FTC Act which, in relevant part, prohibits “unfair or deceptive acts or practices in or affecting commerce.” As this correspondent has written elsewhere, the FTC has increasing used its broad Section 5 powers to go after companies that suffer data breaches, albeit under shifting legal theories and without a clear regulatory mandate to do so.

Since it is unclear how the California identity thieves came to obtain copies of the LabMD day sheets, the FTC’s theory is evidently that it was “unfair” for LabMD to let a wayward employee download a peer-to-peer file-sharing application on a computer that contained PHI.

LabMD fought the FTC on two fronts. LabMD filed a lawsuit in federal district court to enjoin the FTC’s administrative action as falling outside of the FTC’s regulatory authority. And administratively, LabMD moved for summary decision pursuant to FTC rules—a procedure much like moving for summary judgment in court.

At least for the moment, both efforts seem to have failed. On May 12, 2014, the district court held that the FTC’s action cannot be judicially reviewed until the Commission issues a final agency action. A week later, in a one-sentence order, the Eleventh Circuit declined to use its emergency powers to disturb this ruling. Meanwhile, the same day, the FTC unanimously rejected LabMD’s efforts to end the case on the merits. The decision means that the case goes to an Administrative Law Judge for trial.

The FTC’s decision is notable in that the Commission rejected the argument that it can only challenge data breaches that violate HIPAA; rather, the Commission determined that its Section 5 powers are wholly separate from the requirements of HIPAA. According to the Commission, LabMD’s liability will depend on a pure Section 5 issue: whether its “data security practices were reasonable and whether they caused, or were likely to cause, significant injury to consumers that was unavoidable [by consumers] and unjustified by offsetting benefits.”


The FTC’s decision is not shocking, although followers of the FTC will be surprised that its decision was written by Commissioner Wright, who has been an outspoken critic of the broad use of Section 5 “unfairness” powers. More than anything, the decision stands as an unwelcome reminder that OCR is not the only regulator, and HIPAA is not the only data security law, that covered entities and business associates must keep in mind.

Perhaps the scariest implication of the FTC’s action is that the statute of limitations for HIPAA violations just got arguably longer. Under 45 C.F.R. § 160.522, a six-year statute of limitations applies to HIPAA enforcement actions. But Section 5 of the FTC Act contains no explicit limitations provision, and (although it is far from settled) at least some commentators have openly wondered whether the FTC has a statute of limitations on Section 5 cases at all.

This said, it is worth keeping in mind that the FTC’s police powers are limited. As one court wrote just last month in upholding an FTC data security enforcement action, “this decision does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked.” Among other limitations, it appears the FTC will only go after data practices that it deems unreasonably lax. Therefore, at least for today, compliance with the physical, technical, and administrative safeguards embodied in HIPAA’s security rule still should be enough to keep the FTC from knocking on your doors.

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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.

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