LabMD Appeal Has Privacy World Waiting

by Patterson Belknap Webb & Tyler LLP
Contact

It is the case that could define the scope of the U.S. Federal Trade Commission’s authority in data security.

The U.S. Court of Appeals for the Eleventh Circuit heard argument six months ago in LabMD, Inc. v. Federal Trade Commission. As readers of this blog know, the case turns on what kind of consumer harm is required for the agency to maintain a data security enforcement action.

Yet, for a case with such potentially broad implications, it doesn’t involve a high-profile data breach with millions of protected healthcare records roaming freely in the digital ether. Nor does it involve a single instance of identity theft or untoward use of patient information.

In fact, it’s doubtful that there was even a data breach.

The FTC’s enforcement action against LabMD focused on two incidents dating back a decade. In the first instance, the FTC complaint charged that a report with the names, birth dates and Social Security numbers for 9,000 patients was compromised. But the back story is more complicated. A cybersecurity firm soliciting LabMD’s business allegedly “discovered” the report on a peer-to-peer file sharing program installed on one computer in LabMD’s accounting department. The cybersecurity firm allegedly shared the report with the FTC. There’s no evidence, however, that the report was shared with anyone else.

The second instance – the FTC charged – was a document with sensitive patient information that ended up in the hands of identity thieves in California. Again, there’s no evidence that this second document was used for illicit purposes, nor it is clear how the report found its way to California. In fact, the Commission later found that FTC counsel failed to establish that the second incident was “caused by deficiencies in LabMD’s computer security practices” and is now no longer part of the case.

At the heart of the appeal is the scope and reach of the FTC’s enforcement powers under Section 5 of the FTC Act and the trigger for an enforcement action, all hotly debated issues since the case started in 2010 and a powerful test of the Commission’s authority. Section 5 prohibits “unfair” acts or practices that “cause[] or is likely to cause substantial injury to consumers….”

After a three-year investigation, the agency filed an Administrative Complaint in 2013 alleging that LabMD failed to adequately protect patient medical data, and demanded that, as part of a settlement, it institute a comprehensive data security program and submit to third-party security audits for the next 20 years. LabMD rejected the settlement.

Round One: LabMD Wins Administrative FTC Trial
In a stinging 91-page ruling, the agency’s own chief administrative law judge, J. Michael Chappell, dismissed the case against LabMD on the grounds that the Commission failed to demonstrate that it was “likely” consumers had been substantially injured – as required by Section 5 – by the two alleged data security incidents. ALJ Chappell concluded that the FTC failed to show any proof whatsoever of actual consumer injury. He flatly rejected the FTC’s theory that a statistical or hypothetical risk of future harm was enough to find LabMD liable for unfair conduct under Section 5 of the FTC Act.

“To impose liability for unfair conduct under Section 5(a) of the FTC Act, where there is no proof of actual injury to any consumer, based only on an unspecified and theoretical ‘risk’ of a future data breach and identity theft, would require unacceptable speculation and would vitiate the statutory requirements of ‘likely’ substantial consumer injury.”

Round Two: Commission Reverses ALJ
In its Opinion and Final Order, the Commission reversed the ALJ’s ruling and held that the “wrong” legal standard was applied and that the pertinent inquiry is whether the act or practice at issue posed a “significant risk” of injury to consumers.

“[C]ontrary to the ALJ’s holding that ‘likely to cause’ necessarily means that the injury was ‘probable,’” the Commission wrote, “a practice may be unfair if the magnitude of the potential injury is large, even if the likelihood of the injury occurring is low.” The Commission concluded that Congress had entrusted it with protecting a broad range of consumer harms and “need not wait for consumers to suffer known harm at the hands of identity thieves” before taking action.

The Commission, however, also determined that there was no “causal link” between the patient documents found in California and LabMD’s computer security practices and agreed with the ALJ’s dismissal of that portion of the Administrative Complaint.

Round Three: Stay Tuned
In a 20-minute spirited oral argument on June 21, 2017, the Eleventh Circuit asked why the Commission didn’t simply use rulemaking instead of an enforcement action if its concern is the prevention of future incidents. As one member of the court observed during the hearing: “A tree fell and nobody heard it, that’s the case we have here.” To listen to the oral argument, click here.

Even before oral argument, the Eleventh Circuit signaled its discomfort with the FTC’s position that actual or likely consumer injury wasn’t required under Section 5. In a pre-appeal motion, the court noted that LabMD had “made a strong showing” that the agency’s legal interpretation of Section 5 may not be reasonable.

The Eleventh Circuit’s ruling – whenever and however decided – will have far-reaching implications. If the FTC prevails, the agency will likely have more discretion in defining the threshold for consumer harm under a Section 5 enforcement action; and, the agency’s consent decrees will be viewed a body of precedents indicating what data security practices are considered “unfair” by the Commission. But if LabMD wins, the enforcement bar will be raised – requiring more than just speculative or hypothetical consumer injury – to sustain an enforcement action.

 

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.

© Patterson Belknap Webb & Tyler LLP | Attorney Advertising

Written by:

Patterson Belknap Webb & Tyler LLP
Contact
more
less

Patterson Belknap Webb & Tyler 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.
Custom Email Digest
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.