Edit (Feb. 5, 2014): For a more recent update on this case, please see this post.
On November 1, Maureen Ohlhausen, a Commissioner at the Federal Trade Commission (FTC), held an “ask me (almost) anything” (AMAA) session on Reddit. There were no real surprises in the questions Commissioner Ohlhausen answered, and the AMAA format is not well-suited to lengthy responses. One interesting topic that did arise, however, was the FTC’s complaint against Wyndham Worldwide Corporation, and Wyndham’s subsequent filing of a motion to dismiss the FTC action against them. Commissioner Ohlhausen declined to discuss the ongoing litigation, but asserted generally that the FTC has the authority to bring such actions under Section 5 of the FTC Act, 15 U.S.C. § 45. While there were no unexpected revelations in the Commissioner’s response, I thought it presented an excellent opportunity to bring everyone up to speed on the Wyndham litigation.
On June 26, 2012, the Federal Trade Commission (FTC) filed a complaint in Arizona Federal District Court against Wyndham Worldwide Corporation, alleging that Wyndham “fail[ed] to maintain reasonable security” on their computer networks, which led to a data breach resulting in the theft of payment card data for hundreds of thousands of Wyndham customers, and more than $10.6 million in fraudulent charges on customers’ accounts. Specifically, the complaint alleged that Wyndham engaged in deceptive business practices in violation of Section 5 of the FTC Act by misrepresenting the security measures it undertook to protect customers’ personal information. The complaint also alleged that Wyndham’s failure to provide reasonable data security is an unfair trade practice, also in violation of Section 5.
On August 27, 2012, Wyndham responded by filing a motion to dismiss the FTC’s complaint, asserting, inter alia, that the FTC lacked the statutory authority to “establish data-security standards for the private sector and enforce those standards in federal court,” thus challenging the FTC’s authority to bring the unfairness count under the FTC Act. In their October 1, 2012 response, the FTC asked the court to reject Wyndham’s arguments, stating that the FTC’s complaint alleged a number of specific security failures on the part of Wyndham, which resulted in two violations of the FTC Act. The case was transferred to the Federal District of New Jersey on March 25, 2013, and Wyndham’s motions to dismiss were denied. On April 26, Wyndham once again filed motions to dismiss the FTC’s complaint, again asserting that the FTC lacked the legal authority to legislate data security standards for private businesses under Section 5 of the FTC Act.
At stake in this litigation is the FTC’s ability to bring enforcement claims against companies that suffer data breach due to a lack of “reasonable security.” What is unique in this case is Wyndham’s decision to fight the FTC action in court rather than make efforts to settle the case, as other companies have done when faced with similar allegations by the FTC. For example, in 2006, the FTC hit ChoicePoint Inc. with a $10 million penalty over data breach where over 180,000 payment card numbers were stolen. The FTC has also gone after such high-profile companies as Twitter, HTC, and Google based on similar facts and law. These actions resulted in out-of-court settlements.
If Wyndham’s pending motions to dismiss are denied, and the FTC ultimately prevails in this case, it is likely that the FTC will continue to bring these actions, and businesses will likely see an increased level of scrutiny applied to their network security. If, however, Wyndham succeeds and the FTC case against them is dismissed, public policy questions regarding data security will likely fall back to Congress to resolve.
Oral argument for the pending motions to dismiss are scheduled for November 7. No doubt many parties will be following these proceedings with great interest.