The Secure Times

An online forum of the ABA Section of Antitrust Law's Privacy and Information Security Committee


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Caution: Your Company’s Biggest Privacy Threat is…the FTC

Technology companies – from startups to megacorporations – should not overlook an old privacy foe: the Federal Trade Commission (FTC).  Since its inception in 2002, the FTC’s data security program has significantly picked up steam.  In the last two years, the FTC has made headlines for its hefty privacy-related fines against Google and photo-sharing social network, Path.  In January 2014 alone, the agency settled with a whopping 15 companies for privacy violations.  What is more, many of these companies’ practices were not purposefully deceptive or unfair; rather the violations stem from mere failure to invest the time and security resources needed to protect data.

Vested with comprehensive authority and unburdened by certain hurdles that class actions face, the FTC appears poised for more action.  The FTC’s basis for its authority in the privacy context originates from the Federal Trade Commission Act (FTC Act) and is quite broad.  Simply put, it may investigate “unfair and deceptive acts and practices in or affecting commerce.”  In addition to this general authority, the FTC has authority to investigate privacy violations and breaches under numerous sets of rules, including the Children’s Online Privacy Protection Act (COPPA), the Fair Credit Reporting Act including disposal (FCRA), the Gramm-Leach-Bliley Act (GLB), and the Telemarketing and Consumer Fraud and Abuse Prevention Act.  Nor is the FTC hampered with the requirements of private class action litigation.  For example, successful privacy class actions often must establish that consumers were harmed by a data breach (as in In re Barnes & Noble Pin Pad Litigation), consumers actually relied on a company’s promises to keep the information confidential (as in In re Apple iPhone Application Litigation), or the litigation will not be burdened with consumer-specific issues (such as whether the user impliedly consented to the disclosure, as in In re: Google Inc. Gmail Litigation).

The FTC has often focused on companies failing to adhere to their own stated policies, considered a “deceptive” practice by the FTC.  More recently, the FTC settled with the maker of one of the most popular Android Apps, “Brightest Flashlight Free.”  While the App informed users that it collected their data, it is alleged to have failed to disclose that the data would be shared with third parties.  And though the bottom of the license agreement offered consumers an opportunity to click to “Accept” or “Refuse,” the App is alleged to have already been collecting and sending information (such as the location and the unique device identifier) prior to receiving acceptance.  Just last week, the FTC settled with Fandango for failing to adequately secure data transmitted through its mobile app, in contravention of its promise to users.  The FTC alleged that Fandango disabled a critical security process, known as SSL certificate validation, which would have verified that its app’s communications were secure.   As another example, the FTC recently settled with a maker of a camera device used in homes for a variety of purposes, including baby monitoring and security.  The device allows the video to be accessed from any internet connection.  The devices are alleged to have “had faulty software that left them open to online viewing, and in some instances listening, by anyone with the cameras’ Internet address.”

Companies have also been targeted for even slight deviations from their stated policies.  For example, the FTC recently reached settlements with BitTorrent and the Denver Broncos.  The entities were blamed for falsely claiming they held certifications under the U.S.-EU Safe Harbor framework.  In reality, the entities had received the certifications but failed to renew them.  The safe harbor is a streamlined process for US companies (that receive or process personally identifiable information either directly or indirectly from Europe) to comply with European privacy law.  Self-certifying to the U.S.-EU Safe Harbor Framework also ensures that EU organizations know that the organization provides “adequate” privacy protection.

Perhaps most surprising to companies is the FTC’s assertion that it may require them to have reasonable data protection policies in place (even if the company never promised consumers it would safeguard the data).  Failure to secure data, according to the FTC, is an “unfair” practice under the FTC Act.  For example, the FTC recently settled with Accretive Health, a company that handles medical data and patient-financial information.  Among other things, Accretive was alleged to have transported laptops with private information in an unsafe manner, leading to a laptop (placed in a locked compartment of an employee’s car) being stolen.  It is estimated that the FTC has brought over 20 similar types of cases, but all but one settled before any meaningful litigation.  The one: a case against Wyndham Hotels.  There, the FTC has alleged that Wyndham failed to adequately protect consumer data collected by its member hotels.  According to the FTC, hackers repeatedly accessed the data due to the company’s wrongly configured software, weak passwords, and insecure servers.  Though Wyndham’s Privacy Policy did not technically promise that the information would remain secure, the FTC faulted it for the lapse anyway.  Wyndham has challenged the FTC’s position in federal court and a decision is expected soon.

Being a target of an FTC action is no walk in the park.  In addition to paying for attorney fees, the FTC often demands significant remedial measures.  For instance, the company may be asked to (1) create privacy programs and protocols, (2) notify affected consumers, (3) delete private consumer data, (4) hire third-party auditors, and (5) subject itself to continual oversight by the FTC for 20 years.  What is more, if a company ever becomes a repeat offender and violates its agreement not to engage in future privacy violations, it will face significant fines by the FTC.  In this regard, for example, Google was required to pay $22.5 million for violating a previous settlement with the FTC.

All told, technology companies should not feel emboldened by recent class action victories in the privacy context.  To avoid FTC investigation, they should carefully review their data handling practices to ensure that they are in accord with their privacy policy.  Further, they would be wise to invest in the necessary resources required to safeguard data and regularly ensure that their methods are state of the art.

 


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FTC Examines Internet of things, Privacy and Security, in Recent Workshop

On November 19, 2013, the Federal Trade Commission held a day-long workshop, “Internet of Things: Privacy and Security in a Connected World” on the privacy implications concerning devices such as cars, home appliances, fitness equipment, and other machines that are able to gather data and connect to the internet. For consumers, these devices can help track health, remotely monitor aging family members, reduce utility bills, and even send alerts to buy more milk.

Ubiquitous Internet of Things

Technological advances and new business models centered around the internet of things have taken off.
It has been reported that crowd-sourcing start-up, Quirky, has teamed up with GE to develop connected-home products. Another start up company isdeveloping tracking technology through GPS-embedded tags. On November 20, 2013, Qualcomm announced that has developed a line of chips for the internet of things space. It has been argued that companies should adjust their business models and use the internet of things to connect to customers. These developments present the FTC with the challenge of keeping up with technology to protect consumers and the competitive landscape.

In her remarks, Chairwoman Edith Ramirez emphasized how ubiquitous smart devices have become. Five years ago, she remarked, there are more “things” than people connected to the Internet; by 2015, there will be an estimated twenty-five billion things connected to the Internet and by 2020, an estimated fifty billion. Commissioner Maureen Ohlhausen, in her remarks later in the workshop, stated that the FTC will conduct policy research to understand the effects that technological advances and innovative business models concerning the internet of things have on consumers and the marketplace.

Privacy and Security Challenges

Chairwoman Ramirez noted privacy and security challenges presented by the internet of things. Privacy risks are present since devices connected to the internet can collect, compile, and transmit information about consumers in ways that may not have been expected. When aggregated, the data pieces collected by devices present “a deeply personal and startlingly complete picture of each of us.” Security risks are present since “any device connected to the Internet is potentially vulnerable to hijack.” Indeed, these risks have been reported and present real concerns.

Chairwoman Ramirez noted that the FTC will be vigilant in bringing enforcement actions against companies who fail to properly safeguard consumers from security breaches. She noted as an example the FTC’s first enforcement forayinto the internet of things against TRENDnet for failing to properly design its software and test its internet-connected security cameras, leaving consumers vulnerable to a hacker who accessed the live feeds from 700 cameras and made them available on the Internet. When it encounters consumer harm, Commissioner Olhausen stated that the FTC will use its traditional enforcement tools to challenge any potential threats that arise, much like it has done in the data security, mobile, and big data spaces.

Chairwoman Ramirez said that companies that take part in the internet of things ecosystem are “stewards of the consumer data” and that “with big data comes big responsibility.” The FTC has published a number of best practices that Chairwoman Ramirez identified as useful for companies in the internet of things space: (1) privacy by design—privacy protections built in from the outset, (2) simplified consumer choice—allowing consumers to control their data, and (3) transparency—disclosure of what information the devices collect and how it is being used.

FTC Report Forthcoming

The FTC will produce a report on what it has learned from the November 19 workshop and provide fruther recommendations about best practices. The FTC report can educate consumers and businesses on how to maximize consumer benefits and avoid or minimize any identified risks. Commissioner Ohlhausen stressed that the FTC should identify whether existing laws and existing regulatory structures, including self-regulation, are sufficient to address potential harms.

Vint Cerf of Google, who gave the keynote presentation, advised that rather than relying on regulations to protect privacy, social conventions should be developed. He stated that “while regulation might be helpful, an awful lot of the problems that we experience with privacy is a result of our own behavior.”

The same day as the workshop, the Future of Privacy Forum released a white paper arguing for an updated privacy paradigm for the internet of things that focuses not on how information is collected and communicated but on how organizations use personally identifiable information.

The FTC will continue to accept comments until January 10, 2013.


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FTC v. Wyndham Update

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.