Court Rejects Wyndham's Second Bid to Ax FTC Data Security Case, but Permits Review

By Katie W. Johnson  

June 25 — The Federal Trade Commission sufficiently alleged that several Wyndham Hotels entities operated as a common enterprise in the commission's data security enforcement action against them, the U.S. District Court for the District of New Jersey held June 23 in an unpublished opinion.

But Wyndham Hotels and Resorts LLC can seek interlocutory review of portions of an earlier April 7 opinion denying the company's separate motion to dismiss, Judge Esther Salas wrote in a second unpublished opinion (FTC v. Wyndham Worldwide Corp.,2014 BL 174519, D.N.J., No. 2:13-cv-01887, unpublished opinion 6/23/14).

The court, however, didn't stay the underlying litigation, in which Wyndham argued that the FTC lacked the authority to enforce data security under the unfairness prong of Section 5 of the FTC Act and failed to issue data security regulations or guidance.

In reaching its decision to grant the motion for interlocutory appeal, the court said it considered “the nationwide significance of the issues in this action—which indisputably affect consumers and businesses in a climate where we collectively struggle to maintain privacy while enjoying the benefits of the digital age.”

If the U.S. Court of Appeals for the Third Circuit grants the Hotels and Resorts petition, “this would be the first time that a federal appellate court has considered whether the FTC can bring a Section 5 unfairness claim involving data security and whether the FTC must promulgate rules before bringing an unfairness claim,” Jeff Kosseff, an associate at Covington & Burling LLP's Washington office, told Bloomberg BNA June 25.

Kosseff predicted that the Third Circuit is likely to accept review.

Separate Motion to Dismiss Denied

In 2012, the FTC initiated an enforcement action against Wyndham Worldwide Corp. and three of its subsidiaries, alleging that computer network intrusions led to more than $10.6 million in payment card fraud losses.

The companies moved to dismiss, arguing that the FTC exceeded its congressional authority and that its use of enforcement actions in the privacy and data security arena created a piecemeal data security standard that lacked regulatory backing and failed to give the company notice of which practices were lawful.

In a win for the FTC, the court April 7 denied the motion to dismiss by Hotels and Resorts, ruling that the FTC has authority under the unfairness prong of Section 5 of the FTC Act, 15 U.S.C. § 45(a), to bring a data security enforcement action against the company.

The court also ruled that it isn't necessary for Congress to have expressly given the FTC authority to wield the FTC Act against companies who cause harm by maintaining weak data security. Nor is it necessary, the court ruled, for the FTC to have promulgated prior data security regulations.

Common Enterprise?

In its latest series of rulings, the court denied the motion to dismiss by the remaining Wyndham entities—Wyndham Worldwide, Wyndham Hotel Group LLC and Wyndham Hotel Management Inc.

The FTC adequately plead factual allegations supporting its contention that the Wyndham entities operated as a common enterprise while engaging in the unlawful actions alleged in the complaint, the court said. In particular, it said, “the FTC alleges specific facts relating to common control, sharing of office space and a lack of distinction between the Defendants.”

For example, the commission alleged that Wyndham Worldwide creates information security programs for both itself and its subsidiaries and oversees those programs, the court said.

“To be sure, it is premature at this stage to determine whether Defendants actually operated a common enterprise sufficient for joint and several liability,” the court cautioned.

Door Open to Petition for Review

The court, however, granted the motion by Hotels and Resorts to certify the April 7 order for interlocutory appeal.

The defendant satisfied each of the requirements under 28 U.S.C. § 1292(b) for seeking such an appeal, the court said. Specifically, the order concerned controlling questions of law, there are substantial grounds for differences of opinion concerning those questions and an appeal might materially advance the litigation, according to the court.

The district court said that “given the novelty of liability issues relating to data security breaches,” it “finds that reasonable jurists may differ over the Court's resolution of the two legal issues in question.”

The court ordered the following questions to be certified:

  •  “Whether the Federal Trade Commission can bring an unfairness claim involving data security under Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a).”
  •  “Whether the Federal Trade Commission must formally promulgate regulations before bringing its unfairness claim under Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a).”
  •  

    Likelihood of Third Circuit Ruling

    The next step in the case would be for Hotels and Resorts to file a petition for permission to appeal with the U.S. Court of Appeals for the Third Circuit.

    “Because the Third Circuit has complete discretion to grant or deny the petition for interlocutory appeal, the court's decision is difficult to predict with certainty, Kosseff said. “But I think that there is a good chance that the court will grant the petition.”

    He said he agreed with the district court's conclusions that the two issues that were certified are controlling questions of law and that there are substantial grounds for differences of opinion on those questions. “This can be seen in the significant public debate about the scope of the FTC's data security authority that was sparked by Judge Salas's April decision,” he said.

    Kosseff added that “a Third Circuit ruling on the issue would be binding in federal courts in Delaware, New Jersey, and Pennsylvania, and highly persuasive authority in other federal courts.”

    The FTC represented itself. Gibbons PC represented the Wyndham entities.

    To contact the reporter on this story: Katie W. Johnson in Washington at kjohnson@bna.com

    To contact the editor responsible for this story: Barbara Yuill at byuill@bna.com

    Full text of the court's opinion on the motion to dismiss is available at http://www.bloomberglaw.com/public/document/FTC_v_Wyndham_Worldwide_Corp_Civil_Action_No_131887_ES_2014_BL_17.

    Full text of the court's opinion on the motion for interlocutory review is available at http://www.bloomberglaw.com/public/document/FTC_v_Wyndham_Worldwide_Corp_Civil_Action_No_131887_ES_2014_BL_17/1.