Bloomberg Law: Privacy & Data Security brings you single-source access to the expertise of Bloomberg Law’s privacy and data security editorial team, contributing practitioners,...
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security enforcement action against them, the U.S. District Court for the District of New Jersey held June 23 in an unpublished opinion.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of an earlier April 7 opinion denying the company's separate motion to dismiss, Judge Esther Salas wrote in a second unpublished opinion (FTC v. Wyndham Worldwide Corp.,2014 BL 174519, D.N.J., No. 2:13-cv-01887, unpublished opinion 6/23/14).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.
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.
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.
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:
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 firstname.lastname@example.org
To contact the editor responsible for this story: Barbara Yuill at email@example.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.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)