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,...
By Jimmy H. Koo
The Federal Trade Commission’s data security enforcement standard came under fire June 22 from a panel of federal appeals court judges ( LabMD, Inc. v. FTC , 11th Cir., No. 16-16270, oral argument 6/21/17 ).
As predicted, the level of harm required for the FTC to act was “front and center” during the oral argument. Attorneys for the FTC and the now-defunct medical testing company LabMD Inc. squared off before the U.S. Court of Appeals for the Eleventh Circuit over what level of data breach injury is sufficient to allow the privacy regulator to take enforcement action.
Companies subject to the FTC’s data security enforcement authority, will be strongly affected by the court’s ruling on whether to uphold the FTC’s enforcement standard.
In the absence of direct data security statutory or regulatory authority, the commission has relied on FTC Act’s Section 5, a catch-all prohibition against unfair and deceptive trade practices, to carry out data security compliance actions. The FTC requires reasonable data security safeguards for sensitive information and takes action against companies it deems to have lax security that improperly exposed data causing a substantial risk to affected individuals. A wide variety of companies, from social media giant Twitter Inc. to identity theft services company Lifelock Inc., have faced FTC enforcement action over their alleged insufficient data security.
Douglas H. Meal, litigation partner at Ropes & Gray in Boston and counsel for LabMD, argued that the court shouldn’t accept the FTC’s “purely conceptual” argument that there is “substantial injury” sufficient to act against a company over alleged lax data security based only on “any unauthorized access to any personal medical information” rather than evidence of “tangible injury.”
The FTC’s “subjective harm” standard isn’t authorized by Congress or established in regulations, and it gives the FTC too much enforcement discretion, Meal said.
A commission attorney told the court that nothing in the FTC Act’s text or legislative history says that “intangible injuries are off limits.”
According to an audio recording of the oral argument, the bench questioned the “outer limits” of the FTC’s enforcement authority and asked the FTC’s counsel why the commission doesn’t engage in rulemaking to define reasonable security.
Rulemaking isn’t effective and there are too many variables, as standards are always changing, the FTC’s counsel said.
The court, however, questioned how companies are supposed to know “that they’re violating what they’re violating,” if there are no rules.
The FTC said that it is “entitled to proceed in a case-by-case” manner and that companies have “duty to act reasonably under the circumstances.”
Judge Gerald Bard Tjoflat responded that such a standard is “as nebulous as you can get.”
The FTC’s counsel said that data security threats and new technologies are constantly changing, and therefore, it makes more sense to say “you have to act reasonably” than to have specific rules. The court criticized this approach, saying that this unclear standard of “reasonableness,” determined by the commissioners, isn’t “good public policy.”
Judges Charles R. Wilson and Eduardo C. Robreno also sat on the bench for the oral argument.
Meal said there are instances of successful rulemaking in other agencies, citing Health Insurance Portability and Accountability Act regulations by the Department of Health an Human Services. “What about payment card security rulemaking? It’s not impossible,” Meal said.
If the FTC wishes to change the standard for actionable injury, the commission should “go to congress,” Meal said. Just because the commissioners want to change the standard, it doesn’t mean you can change it, he told the court.
Meal, who has been the lead outside lawyer for numerous companies facing claims from data security breaches, including Target Corp., Neiman Marcus Group LLC, The Home Depot Corp., and Wyndham Worldwide Corp, told Bloomberg BNA that “we greatly appreciate the time and attention the court is giving to LabMD’s arguments.”
The FTC declined to comment.
To contact the reporter on this story: Jimmy H. Koo in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Donald Aplin at email@example.com
Full audio recording of the oral argument is available at http://www.ca11.uscourts.gov/oral-argument-recordings.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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)