LabMD Wants Stay of Landmark FTC Data Security Ruling

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By Jimmy H. Koo

Aug. 31 — LabMD Inc. Aug. 30 asked the Federal Trade Commission to stay the effective date of its landmark data security enforcement action against the medical testing company until after planned court appeals are resolved.

The FTC's ruling against the private company overturned its own chief administrative law judge's (ALJ) decision questioning the commission's ability to go after companies for alleged lax data security where there is no direct showing of consumer harm (15 PVLR 1593, 8/8/16). Most companies have elected not to directly challenge the FTC's data security enforcement authority, instead entering no-fault consent orders with the commission.

FTC Building

The ultimate resolution of the dispute has significance for how companies that fall under the FTC's general consumer protection jurisdiction must deal with data security compliance issues. In absence of direct data security enforcement authority, the FTC has relied on the general authority granted by Section 5 of the FTC Act to carry out data security compliance actions.

Why Stay?

LabMD told the FTC that it intends to appeal the administrative ruling to a U.S. Court of Appeals. LabMD CEO Michael J. Daugherty told Bloomberg BNA that his attorneys haven't decided in which appeals court to file the appeal. The proposed order accompanying LabMD's motion would postpone the FTC's action for the length of the appeals process up to any activity before the U.S. Supreme Court.

LabMD's Aug. 30 application for a stay, obtained by Bloomberg BNA, asserted that the company isn't able pay for the expensive and time-consuming tasks required by FTC's final order. LabMD also argued that “it is always in the public interest” to make sure that the commission's final order complies with the U.S. Constitution and other federal law.

According to LabMD's application, this case presents “important unresolved legal questions,” including:

  •  the meaning of “likely to cause substantial injury” under Section 5 of the FTC Act;
  •  whether the FTC has authority to enforce data security and, if so, whether the commission provided adequate notice of what is required or prohibited under Section 5 of the FTC Act;
  •  whether the FTC may exercise Section 5 “unfairness” jurisdiction over Health Insurance Portability and Accountability Act-covered health-care providers' data security;
  •  whether the alleged disclosure of sensitive medical information, by itself and without proven economic or physical harm, can be considered an actual harm satisfying the “substantial injury” requirement; and
  •  whether an alleged privacy harm, standing alone, can be deemed actual harm to constitute substantial injury.

“The issues in this case are sufficiently complex” to support a stay pending appeal, LabMD said.

Final Decision

In 2013, the commission filed an administrative complaint against LabMD for allegedly storing its patient information on a peer-to-peer file-sharing network. In its July 29 final opinion, the commission reversed a November 2015 ruling by Chief ALJ D. Michael Chappell. He held that the FTC failed to show that LabMD's data security practices either caused or were likely to cause substantial injury to consumers.

Reversing, the commission said that it doesn't know whether the alleged unauthorized disclosure of sensitive medical information by the now-defunct Atlanta-based company resulted in actual identity theft or physical harm for any of the consumers. But, it ruled that a disclosure “causes additional harms that are neither economic nor physical in nature but are nonetheless real and substantial and thus cognizable” under Section 5 of the FTC Act. The FTC also disagreed with the ALJ's ruling that “likely to cause” means that injury was probable, concluding that “a practice may be unfair if the magnitude of the potential injury is large, even if the likelihood of the injury occurring is low.”

To contact the reporter on this story: Jimmy H. Koo in Washington at jkoo@bna.com

To contact the editors responsible for this story: Donald G. Aplin at daplin@bna.com ; Daniel R. Stoller at dstoller@bna.com

For More Information

Full text of the application for stay is available at http://src.bna.com/ia5.

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