U.S. Federal Trade Commission (FTC) Issues

This week the Federal Trade Commission (FTC) fined TRUSTe, a company that endorses the data privacy practices of businesses, for misrepresenting its certification programs to consumers. TRUSTe offers Certified Privacy Seals, representing TRUSTe’s guarantee that e-commerce websites, mobile apps, cloud-based services, and child-centric websites are compliant with applicable regulatory mandates and employ best practices in protecting consumer information. To earn a Certified Privacy Seal, businesses must share their data privacy practices with TRUSTe, meet TRUSTe’s requirements for consumer transparency, and allow consumers to choose how personal information is collected and used.

However, once TRUSTe bestowed a Certified Privacy Seal on some companies, the FTC alleges that TRUSTe did little to ensure that these companies continued to follow TRUSTe’s best practices. TRUSTe admitted that it failed to conduct annual audits of previously certified websites, but reiterated that less than 10% of TRUSTe’s certifications were part of this oversight. You can read TRUSTe’s statement on its blog.

So, if you’re a business that deals with consumer personal information, is it worth the time and expense to receive third party certifications like those given by TRUSTe? It depends. Third party oversight may be valuable reassurance for your business, instilling confidence that all best practices and regulatory frameworks are identified and followed. However, don’t rely too heavily on such third party certification. While the FTC was silent on any ramifications for customers of TRUSTe, businesses should engage any third party certification with the mindset that the business itself is ultimately responsible for ensuring its privacy practices follow industry standards and meet all regulatory requirements.


Imagine you have completed your HIPAA risk assessment and implemented a robust privacy and security plan designed to meet each criteria of the Omnibus Rule. You think that, should you suffer a data breach involving protected health information as defined under HIPAA (PHI), you can show the Secretary of the Department of Health and Human Services (HHS) and its Office of Civil Rights (OCR), as well as media reporters and others, that you exercised due diligence and should not be penalized. Your expenditure of time and money will help ensure your compliance with federal law.

Unfortunately, however, HHS is not the only sheriff in town when it comes to data breach enforcement. In a formal administrative action, as well as two separate federal court actions, the Federal Trade Commission (FTC) has been battling LabMD for the past few years in a case that gets more interesting as the filings and rulings mount (In the Matter of LabMD, Inc., Docket No. 9357 before the FTC). LabMD’s CEO Michael Daugherty recently published a book on the dispute with a title analogizing the FTC to the devil, with the byline, “The Shocking Expose of the U.S. Government’s Surveillance and Overreach into Cybersecurity, Medicine, and Small Business.” Daugherty issued a press release in late January attributing the shutdown of operations of LabMD primarily to the FTC’s actions.

Among many other reasons, this case is interesting because of the dual jurisdiction of the FTC and HHS/OCR over breaches that involve individual health information.

On one hand, the HIPAA regulations detail a specific, fact-oriented process for determining whether an impermissible disclosure of PHI constitutes a breach under the law. The pre-Omnibus Rule breach analysis involved consideration of whether the impermissible disclosure posed a “significant risk of financial, reputational, or other harm” to the individual whose PHI was disclosed. The post-Omnibus Rule breach analysis presumes that an impermissible disclosure is a breach, unless a risk assessment that includes consideration of at least four specific factors demonstrates there was a “low probability” that the individual’s PHI was compromised.

In stark contrast to HIPAA, the FTC files enforcement actions based upon its decision that an entity’s data security practices are “unfair”, but it has not promulgated regulations or issued specific guidance as to how or when a determination of “unfairness” is made. Instead, the FTC routinely alleges that entities’ data security practices are “unfair” because they are not “reasonable” – two vague words that leave entities guessing about how to become FTC compliant.

In 2013, in an administrative action, LabMD challenged the FTC’s authority to institute these type of enforcement actions. LabMD argued, in part, that the FTC does not have the authoritiy to bring actions under the “unfairness” prong of Section 5 of the FTC Act. LabMD further argued that there should only be one sheriff in town – not both HHS and the FTC. Not surprisingly, in January 2014, the FTC denied the motion to dismiss, finding that HIPAA requirements are “largely consistent with the data security duties” of the FTC under the FTC Act.The opinion speaks of “data security duties” and “requirements” of the FTC Act, but these “duties” and “requirements” are not spelled out (much less even mentioned) in the FTC Act. As a result, how can anyone arrive at the determination that the standards are consistent? Instead, entities that suffer a data security incident must comply with the detailed analysis under HIPAA, as well as the absence of any clear guidance under the FTC Act.

In a March10, 2014 ruling, the administrative law judge ruled that he would permit LabMD to depose an FTC designee regarding consumers harmed by LabMD’s allegedly inadequate security practices. However, the judge also ruled that LabMD could not “inquire into why, or how, the factual bases of the allegations … justify the conclusion that [LabMD] violated the FTC Act.” So while the LabMD case may eventually provide some guidance as to the factual circumstances involved in an FTC determination that data security practices are “unfair” and have caused, or are likely to cause, consumer harm, the legal reasoning behind the FTC’s determinations is likely to remain a mystery.

In addition to the challenges mounted by LabMD, Wyndham Worldwide Corp., has also spent the past year contesting the FTC’s authority to pursue enforcement actions based upon companies’ alleged “unfair” or “unreasonable” data security practices. On Monday, April 7, 2014, the United States District Court for the District of New Jersey sided with the FTC and denied Wyndham’s motion to dismiss the FTC’s complaint. The Court found that Section 5 of the FTC Act permits the FTC to regulate data security, and that the FTC is not required to issue formal rules about what companies must do to implement “reasonable” data security practices.

These recent victories may cause the “other sheriff” – the FTC – to ramp up its efforts to regulate data security practices. Unfortunately, because it does not appear that the FTC will issue any guidance in the near future about what companies can do to ensure that their data security practices are reasonable, these companies must monitor closely the FTC’s actions, adjudications or other signals in an attempt to predict what the FTC views as data security best practices.

On Friday, February 22, 2013, the FTC resolved an enforcement action that it brought against HTC America Inc. for allegedly failing to use "reasonable and appropriate" security measures in developing and customizing its devices. In its first case against a mobile device manufacturer, the FTC has instructed HTC America Inc. about how to develop and build its products. The settlement between the FTC and HTC serves as yet another example where, in the absence of federal or state legislation, the FTC has stepped in and created data security standards. Essentially, the FTC continues to informally create legislation through settlements of its enforcement actions.  A copy of the consent order settling this action is attached here: ftc.gov/os/caselist/1223049/130222htcorder.pdf

The Federal Trade Commission announced yesterday a settlement with Epic Marketplace, an online advertising network, which prohibits Epic from further collection of data obtained by “browser sniffing” the surfing history of Internet users and requires Epic to destroy all previously collected data.

According to the FTC complaint, Epic was collecting information from millions of individuals by “browser sniffing,” which is a practice that allowed Epic to determine whether the user had previously visited more than 54,000 websites, including websites relating to fertility issues, impotence, menopause, incontinence, disability insurance, credit repair, debt relief, and personal bankruptcy. Once Epic had this information, it would then send targeted advertisements to the user.

Many users have no idea that this technology even exists, and the FTC’s main gripe appears to be that the user did not have knowledge this was occurring on sites outside of Epic’s advertising network. Epic’s privacy policy promised that Epic would collect information about users only for use in Epic’s 45,000 website network. Apparently, the FTC was not concerned with the practice but it’s concern was centered around Epic collecting information from users about visits to websites not in Epic’s website network.

“Consumers searching the Internet shouldn’t have to worry about whether someone is going to go sniffing through the sensitive, personal details of their browsing history without their knowledge,” FTC Chairman Jon Leibowitz said in a statement. “This type of unscrupulous behavior undermines consumers’ confidence, and we won’t tolerate it.”

Stated another way, the FTC is saying that Epic could collect information about whether consumers visited sites in its advertising network having to do with fertility issues, impotence, menopause, incontinence, disability insurance, credit repair, debt relief, and personal bankruptcy, and then use that information to serve that consumer advertisements. The problem was that Epic went beyond its own advertising network. That makes sense.  A company breaching the representations in its own privacy policy is low hanging fruit.

What the FTC is NOT saying is that consumers would never know what the heck Epic’s privacy policy says, so how could they consent to this collection and use of their information. Online advertisers are in this wonderful position where the consumer never really “gets” to them, the consumer only sees the advertisements that are served. .

So is the take away that any company besides Epic can use “browser sniffing” as long as its use is disclosed in its privacy policy (which consumers would not even know existed) and followed by that company?  The FTC is certainly not taking a contrary position.

The FTC press release follows:

Continue Reading FTC “History Sniffing” Settlement Meaningless or the Start of Something Bigger

According to a press release issued yesterday, November 29, 2011, by the Federal Trade Commission, Facebook settled charges that Facebook “deceived consumers by telling them they could keep their information on Facebook private, and then repeatedly allowing it to be shared and made public.”

The complaint (PDF link) lists a litany of bad practices by Facebook. One allegation that stands out, largely because of the media firestorm that it created at the time, was Facebook’s change in privacy settings to users’ accounts in December 2009. The foregoing settings change was, in the FTC’s opinion, particularly egregious because Facebook undertook the changes without any notice or consent from users.

Another allegation that stands out, again both because of the media firestorm and the falsehood, was Facebook’s assertion that information from deactivated user accounts would not be accessible.

And what grueling punishment must Facebook endure for its privacy-related bad acts? According to Jon Leibowitz, Chairman of the FTC, "Facebook is obligated to keep the promises about privacy that it makes to its hundreds of millions of users." Rough justice.

In all seriousness, there is some substance to the settlement. Facebook must not make any further deceptive privacy claims. Facebook must also get consumers’ approval before it changes the way it shares their data. Finally, Facebook must obtain periodic assessments of its privacy practices by independent, third-party auditors for the next 20 years.

Frankly, the foregoing requirements on Facebook are all steps that a company like Facebook, if not substantially all companies handling consumer personal information, should be undertaking.

Specifically, under the proposed settlement, Facebook is:

  • barred from making misrepresentations about the privacy or security of consumers’ personal information;
  • required to obtain consumers’ affirmative express consent before enacting changes that override their privacy preferences;
  • required to prevent anyone from accessing a user’s material more than 30 days after the user has deleted his or her account;
  • required to establish and maintain a comprehensive privacy program designed to address privacy risks associated with the development and management of new and existing products and services, and to protect the privacy and confidentiality of consumers’ information; and
  • required, within 180 days, and every two years after that for the next 20 years, to obtain independent, third-party audits certifying that it has a privacy program in place that meets or exceeds the requirements of the FTC order, and to ensure that the privacy of consumers’ information is protected.

The proposed order also contains standard record-keeping provisions to allow the FTC to monitor compliance with its order.

The proposed settlement is not yet final. The proposed settlement will be open to public comment for thirty days, ending on December 30, 2011. The terms of the proposed settlement is published in the Federal Register shortly. After the close of the comment period, the FTC will decide whether to make the proposed consent order final.

Interested in submitting your comments to the FTC? According to the press release: Interested parties can submit comments online or in paper form by following the instructions in the "Invitation To Comment" part of the "Supplementary Information" section. Comments in paper form should be mailed or delivered to: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC is requesting that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.

In an effort to ease the holiday weekend of those affected, the FTC announced that the effective date of the Red Flag Rules has been delayed until December 31, 2010.  This announcement may have a familiar feel to you (January 1, 2008, November 1, 2008, June 1, 2010?).  Click here to read at the FTC web site, of read the full text by clicking "Continue Reading" below.  Happy Memorial Day.

Continue Reading FTC Delays Implementation of Red Flag Rules Until December 31, 2010

The FTC has again extended enforcement of the Red Flag Rules, this time until June 1, 2010.

This extension comes just one day after the ABA won a victory with its request that practicing attorneys be exempted from compliance with the Red Flag Rules.

The extension of the enforcement deadline also comes shortly after certain other exemptions, namely, health care practices, accounting practices, legal practices (each with 20 or fewer employees) and certain other businesses approved by the FTC that are engaged in domestic services, engage in services where identity theft is rare and have no incidence of identity theft, were passed in the House of Representatives.

Originally, the Red Flag Rules would have taken effect on November 1, 2008, which was then extended to May 1, 2009, and then further extended to November 1, 2009.

The United States District Court for the District of Columbia ruled that the Red Flag Rules are not applicable to attorneys engaged in the practice of law.

The complaint, filed in late August 2009, argues that the FTC overstepped its statutory authority by imposing the Red Flag Rules on attorneys engaged in the practice of law.

The ruling is another victory by the American Bar Association when it comes to exempting attorneys from rules regarding the handling of financial and/or sensitive information. It would seem that the FTC would have made adjustments to its definitions of “creditor” to make it clear that attorneys should be included in its regulations, but that clarification may need to be addressed at the Congressional level to avoid future ambiguity.

If Congress does present future legislation, or an amendment to existing legislation, that specifically includes attorneys, it will be interesting to see how the ABA argues that attorneys should be exempted from these these types of federal consumer protection statutes.

The BLT: The Blog of LegalTimes reports that it is expected that the FTC will appeal the ruling.

Representative John Adler’s (D-NJ) amendment to the FTC Red Flag Rules, an act titled “To amend the Fair Credit Reporting Act to provide for an exclusion from Red Flag Guidelines for certain businesses,” passed the House of Representatives on October 20, 2009.

Currently, the Red Flag Rules go into effect on November 1, 2009.

Set forth in full below, the bill exempts health care practices, accounting practices, legal practices (each with 20 or fewer employees) and certain other businesses approved by the FTC that are engaged in domestic services, engage in services where identity theft is rare and have no incidence of identity theft, from complying with the Red Flag Rules.

The Adler amendment will have little effect on the litigation brought in August by the American Bar Association because of its limited scope.