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The Privacy Advisor | The Court Says FTC Can Punish Rulebreakers, but What Exactly Are the Rules? Related reading: Global News Roundup: Aug. 9-15, 2022



If anyone was having a case of the Mondays this week it was Wyndham Hotels and Resorts, after a District Court of New Jersey judge denied the company’s motion to dismiss a Federal Trade Commission (FTC) lawsuit alleging Wyndham violated Section 5 of the FTC Act.

Some say it’s a landmark decision that emboldens the FTC’s authority as a de facto privacy regulator and could even thwart national privacy legislation, while others say the decision simply gives the FTC the power to regulate concepts that aren’t well defined, as they haven’t been proscribed succinctly for companies aiming to comply with rules effectively created piecemeal via FTC consent decrees.

To recap: The FTC charged Wyndham Worldwide Corporation in 2012 for unfair and deceptive acts and practices arising from data breaches in its franchisees’ computer systems. The brand was breached three times, affecting hundreds of thousands’ of customers’ payment card data in the end.

In its lawsuit, the FTC alleged Wyndham violated both the “unfairness” and “deceptive” provisions of Section 5 of the FTC Act because it claimed “industry-standard practices” in its own privacy policy but failed to utilize basic protections and customers suffered “substantial” harm as a result of its breaches.

It’s not enough to say ‘This kind of looks like unfairness to us.' That’s the common law they point to. It’s not a meaningful analysis. It’s like an initial indictment.

Berin Szoka of Tech Freedom

But Wyndham asked a District Court Judge in New Jersey to dismiss the case, arguing that Section 5 of the FTC Act does not give the FTC the authority to regulate data security and that the FTC itself had numerous times prior declared so itself, as IAPP Westin Fellow Kelsey Finch reported.

In fact, Wyndham argued, the FTC has asked Congress to pass data-security litigation, indicating it “necessarily then lacks the authority under Section 5” and that its consent orders don’t carry the force of law and shouldn’t be regulated as such, a point with which many industry voices vehemently agree.

Wyndham further argued that if the FTC is going to regulate based on its own rules, it has to more clearly define those rules.

But U.S. District Court Judge Esther Salas agreed with the FTC that its 52 data security consent decrees serve as fair warning to companies, and Wyndham should have known better.

Privacy insiders have largely cast the ruling as one of the most defining in privacy regulation and a big win for the FTC.

That doesn’t mean everyone is happy about it. Deborah White, president of the Retail Litigation Center (RLC), which was part of an industry coalition that filed an amicus brief with the court in favor of dismissing the FTC’s suit, said the RLC is “disappointed with the decision and continues to believe the FTC’s actions exceed the scope of the authority that Congress granted the agency.”

However, Samford University Prof. Woodrow Hartzog, who co-authored The FTC and the New Common Law of Privacy and will teach “Privacy and the Federal Trade Commission” at the IAPP’s Summer Privacy Institute, said the decision“wisely recognizes that guidance for what constitutes reasonable data security practices can come from several places, including previous FTC complaints and industry guidance.”

Alternately, Berin Szoka of nonprofit, public policy think-tank TechFreedom—which also filed an amicus brief in favor of Wyndham—said the court’s ruling misses the problem entirely. The question, he said, isn’t whether the FTC must officially rule-make before it can regulate and whether it has the authority to do so in absence of hard-and-fast rules, it’s whether its case-by-case method of setting parameters is just and fair in its own right.

“’Does the FTC have the authority here?’ was a sexier headline,” Szoka said. “And it does. But the question is how the FTC uses it.”

While the FTC says its past consent decrees indicate how it uses its authority on unfairness and deception and companies should take heed, that’s not enough to inform the rule-followers, Szoka said.

“It’s not enough to say ‘This kind of looks like unfairness to us,’” he said. “That’s the common law they point to. It’s not a meaningful analysis. It’s like an initial indictment.”

Holding up consent decrees as authoritative guidance doesn’t work because, as the FTC, itself, says, consent decrees are negotiated and apply solely to the facts of each individual case, said George Mason University adjunct law Prof. Gerry Stegmaier, CIPP/US, whose opinion was cited in the court’s decision. The facts of each case are only briefly mentioned in consent decrees, meaning businesses don’t really even have access to the FTC’s expectations on specific practices.

While there are guidance documents and reports on privacy, there aren’t the same guidance and documents on data security, he said.

“We have a basic principle of criminal law and adjudicative law in the U.S. that if you are going to punish people, they need to have been able to reasonably know the conduct is illegal,” Stegmaier said.

For that reason, it would not be surprising if we now see the FTC more actively use its ‘unfairness’ authority in the privacy and data security realm, even without claims of deception, where the FTC can point to some injury by consumers.

Alysa Hutnik of Kelley Drye

Hartzog agrees to some extent.

“Of course, the more information companies have regarding what constitutes fair and reasonable data security practices the better,” he said, “and there is likely more to come in this dispute, but this opinion is an important victory in ensuring baseline data security protections for consumers.”

Stegmaier said the case also means a victim is being prosecuted. Take Target, for example: It has been pilloried across the media, but the company, itself, suffered 10 percent profit losses in Q4 following its breach.

“Rather than prosecuting the bad guys, we are prosecuting the victims,” said Stegmaier. “It’s kind of like saying, ‘My bar got robbed, so I’m going to arrest the owner because he didn’t have a good enough lock on the front door, and I’m going to tell people not to go to the bar,’ rather than say, ‘Let’s go find the person that broke into that bar.’”

Wiley Rein’s Kirk Nahra, CIPP/US, said the decision supports the FTC’s work in the last decade and it will likely embolden the FTC to be more aggressive moving forward. Indeed, Chairwoman Edith Ramirez tweeted Monday that she’s pleased the court recognized the FTC’s authority.

Nahra said the decision may also “reduce pressure on Congress going forward to pass data security legislation.”

While Judge Salas said the ruling “does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked,” Alysa Hutnik of Washington, DC, law firm Kelley Drye, said the ruling indicates the risk companies face if a data breach occurs. They are likely to face FTC scrutiny, and the FTC’s ability to use “deception” and “unfairness” under Section 5 has just been affirmed.

“For that reason, it would not be surprising if we now see the FTC more actively use its ‘unfairness’ authority in the privacy and data security realm, even without claims of deception, where the FTC can point to some injury by consumers,” she said.

While the decision (read the full text here) will likely have companies looking at their own policies to be sure they have reasonable enough procedures in line to protect themselves against unwanted FTC attention, Szoka maintains that “reasonable” isn’t in Section 5.

“The court takes for granted that reasonableness is a valid way to regulate data security,” he said. “I agree with the FTC in general, but it comes down to the final point that, unlike other areas of law that the court points to, where an agency has actually issued a lot of guidance and gone through litigation, the FTC has never done any of that.”

So what’s to come? Who knows?

Steve Lehotsky, deputy chief counsel for litigation at the National Chamber Litigation Center, which also filed an amicus brief with the court in favor of Wyndham, said the decision is just one from the court and won’t be the last word.

“The FTC's regulation of cybersecurity practices must provide fair notice to companies and must be clearly within the bounds of the commission's statutory authority,” Lehotsky said. ”We will continue to support Wyndham as this litigation progresses.”

“The Wyndham litigation is a marathon,” Stegmaier said. “And the starters’ gun just went off.”

Editor’s Note: In an effort to build a body of knowledge on FTC consent decrees, The IAPP Westin Research Center has begun producing an FTC Privacy Casebook, which collates, organizes, indexes, tags and annotates the body of FTC privacy and data security jurisprudence. You can find the first 10 settlement agreements analyzed here.


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