FTC May Use Unfair and Deceptive Trade Practices Authority to Regulate Cybersecurity

Even Where It Has Not Issued Regulations to Set an Acceptable Cyber Security Standard

April 9, 2014

Since the mid- to late 1990s, the Federal Trade Commission (FTC) has been the leading federal regulator in the field of data privacy and security. It has operated under its general grant of consumer protection authority in the Federal Trade Commission Act (FTCA). The FTCA was enacted in 1914 and obviously was not drafted to address directly Internet-related issues. Privacy lawyers and scholars alike have been wrestling with the question of whether the FTC really has a legislative grant of authority to regulate cybersecurity. But until the FTC sued the hotel chain Wyndham Worldwide, companies that received FTC complaints settled prior to the issue of FTC’s authority being litigated. The somewhat abstruse issue of the FTC’s authority was never given its day in court—until FTC v. Wyndham.

Data privacy and security lawyers have been watching the United States District Court for the District of New Jersey, anticipating that court’s ruling regarding the FTC’s statutory authority to regulate data security practices. Tuesday, April 8, 2014, we finally got an answer. In FTC v. Wyndham Worldwide Corp., et. al., 2:13 CV 01887-ES-JAD (“Wyndham”), the court denied Wyndham’s motion to dismiss the FTC’s complaint against it for violating Section 5 of the FTCA for alleged unfair and deceptive trade practices “in connection with [Wyndham’s] failure to maintain reasonable and appropriate data security for consumers’ sensitive personal information.”

Wyndham had moved to dismiss the FTC’s complaint under Federal Rule of Civil Procedure 12(b)(6), challenging, among other things, the FTC’s authority to regulate data security. Wyndham claimed that FTC had no express statutory authority to regulate cybersecurity; that it did not promulgate regulations that would notify companies of the cyber security standards it seeks to enforce; and that there was not sufficient consumer harm. In a detailed and lengthy opinion, U.S. District Court Judge Esther Salas denied Wyndham’s motion and affirmed FTC’s authority to bring Section 5 unfair and deceptive trade practices actions against companies for cybersecurity-related acts or omissions.

Both Edith Ramirez, Chairwoman of the FTC, and Julie Brill, FTC Commissioner, tweeted their approval of the ruling. “Pleased the court recognized @FTC’s authority to hold biz accountable for safeguarding consumer data & look forward to trying this case,” tweeted Ramirez. Commissioner Brill’s tweet was similar. We can assume from such tweets that the FTC views the Wyndham case as a judicial blessing of its increased cyber security focus.

The Wyndham decision is interesting not just because of its holding, which is appealable after entry of final judgment in the case, but also because it is consistent with a recent appellate decision. As I wrote in a recent Law360 article, the United States Fourth Circuit Court of Appeals decision FTC v. Ross also affirmed FTC’s authority to sue companies for cyber security-related issues. That said, because the ultimate defendant in Ross was an individual manager and not the company, the case did not address the FTC authority question nearly so directly as Wyndham. Nonetheless, data privacy and security lawyers who represent companies in FTC actions will think twice before opting out of settlement discussions with the FTC and having their day in court. The Ross and Wyndham decisions seem to prophesy that courts may not find such arguments as persuasive as defense counsel had hoped.

Also of note is how the Ross and Wyndham courts reached their similar holdings. The Court of Appeals for the Fourth Circuit in Ross relied upon Congress’s awareness of “a district court’s equitable jurisdiction to decide all relevant matters in dispute and to award complete relief,” combined with its authorization of FTC to go to court and seek equitable redress for unfair and deceptive trade practices, as sufficient for it to find Section 5 authority to regulate cyber practices. The court in Wyndham based its ruling on the breadth of the FTCA mandate, principles of fair notice and agency discretion. Reviewing various appellate decisions affirming the breadth of FTC Section 5 authority in contexts outside the cybersecurity space, and noting that FTC consent decrees have built up a body of law sufficient to provide notice of its standards, the court found that FTC authority to regulate data security practices is within the agency’s discretion.

So what does this mean for the FTC-regulated company? The tweets from Ramirez and Brill say it all. The FTC is pleased at this affirmation of its authority, and it will continue its practice of using its Section 5 authority to police privacy and security on the web. FTC has long insisted that its prior consent decrees do not create a quasi-common-law interpretation of Section 5, and the Wyndham decision lends substantial weight to those prior settlements as precedent. Companies need to closely examine their data privacy and security practices—and do it under the protection of the attorney-client privilege.