August 16, 2022

Volume XII, Number 228

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August 15, 2022

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FTC Settles Privacy and Security Allegations with Online Merchant for $500K and Agreement to Extensive Compliance Program

The FTC recently settled its enforcement action involving data privacy and security allegations against an online seller of customized merchandise. In addition to agreeing to pay $500,000, the online merchant consented to multiyear compliance, recordkeeping, and FTC reporting requirements. The essence of the FTC’s seven count Complaint is that the merchant failed to properly disclose a data breach, misrepresented is data privacy and security practices, and did not maintain reasonable data security practices.

The federal consumer protection agency has broad enforcement authority under Section 5 of the Federal Trade Commission Act (FTC Act) which prohibits ”unfair or deceptive acts or practices in or affecting commerce.” This enforcement action follows other recent FTC actions on similar issues, suggesting the agency ramping up consistent with the overall direction of the Biden Administration concerning cybersecurity. There are steps organizations can take to minimize FTC scrutiny, and one place to start might be website disclosures, perhaps in connection with addressing the imminent website privacy compliance obligations under the California Privacy Rights Act.

In reviewing the FTC enforcement action in this matter, it is interesting to see what the agency considered personal information:

names, email addresses, telephone numbers, birth dates, gender, photos, social media handles, security questions and answers, passwords, PayPal addresses, the last four digits and expiration dates of credit cards, and Social Security or tax identification numbers

Some are obvious, some not so much.

The FTC also examined the merchant’s public disclosures concerning privacy and security of personal information, including from its website privacy policy, as well as email responses to customers and checkout pages. Here’s an example:

[Company] also pledges to use the best and most accepted methods and technologies to insure [sic] your personal information is safe and secure

In addition, the agency pointed to practices its viewed as not providing reasonable security for personal information stored on a network, such as

  • Failing to implement “readily-available…low-cost protections,” against “well-known and reasonably foreseeable vulnerabilities,” such as “Structured Query Language” (“SQL”) injection, Cascading Style Sheets (“CSS”) and HTML injection, etc.
  • Storing personal information such as Social Security numbers and security questions and answers in clear, readable text
  • Using the SHA-1 hashing algorithm to protect passwords, a method deprecated by the National Institute of Standards and Technology in 2011
  • Failing to maintain a process for receiving and addressing security vulnerability reports from third-party researchers, academics, or other members of the public
  • Not implementing patch management policies and procedures to ensure the timely remediation of critical security vulnerabilities
  • Maintaining lax password policies that allows, for example, users to select the same word, including common dictionary words, as both the password and user ID
  • Storing personal information indefinitely on a network without a business need
  • Failing to log sufficient information to adequately assess cybersecurity events
  • Failing to comply with existing written security policies
  • Failing to reasonably respond to security incidents, including timely disclosure of security incidents
  • Not adequately assessing the extent of and remediate malware infections after learning that devices on the network were infected with malware

The above list (including the additional items listed in the Complaint and the Consent Order) provide valuable insights into what measures the FTC might expect be in place to secure personal information.

The FTC also scrutinized the merchant’s disclosures on its website concerning the EU-U.S. Privacy Shield, alleging it failed to comply with some of the representations made in those disclosures. This aspect of the FTC’s enforcement action is notable because the agency acknowledged that the Privacy Shield had been invalidated by a decision of the European Court of Justice on July 16, 2020. But the FTC made clear that even if the Privacy Shield was determined to be insufficient under GDPR to permit the lawful transfer of personal data from the EU to the U.S., the merchant nonetheless represented that it would comply with the provisions of that framework.

The agreement reached in the Consent Order requires the merchant to take several steps, such as:

  • WISP. Within 60 days of the order, establish and implement a comprehensive written information security program (WISP) that protects the privacy, security, confidentiality, and integrity of personal information. To meet this requirement, the merchant must, among other things, (i) provide the WISP to its board or senior management every 12 months and not more than 30 days after a security incident, (ii) implement a range of specific safeguards and controls such as encryption, MFA, annual training, etc., (iii) consult with third-party experts concerning the WISP, and (iv) evaluate the capability of third party service providers to safeguard personal information and contractually require them to do so.
  • Independent WISP Assessment. The merchant must obtain independent third-party assessments of its WISP. The reporting period for these assessments is the first 180 days after the Consent Order, and each two-year period for 20 years following the Order.

To help survive FTC scrutiny, it is not enough to maintain reasonable safeguards to protect personal information. Companies also must ensure the statements that they make about those safeguards are consistent with the practices that they maintain. This includes statements in website privacy policies, customer receipts, and other correspondence. Additionally, companies must fully investigate inappropriately respond to potential security incidents that may have caused or could lead to in the future unauthorized access or acquisition of personal information.

Jackson Lewis P.C. © 2022National Law Review, Volume XII, Number 82
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About this Author

Principal

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm's Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and...

973- 538-6890
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