FTC v. Wyndham: The Third Circuit Recognizes FTC Authority to Regulate Commercial Cyber Security Practices
In 2014, the United States Court of Appeals for the Third Circuit ruling in FTC v. Wyndham Worldwide Corporation agreed to hear an immediate appeal on two issues: “whether the FTC has authority to regulate cybersecurity under the unfairness prong of § 45(a); and, if so, whether Wyndham had fair notice its specific cybersecurity practices could fall short of that provision.” On August 24, 2015 the Third Circuit affirmed the decision of the District Court and denied Wyndham’s motion to dismiss the complaint.
n 2012, after a two-year investigation into Wyndham’s data security practices, the FTC filed suit against the hospitality company alleging that Wyndham had engaged in “unfair … acts or practices” in violation of the Federal Trade Commission Act 15 U.S.C. § 45(a), by failing to take “reasonable and appropriate” measures to adequately secure hotel guests’ personal information. Specifically, the FTC alleged that between 2008 and January 2010, hackers gained access on three separate occasions to Wyndham’s computer network and that Wyndham engaged in a number of practices that “unreasonably and unnecessarily exposed consumers’ personal data to unauthorized access and theft” including the following:
the storage of credit card information in clear, unencrypted text;
failure to require employees to use complex user IDs and passwords to access company servers;
failure to use readily available security measures, such as firewalls to limit access between the corporate network and the Internet;
failure to implement reasonable information security procedures prior to connecting local computer networks to corporate-level networks;
failure to “adequately restrict” the access of third-party vendors to its networks;
failure to employ reasonable measures to detect and prevent unauthorized access to its computer network or to conduct security investigations; and
failure to follow proper incident response procedures.
The FTC’s complaint alleged that Wyndham’s deficient security practices led and “the compromise of more than 619,000 consumer payment card account numbers, the exportation of many of those account numbers to a domain registered in Russia, fraudulent charges on many consumers’ accounts, and more than $10.6 million in fraud loss.” Wyndham moved before the United States District Court for the District of New Jersey to dismiss the FTC’s complaint arguing that the FTC did not have the authority to regulate bring on unfairness claim involving data security under of §45(a) of the FTC Act. Second, if FTC authorization did in fact exist, the FTC must formerly promulgate regulations before bringing a fairness claim. Wyndham also claimed it did not have fair notice that its specific cybersecurity practices could fall short of that provision. In April 2014, after Wyndham’s motion was denied by the District Court, it sought and received an interlocutory appeal from the Third Circuit to settle the matter of authority and notice.
The Third Circuit’s Holding: The FTC Had Authority and Wyndham Had Notice
What Wyndham Means – The Takeaways
In case there were any looming questions as to whether there are legal risks associated with lax cybersecurity, the Wyndham decision should provide a definitive affirmative answer. All web‑facing companies which collect personally identifiable information are on notice that they routinely must maintain the integrity and security of such consumer data. Companies also must make sure that their privacy policies are accurate and not deceptive. This means ensuring familiarity with and awareness of evolving industry standard security practices and the FTC guidelines derived through the latest security settlements and consent orders posted on the FTC website. If a company does not keep up with industry standards and developments, as recognized by FTC Chairwoman Edith Ramirez, it will be the FTC’s responsibility “to hold companies accountable for failing to safeguard consumer data. It is not only appropriate, but critical, that the FTC has the ability to take action on behalf of consumers when companies fail to take reasonable steps to secure sensitive consumer information.” The Wyndham decision serves to emphasize a significant problem facing all commercial companies — the protection of the consumer data they collect and hold. Whether one considers that data is intellectual property, private/personal communications, or consumer information, companies need to ensure they are following proper, necessary, and “reasonable” cybersecurity protocols. The challenge, of course, is that “reasonableness” is a moving target driven by technology, hackers, and the industry within which each company operates. As such, it is recommended that companies take cybersecurity precautions that align with industry standards and the NIST Framework and perhaps examine what the federal government is requiring in terms of cybersecurity from its contractors (see NIST SP 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations). While such efforts may never stop cyber -breaches, they should ensure that one avoids scrutiny from the FTC and the potential liability that might result from burying one’s head in the sand.