Archives For Common Law

Since the LabMD decision, in which the Eleventh Circuit Court of Appeals told the FTC that its orders were unconstitutionally vague, the FTC has been put on notice that it needs to reconsider how it develops and substantiates its claims in data security enforcement actions brought under Section 5. 

Thus, on January 6, the FTC announced on its blog that it will have “New and improved FTC data security orders: Better guidance for companies, better protection for consumers.” However, the changes the Commission highlights only get to a small part of what we have previously criticized when it comes to their “common law” of data security (see here and here). 

While the new orders do list more specific requirements to help explain what the FTC believes is a “comprehensive data security program”, there is still no legal analysis in either the orders or the complaints that would give companies fair notice of what the law requires. Furthermore, nothing about the underlying FTC process has changed, which means there is still enormous pressure for companies to settle rather than litigate the contours of what “reasonable” data security practices look like. Thus, despite the Commission’s optimism, the recent orders and complaints do little to nothing to remedy the problems that plague the Commission’s data security enforcement program.

The changes

In his blog post, the director of the Bureau of Consumer Protection at the FTC describes how new orders in data security enforcement actions are more specific, with one of the main goals being more guidance to businesses trying to follow the law.

Since the early 2000s, our data security orders had contained fairly standard language. For example, these orders typically required a company to implement a comprehensive information security program subject to a biennial outside assessment. As part of the FTC’s Hearings on Competition and Consumer Protection in the 21st Century, we held a hearing in December 2018 that specifically considered how we might improve our data security orders. We were also mindful of the 11th Circuit’s 2018 LabMD decision, which struck down an FTC data security order as unenforceably vague.

Based on this learning, in 2019 the FTC made significant improvements to its data security orders. These improvements are reflected in seven orders announced this year against an array of diverse companies: ClixSense (pay-to-click survey company), i-Dressup (online games for kids), DealerBuilt (car dealer software provider), D-Link (Internet-connected routers and cameras), Equifax (credit bureau), Retina-X (monitoring app), and Infotrax (service provider for multilevel marketers)…

[T]he orders are more specific. They continue to require that the company implement a comprehensive, process-based data security program, and they require the company to implement specific safeguards to address the problems alleged in the complaint. Examples have included yearly employee training, access controls, monitoring systems for data security incidents, patch management systems, and encryption. These requirements not only make the FTC’s expectations clearer to companies, but also improve order enforceability.

Why the FTC’s data security enforcement regime fails to provide fair notice or develop law (and is not like the common law)

While these changes are long overdue, it is just one step in the direction of a much-needed process reform at the FTC in how it prosecutes cases with its unfairness authority, particularly in the realm of data security. It’s helpful to understand exactly why the historical failures of the FTC process are problematic in order to understand why the changes it is undertaking are insufficient.

For instance, Geoffrey Manne and I previously highlighted  the various ways the FTC’s data security consent order regime fails in comparison with the common law: 

In Lord Mansfield’s characterization, “the common law ‘does not consist of particular cases, but of general principles, which are illustrated and explained by those cases.’” Further, the common law is evolutionary in nature, with the outcome of each particular case depending substantially on the precedent laid down in previous cases. The common law thus emerges through the accretion of marginal glosses on general rules, dictated by new circumstances. 

The common law arguably leads to legal rules with at least two substantial benefits—efficiency and predictability or certainty. The repeated adjudication of inefficient or otherwise suboptimal rules results in a system that generally offers marginal improvements to the law. The incentives of parties bringing cases generally means “hard cases,” and thus judicial decisions that have to define both what facts and circumstances violate the law and what facts and circumstances don’t. Thus, a benefit of a “real” common law evolution is that it produces a body of law and analysis that actors can use to determine what conduct they can undertake without risk of liability and what they cannot. 

In the abstract, of course, the FTC’s data security process is neither evolutionary in nature nor does it produce such well-defined rules. Rather, it is a succession of wholly independent cases, without any precedent, narrow in scope, and binding only on the parties to each particular case. Moreover it is generally devoid of analysis of the causal link between conduct and liability and entirely devoid of analysis of which facts do not lead to liability. Like all regulation it tends to be static; the FTC is, after all, an enforcement agency, charged with enforcing the strictures of specific and little-changing pieces of legislation and regulation. For better or worse, much of the FTC’s data security adjudication adheres unerringly to the terms of the regulations it enforces with vanishingly little in the way of gloss or evolution. As such (and, we believe, for worse), the FTC’s process in data security cases tends to reject the ever-evolving “local knowledge” of individual actors and substitutes instead the inherently limited legislative and regulatory pronouncements of the past. 

By contrast, real common law, as a result of its case-by-case, bottom-up process, adapts to changing attributes of society over time, largely absent the knowledge and rent-seeking problems of legislatures or administrative agencies. The mechanism of constant litigation of inefficient rules allows the common law to retain a generally efficient character unmatched by legislation, regulation, or even administrative enforcement. 

Because the common law process depends on the issues selected for litigation and the effects of the decisions resulting from that litigation, both the process by which disputes come to the decision-makers’ attention, as well as (to a lesser extent, because errors will be corrected over time) the incentives and ability of the decision-maker to render welfare-enhancing decisions, determine the value of the common law process. These are decidedly problematic at the FTC.

In our analysis, we found the FTC’s process to be wanting compared to the institution of the common law. The incentives of the administrative complaint process put a relatively larger pressure on companies to settle data security actions brought by the FTC compared to private litigants. This is because the FTC can use its investigatory powers as a public enforcer to bypass the normal discovery process to which private litigants are subject, and over which independent judges have authority. 

In a private court action, plaintiffs can’t engage in discovery unless their complaint survives a motion to dismiss from the defendant. Discovery costs remain a major driver of settlements, so this important judicial review is necessary to make sure there is actually a harm present before putting those costs on defendants. 

Furthermore, the FTC can also bring cases in a Part III adjudicatory process which starts in front of an administrative law judge (ALJ) but is then appealable to the FTC itself. Former Commissioner Joshua Wright noted in 2013 that “in the past nearly twenty years… after the administrative decision was appealed to the Commission, the Commission ruled in favor of FTC staff. In other words, in 100 percent of cases where the ALJ ruled in favor of the FTC, the Commission affirmed; and in 100 percent of the cases in which the ALJ ruled against the FTC, the Commission reversed.” In other words, the FTC nearly always rules in favor of itself on appeal if the ALJ finds there is no case, as it did in LabMD. The combination of investigation costs before any complaint at all and the high likelihood of losing through several stages of litigation makes the intelligent business decision to simply agree to a consent decree.

The results of this asymmetrical process show the FTC has not really been building a common law. In all but two cases (Wyndham and LabMD), the companies who have been targeted for investigation by the FTC on data security enforcement have settled. We also noted how the FTC’s data security orders tended to be nearly identical from case-to-case, reflecting the standards of the FTC’s Safeguards Rule. Since the orders were giving nearly identical—and as LabMD found, vague—remedies in each case, it cannot be said there was a common law developing over time.  

What LabMD addressed and what it didn’t

In its decision, the Eleventh Circuit sidestepped fundamental substantive problems with the FTC’s data security practice (which we have made in both our scholarship and LabMD amicus brief) about notice or substantial injury. Instead, the court decided to assume the FTC had proven its case and focused exclusively on the remedy. 

We will assume arguendo that the Commission is correct and that LabMD’s negligent failure to design and maintain a reasonable data-security program invaded consumers’ right of privacy and thus constituted an unfair act or practice.

What the Eleventh Circuit did address, though, was that the remedies the FTC had been routinely applying to businesses through its data enforcement actions lacked the necessary specificity in order to be enforceable through injunctions or cease and desist orders.

In the case at hand, the cease and desist order contains no prohibitions. It does not instruct LabMD to stop committing a specific act or practice. Rather, it commands LabMD to overhaul and replace its data-security program to meet an indeterminable standard of reasonableness. This command is unenforceable. Its unenforceability is made clear if we imagine what would take place if the Commission sought the order’s enforcement…

The Commission moves the district court for an order requiring LabMD to show cause why it should not be held in contempt for violating the following injunctive provision:

[T]he respondent shall … establish and implement, and thereafter maintain, a comprehensive information security program that is reasonably designed to protect the security, confidentiality, and integrity of personal information collected from or about consumers…. Such program… shall contain administrative, technical, and physical safeguards appropriate to respondent’s size and complexity, the nature and scope of respondent’s activities, and the sensitivity of the personal information collected from or about consumers….

The Commission’s motion alleges that LabMD’s program failed to implement “x” and is therefore not “reasonably designed.” The court concludes that the Commission’s alleged failure is within the provision’s language and orders LabMD to show cause why it should not be held in contempt.

At the show cause hearing, LabMD calls an expert who testifies that the data-security program LabMD implemented complies with the injunctive provision at issue. The expert testifies that “x” is not a necessary component of a reasonably designed data-security program. The Commission, in response, calls an expert who disagrees. At this point, the district court undertakes to determine which of the two equally qualified experts correctly read the injunctive provision. Nothing in the provision, however, indicates which expert is correct. The provision contains no mention of “x” and is devoid of any meaningful standard informing the court of what constitutes a “reasonably designed” data-security program. The court therefore has no choice but to conclude that the Commission has not proven — and indeed cannot prove — LabMD’s alleged violation by clear and convincing evidence.

In other words, the Eleventh Circuit found that an order requiring a reasonable data security program is not specific enough to make it enforceable. This leaves questions as to whether the FTC’s requirement of a “reasonable data security program” is specific enough to survive a motion to dismiss and/or a fair notice challenge going forward.

Under the Federal Rules of Civil Procedure, a plaintiff must provide “a short and plain statement . . . showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), including “enough facts to state a claim . . . that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements” will not suffice. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In FTC v. D-Link, for instance, the Northern District of California dismissed the unfairness claims because the FTC did not sufficiently plead injury. 

[T]hey make out a mere possibility of injury at best. The FTC does not identify a single incident where a consumer’s financial, medical or other sensitive personal information has been accessed, exposed or misused in any way, or whose IP camera has been compromised by unauthorized parties, or who has suffered any harm or even simple annoyance and inconvenience from the alleged security flaws in the DLS devices. The absence of any concrete facts makes it just as possible that DLS’s devices are not likely to substantially harm consumers, and the FTC cannot rely on wholly conclusory allegations about potential injury to tilt the balance in its favor. 

The fair notice question wasn’t reached in LabMD, though it was in FTC v. Wyndham. But the Third Circuit did not analyze the FTC’s data security regime under the “ascertainable certainty” standard applied to agency interpretation of a statute.

Wyndham’s position is unmistakable: the FTC has not yet declared that cybersecurity practices can be unfair; there is no relevant FTC rule, adjudication or document that merits deference; and the FTC is asking the federal courts to interpret § 45(a) in the first instance to decide whether it prohibits the alleged conduct here. The implication of this position is similarly clear: if the federal courts are to decide whether Wyndham’s conduct was unfair in the first instance under the statute without deferring to any FTC interpretation, then this case involves ordinary judicial interpretation of a civil statute, and the ascertainable certainty standard does not apply. The relevant question is not whether Wyndham had fair notice of the FTC’s interpretation of the statute, but whether Wyndham had fair notice of what the statute itself requires.

In other words, Wyndham boxed itself into a corner arguing that they did not have fair notice that the FTC could bring a data security enforcement action against the under Section 5 unfairness. LabMD, on the other hand, argued they did not have fair notice as to how the FTC would enforce its data security standards. Cf. ICLE-Techfreedom Amicus Brief at 19. The Third Circuit even suggested that under an “ascertainable certainty” standard, the FTC failed to provide fair notice: “we agree with Wyndham that the guidebook could not, on its own, provide ‘ascertainable certainty’ of the FTC’s interpretation of what specific cybersecurity practices fail § 45(n).” Wyndham, 799 F.3d at 256 n.21

Most importantly, the Eleventh Circuit did not actually get to the issue of whether LabMD actually violated the law under the factual record developed in the case. This means there is still no caselaw (aside from the ALJ decision in this case) which would allow a company to learn what is and what is not reasonable data security, or what counts as a substantial injury for the purposes of Section 5 unfairness in data security cases. 

How FTC’s changes fundamentally fail to address its failures of process

The FTC’s new approach to its orders is billed as directly responsive to what the Eleventh Circuit did reach in the LabMD decision, but it leaves so much of what makes the process insufficient in place.

First, it is notable that while the FTC highlights changes to its orders, there is still a lack of legal analysis in the orders that would allow a company to accurately predict whether its data security practices are enough under the law. A listing of what specific companies under consent orders are required to do is helpful. But these consent decrees do not require companies to admit liability or contain anything close to the reasoning that accompanies court opinions or normal agency guidance on complying with the law. 

For instance, the general formulation in these 2019 orders is that the company must “establish, implement, and maintain a comprehensive information/software security program that is designed to protect the security, confidentiality, and integrity of such personal information. To satisfy this requirement, Respondent/Defendant must, at a minimum…” (emphasis added), followed by a list of pretty similar requirements with variation depending on the business. Even if a company does all of the listed requirements but a breach occurs, the FTC is not obligated to find the data security program was legally sufficient. There is no safe harbor or presumptive reasonableness that attaches even for the business subject to the order, nonetheless companies looking for guidance. 

While the FTC does now require more specific things, like “yearly employee training, access controls, monitoring systems for data security incidents, patch management systems, and encryption,” there is still no analysis on how to meet the standard of reasonableness the FTC relies upon. In other words, it is not clear that this new approach to orders does anything to increase fair notice to companies as to what the FTC requires under Section 5 unfairness.

Second, nothing about the underlying process has really changed. The FTC can still investigate and prosecute cases through administrative law courts with itself as initial court of appeal. This makes the FTC the police, prosecutor, and judge in its own case. In the case of LabMD, who actually won after many appeals, this process ended in bankruptcy. It is no surprise that since the LabMD decision, each of the FTC’s data security enforcement cases have been settled with consent orders, just as they were before the Eleventh Circuit opinion. 

Unfortunately, if the FTC really wants to evolve its data security process like the common law, it needs to engage in an actual common law process. Without caselaw on the facts necessary to establish substantial injury, “unreasonable” data security practices, and causation, there will continue to be more questions than answers about what the law requires. And without changes to the process, the FTC will continue to be able to strong-arm companies into consent decrees.

With thanks to Geoff and everyone else, it’s great to join the cast here at TOTM. Geoff gave a nice introduction, so I won’t use this first post to further that purpose – especially when I have substance to discuss. The only prefatory words I’ll offer are that my work lies at the intersection of law and technology, with a focus on telecommunications and the regulation of technology. Most of my posts here will likely relate to those subjects. But I may occasionally use this forum to write briefly on topics further afield of my research agenda (and to which I therefore cannot dedicate more than blog-post-length musings to develop).

But one paragraph of navel-grazing is enough; on to substance:

The WSJ had a nice piece the other day about the Consumer Product Safety Commission’s (CPSC) ongoing persecution of Craig Zucker. Several years ago, Zucker founded a company that sold small, strong, rare-earth magnets that are a ton of fun to play with. He called them BuckyBalls. In 2011, the CPSC determined that BuckBalls are inherently unsafe because children may swallow them, which can result in serious injury. The CPSC effectively forced the company to shut down in 2012. Unsatisfied with forcing a profitable small firm out of the market, the CPSC is now going after Zucker individually to, at his own expense, recall and refund the purchase price of all BuckyBalls the company sold.

BuckyBalls(Full disclosure: I own a bunch of BuckyBalls. In fact, they’re all over my office. To date, they have not harmed anyone. The photo to the left is of the “BuckyBall decapode” that I have behind my chair. Note: the CPSC is not concerned about BuckyBall decapodes, which could pose a legitimate danger if they became sentient, but about the individual magnets.)

The CPSC’s action is a case study in bad judgment, arguably abusive and vindictive government conduct, and a basic lack of common sense. But I don’t want to focus on common sense here – I want to focus on the common law. My question is why in the world do we need the CPSC protecting consumers from these magnets when the common law clearly offers sufficient protection?

These cases almost always follow a similar pattern. Adults buy BuckyBalls. Adults either give children BuckyBalls or leave BuckyBalls where children can get them. Children, acting as children are wont to act, somehow swallow BuckyBalls.

The CPSC’s complaint identifies 5 specific cases of children ingesting BuckyBalls and notes that “over one dozen” reports have been received. The complaint doesn’t discuss in detail any injuries that resulted, beyond noting that in some cases surgery was required (and in one case, treatment included “monitoring for infection and internal damage”). It doesn’t say whether any of these cases resulted in permanent injury or disability (presumably not, or that would surely be mentioned). There have been no reported deaths or, that I have seen reported, debilitating injuries.

On the flipside, over the few years that Zucker was in business (roughly 2009, when the product became popular, through 2012, when the company closed down), he sold about $75 million worth of BuckyBalls (per the WSJ piece, “’Two and a half million adults spent $30’”). This product wasn’t a mere novelty, but something created substantial economic value for consumers.

So, what do we have? A relatively small number of injuries, with very few disputable facts, and readily identifiable harm. These would be some of the easiest possible cases to bring to court, and would occur in small enough numbers that they wouldn’t burden the court system. After the first of these cases was decided, most of the others – given the similarity of facts – would likely settle. If the harms caused by BuckyBalls were sufficient to outweigh the economic value created by this product, Zucker could have responded by altering the product, seeking insurance, or shutting down. This is exactly the sort of case we have the courts for!

That penultimate sentence should be dwelt upon: the incremental approach of the common law would allow the firm to alter and improve its product, to avoid or reduce future harm. In this way, the law develops along with new products and technologies, supporting a dynamic market. Compare this to the CPSC approach, which was to demand that Zucker comply with the agency’s demands in a short period of time (which he did), and then, the very next day, to bring the administrative suit that forced Zucker to shut the company down. The CPSC could not have reviewed his response to its demands in that timeframe; even if it did and found the response lacking, its next step should have been to engage him to address any problems, with the twain objectives of both remedying any problems but also preserving the business. Rather, the CPSC’s purpose seems to have been from the outset to shut Zucker down. It seems that in its fervor to protect the children from negligent adults, it is willing to harm the consumers who enjoy these products — perhaps we should rechristen it the Children’s Product Safety Commission.

Others have written about the CPSC’s lack of common sense in this matter. My contribution to that discussion would be to say that the CPSC has become the FTC’s successor as the “National Nanny” (not to say the FTC does not deserve the title, as demonstrated by the POM Wonderful case – but today CPSC may be even more deserving of the title).

But the BuckyBalls case raises a more fundamental concern. The CPSC surely should be lambasted for its decision to pursue this matter at all; and even more for persecuting Mr. Zucker. But beyond that, this case raises fundamental questions about the need for, and the basic legitimacy of, the CPSC.