With “LabMD” Decision Looming, FTC Workshop Delves into Privacy & Data Security Harms

meal-doug-newvisser-michellecohen-david-t

Guest Commentary

By Douglas H. Meal, Michelle Visser, and David T. Cohen, Partners with Ropes & Gray LLP.

For years, the Federal Trade Commission (FTC), the primary consumer protection agency in the United States, has brought enforcement actions against companies on the basis that their alleged failure to use specified privacy and data security measures was purportedly an “unfair” business practice prohibited by § 5 of the Federal Trade Commission Act.  But FTC in fact has no authority under § 5 to declare a practice “unfair” unless, among other things, it causes or is likely to cause substantial, unavoidable injury to consumers that is not outweighed by countervailing benefits.

What (if anything), then, is a “substantial” injury in the privacy and data security context, how should its likelihood be measured, and how should one measure the benefits and costs of particular practices?

On December 12, FTC took a step closer to proposing a framework for analyzing these issues by hosting a “Workshop on Informational Injury” (the “Workshop”).  [Ed. Note: WLF’s comments filed prior to the Workshop can be found here.]  At the Workshop, panelists discussed how to identify and measure consumer injuries that may result from privacy and data security practices.  FTC’s response to the Workshop will likely provide businesses with more clarity concerning compliance with FTC’s expectations in this area, and a forthcoming judicial decision may bring the first definitive ruling on these matters from the courts.  Companies that collect or use personal information should closely monitor these developments as they seek to minimize their exposure to an ever-rising tide of regulatory scrutiny and litigation surrounding privacy and cybersecurity.

The Workshop featured opening remarks by Acting Chairman Maureen Ohlhausen, four panel discussions, and closing remarks by Andrew Stivers, Deputy Director for Consumer Protection in the Bureau of Economics.

Acting Chairman Ohlhausen’s Opening Remarks

In her opening remarks, Acting Chairman Ohlhausen discussed her goals for the workshop:

  • better identify the qualitatively different types of injury to consumers and businesses from privacy and data security incidents;
  • explore frameworks for how FTC might quantitatively measure such injuries and estimate the risk of their occurrence; and
  • better understand how consumers and businesses weigh these injuries and risks when evaluating the tradeoffs to sharing, collecting, storing, and using information.

She explained that “in making policy determinations, injury matters” because “if there are no harms, then data use restrictions impose only costs and no benefits.”

Panel Discussion and Closing Remarks

The Workshop panelists included industry representatives, consumer advocates, academics, and government researchers.  In their discussion, which Deputy Director Andrew Stivers highlighted in his closing remarks, they generally agreed that privacy and data security events can cause non-traditional, and as-yet unrecognized, harms, but there was little agreement on how to determine which of these harms should trigger regulatory action, and further, how to quantify these harms.

Even the threshold question of whether a harm occurs at all from particular practices (let alone an actionable one) prompted varying responses. For instance, during the panel on identifying privacy injuries, the panelists disputed at what point an injury occurs in a hypothetical involving in-store tracking that reveals that a customer was looking at HIV tests and greeting cards. Some panelists suggested a privacy injury occurs when the consumer is exposed to a risk of being individually identified, while others argued that the societal benefit of the data collection must be taken into account before determining a harm has occurred.

Notably, the panelists did not address whether these sorts of intangible injuries would be “substantial” as required for an unfairness claim under § 5; no court has ever held that they are.

Implications 

While for years FTC has suggested that § 5’s substantial injury requirement is satisfied whenever, in the Commission’s view, a company’s underlying privacy or data security practices were “unreasonable,” Acting Chairman Ohlhausen is now conceding that the Commission “need[s] a framework for principled and consistent analysis of consumer injury in the context of specific privacy and data security incidents.”

Such a framework could potentially be announced shortly by the U.S. Court of Appeals for the Eleventh Circuit, where cancer-detection laboratory LabMD, backed by amicus briefs from business and technology organizations, is challenging an FTC data security action that resulted in an FTC finding that the company’s data security practices were an “unfair” practice under §5.  Ropes & Gray represents LabMD in the appeal.

The resolution of these issues will have significant practical implications for businesses nationwide. Both as a matter of business administration and to ensure compliance with § 5, organizations engage in cost/benefit analysis to determine whether additional or different measures should be incorporated into their business practices.

To the extent § 5 governs privacy and data security, as FTC contends it does, the cost/benefit analysis depends in part on what if any “informational injuries” must be taken into account, as well as how large and likely those injuries must be to trigger liability.  That being the case, companies that collect or use personal information should closely monitor FTC’s response to the Workshop and the guidance on these matters that may be forthcoming from the courts.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s