[BreachExchange] The FTC Faces an Embarrassing Set-Back in its Data Security Enforcement Authority as the LabMD Saga Continues

[Audrey McNeil]

http://www.jdsupra.com/legalnews/the-ftc-faces-an-
embarrassing-set-back-73031/

On November 10th, the Eleventh Circuit Court of Appeals handed an
embarrassing defeat to the Federal Trade Commission and an early Christmas
present to LabMD, Inc. in the ongoing David and Goliath battle between the
government agency and the new-defunct clinical lab.

What Happened?

It’s not easy to explain in a blog entry the complex backstory leading up
to LabMD’s recent win, but here goes:

Over a thirteen year period (until it ceased business in 2014), LabMD
operated a clinical laboratory that performed tests on patient specimen
samples.  As part of its operations, LabMD had access to sensitive
information – such as names, birthdates, addresses and social security
numbers — on over 750,000 patients.

LabMD’s information security practices were not always ideal.  For example,
LabMD allowed its managerial and sales employees to have administrative
rights over their computers.  A billing manager used these rights to
download LimeWire (a P2P file sharing program) on her work computer.  She
intended to use the program for sharing music and video files.  However,
the filing sharing program also had access to LabMD’s patient records.

Now the story gets odd.  Tiversa Holding Company, a data security firm with
unorthodox sales techniques, gained access to the billing manager’s
computer and downloaded some of LabMD’s patient files.  Sometime in 2008,
Tiversa contacted LabMD in an attempt to sell its data security services.
While pitching its services, Tiversa falsely claimed that it had evidence
that LabMD’s patient files had been spread across P2P networks.  LabMD
decided not to buy Tiversa’s services.

In the tale’s next twist, Tiversa contacted the FTC to inform the agency
that LabMD had been subject to data breaches.  In 2010, the FTC commenced
an investigation against LabMD.

The Legal Fight Begins

Following the FTC’s investigation, it issued a complaint against LabMD in
2013.  The FTC’s complaint alleged that LabMD failed to provide reasonable
security for its customers’ personal information and that failure caused
(or was likely to cause) substantial consumer injury — which constituted an
unfair act under Section 5 of the FTC Act.

LabMD went out of business in 2014 but nonetheless continued to fight the
FTC’s allegations.

The first round of the dispute was won by LabMD in front of an
Administrative Law Judge.  The ALJ found no evidence that anyone other than
Tiversa had ever downloaded LabMD’s patient records.  Therefore, there was
no proof that LabMD’s data security practices caused or were likely to
cause substantial consumer injury.

The ruling was appealed to the full FTC.  Not surprisingly, the FTC
overturned the ALJ’s ruling.  In its opinion, the FTC decided that
substantial injuries were both inflicted and likely to be further inflicted
on consumers as a result of LabMD’s poor security practices.  It based this
decision on the novel theory that (a) the mere unauthorized access of
patient health records by Tiversa caused actual substantial injury (e.g.,
embarrassment and reputational injury) even if there was no evidence the
data was ever used by Tiversa to the detriment of the impacted patients and
(b) the likelihood of injury occurring must be evaluated in the context of
the significance of the harm that would result if the data was further
exposed (i.e., even if the risk of further exposure was low, the likelihood
of injury test would be met if substantial harm would occur from any data
exposure).  As result of its decision, the FTC ordered LabMD to implement
expensive remedial measures – despite the fact that LabMD was no longer a
going concern.

LabMD Prevails (for now)

LabMD appealed the FTC’s order to the Eleventh Circuit.  Pending final
resolution of its appeal, LabMD moved for a stay against enforcement of the
FTC order.  The Eleventh Circuit granted LabMD’s motion.

In its ruling, the Eleventh Circuit dismissed much of the reasoning in the
FTC’s opinion.  The court noted that the FTC’s use of intangible harm to
find a “substantial injury” to consumers (in absence of proof of actual
economic injury) was likely not a reasonable interpretation of the Section
5 of the FTC Act.  The court also found that the FTC was unreasonable in
finding a likelihood of harm in “something that has a low likelihood” of
occurring (i.e., there was little chance there would be any further data
exposure).

What Does it Mean?

The FTC has been aggressive in using its Section 5 authority to bring
enforcement actions against companies with poor security practices.
However, as demonstrated by the Eleventh Circuit’s stay in the LabMD case,
there are limits to the FTC’s power.    If the Eleventh Circuit’s view
prevails, the FTC will need to show more than poor data security practices
and possible reputational or emotional harm – it will need to show that
either actual substantial injuries occurred (e.g., monetary damages) or
that there is at least a probable or reasonable expectation of harm that
would result from the breach.
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