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Hey "Chicken Littles," Wyndham Doesn’t Mean the Sky is Falling

Based on the extensive news coverage of this week’s court ruling against Wyndham Hotels and Resorts in its battle with the Federal Trade Commission (FTC), one would think that the sky is falling on efforts to resist FTC enforcement actions relating to data security.

Adweek wrote that the case is “a test for how much authority the FTC has in bringing cases against companies the agency deems have inadequate data security standards.” Law360 dubbed the opinion “the latest and most important federal court decision on data security enforcement.” Nextgov called the ruling “a major win for the agency.”

I offer a different take on the ruling: The sky is not falling.

Indeed, it may even be safe to say that nothing has changed in the past week. The court’s opinion does not provide the FTC with any additional authority to enforce privacy and data security standards—at least not yet.

For more background on the case, click here, and for more background on Monday’s ruling by U.S. District Court Judge Esther Salas, click here.

It may be tempting to read Salas’s opinion as a definitive ruling that the FTC may use its “unfairness” authority to police companies that did not implement adequate data security measures. But I would caution against such a reading for a few reasons.

Indeed, one could read her opinion to suggest that in order to prevail the FTC will be required to prove that the data breaches in fact harmed consumers—something that other courts that have refused to do when grappling with this issue in similar contexts.

Salas was denying a motion to dismiss, which is filed at a very early stage in litigation. At this stage, the defendant does not have the opportunity to present any facts that would support dismissal. A judge may grant a motion to dismiss only if she finds that the complaint, when read in the light most favorable to the plaintiff, does not state a plausible claim for relief. That is a pretty tough standard to meet. Salas may very well rule differently in a later stage of the litigation, such as summary judgment, when she is not required to accept every allegation by the FTC as true. Indeed, one could read her opinion to suggest that in order to prevail the FTC will be required to prove that the data breaches in fact harmed consumers—something that other courts have refused to do when grappling with this issue in similar contexts.

Additionally, Salas’s ruling is not binding in any other case. Only appellate courts—federal circuit courts and the Supreme Court—can issue precedential opinions that bind other courts. Salas is a district judge, and therefore, while her ruling may (or may not) be persuasive to other judges, it is not binding precedent. Another district judge could rule that the FTC does not have the authority to bring data security-related lawsuits. Indeed, many judges issue rulings that are in direct conflict with one another.

No matter what the ultimate outcome is in the district court, it is probable that the principal legal question—whether the FTC’s unfairness authority applies to data security—will reach the U.S. Court of Appeals for the Third Circuit, which hears appeals from New Jersey. But that might not happen for some time. Wyndham cannot immediately appeal the denial of the motion to dismiss, unless it obtains special permission from both Judge Salas and the Third Circuit.

Once it eventually hears the appeal, the Third Circuit may view the legal issues differently than Salas. And even after the Third Circuit issues its opinion, the Supreme Court may decide to review the case if it is appealed. It is always difficult to guess how the Supreme Court (or any court for that matter) will rule on an issue—and my goal in this article is not to evaluate the legal merits of Wyndham’s case—but it is worth noting that the current Supreme Court is generally viewed as business-friendly and hesitant to uphold government regulation of businesses. Indeed, a recent study published in the Minnesota Law Review found that of all of the Supreme Court justices since 1946, Chief Justice John Roberts and Justice Samuel Alito were most likely to vote in favor of business interests.

Rather than focusing on a single court’s nonbinding interpretation of the FTC’s “unfairness” authority, the privacy community may be well served to pay more attention to legislative efforts in Congress.

Even if the Supreme Court ultimately were to adopt Salas’s conclusion, such an opinion likely would not expand the FTC’s privacy and data security authority. The FTC routinely uses its “unfairness” authority to pursue companies that allegedly failed to safeguard customer information, but the vast majority of those cases result in settlements before any litigation. This case has received attention because Wyndham, unlike most other companies, refused to settle, not because the FTC has done something novel here.

Rather than focusing on a single court’s nonbinding interpretation of the FTC’s “unfairness” authority, the privacy community may be well served to pay more attention to legislative efforts in Congress. Prompted by a number of recent high-profile data breaches, legislators have proposed five bills that would set nationwide standards for data security and breach notification. These bills would provide the FTC and state attorneys general with the ability to set minimum data security standards and set requirements for breach notifications, and they would preempt the patchwork of state laws that impose such requirements. In light of the continued public attention to data breaches, it seems possible that one of these bills could become law well before the Wyndham case is resolved in full.

photo credit: mhLecaros via photopin cc

Written By

Jeffrey Kosseff, CIPP/US

2 Comments

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  • Ruby Zefo Apr 10, 2014

    Nice to see another kindred spirit in looking on the bright side of privacy developments now and then.

  • Name Julie Glover, 6 Degrees Privacy Consulting Apr 10, 2014

    I agree, Ruby! Thanks, Jeff, for balancing the view.

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