Court Upholds FTC’s Power to Sue Hacked Companies

A federal court rejects a bid from Wyndham Hotels to undercut federal authority over data security.

Wyndham hotel in Pittsburgh, Pa.
National Journal
Brendan Sasso
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Brendan Sasso
April 7, 2014, 12:56 p.m.

The Fed­er­al Trade Com­mis­sion has the power to sue com­pan­ies that fail to pro­tect their cus­tom­ers’ data, a fed­er­al court in New Jer­sey said Monday.

The rul­ing shoots down a chal­lenge from Wyndham Ho­tels, which ar­gued that the FTC over­stepped its au­thor­ity with a 2012 law­suit against the glob­al hotel chain.

The de­cision by U.S. Dis­trict Court Judge Es­th­er Salas is a ma­jor win for the agency. If the court had sided with Wyndham, it would have stripped the fed­er­al gov­ern­ment of over­sight of data se­cur­ity prac­tices just as hack­ers be­gin to pull off more and more high-pro­file at­tacks.

Salas said her de­cision “does not give the FTC a blank check to sus­tain a law­suit against every busi­ness that has been hacked,” but that she must fol­low the “bind­ing and per­suas­ive pre­ced­ent” to up­hold the agency’s au­thor­ity.

The FTC is cur­rently in­vest­ig­at­ing Tar­get over the massive hack last year that ex­posed in­form­a­tion on 40 mil­lion cred­it cards. Tar­get could have pre­ven­ted the at­tack with bet­ter se­cur­ity prac­tices, ac­cord­ing to a re­cent re­port from the Sen­ate Com­merce Com­mit­tee.

The FTC has sued dozens of com­pan­ies in re­cent years for fail­ing to take reas­on­able steps to pro­tect cus­tom­er data. The agency says it has the au­thor­ity to po­lice data se­cur­ity prac­tices be­cause Con­gress gave it power over “un­fair” busi­ness prac­tices.

The FTC sued Wyndham in 2012, main­tain­ing that the hotel chain didn’t use ba­sic se­cur­ity meas­ures such as fire­walls, com­plex pass­words, or sep­ar­at­ing net­works in dif­fer­ent loc­a­tions. As a res­ult, hack­ers were able to pen­et­rate a com­puter net­work in a Wyndham hotel in Phoenix and ul­ti­mately make off with in­form­a­tion on 500,000 cred­it cards, the FTC charged.

Wyndham asked the fed­er­al court to throw out the suit, ar­guing that in­ad­equate data se­cur­ity prac­tices aren’t “un­fair” un­der the leg­al defin­i­tion. The com­pany also claimed the FTC should have pub­lished clear rules on data se­cur­ity be­fore fil­ing suit.

But Judge Salas said she wouldn’t “carve out a data-se­cur­ity ex­cep­tion” to the FTC’s power over un­fair prac­tices. She also con­cluded that the agency isn’t re­quired to spell-out spe­cif­ic data se­cur­ity rules. 

Al­though the court dis­missed Wyndham’s at­tempt to block the suit, the FTC will still have to prove the charges.  

FTC Chair­wo­man Edith Ramirez said she’s “pleased” with the de­cision and looks for­ward to try­ing the case against Wyndham. 

“Com­pan­ies should take reas­on­able steps to se­cure sens­it­ive con­sumer in­form­a­tion,” she said. “When they do not, it is not only ap­pro­pri­ate but crit­ic­al that the FTC take ac­tion on be­half of con­sumers.”

Mi­chael Valentino, a Wyndham spokes­man, noted that the de­cision is lim­ited to the FTC’s power and does not ad­dress wheth­er Wyndham broke the law.   “We con­tin­ue to be­lieve the FTC lacks the au­thor­ity to pur­sue this type of case against Amer­ic­an busi­nesses, and has failed to pub­lish any reg­u­la­tions that would give such busi­nesses fair no­tice of any pro­posed stand­ards for data se­cur­ity,” he said. “We in­tend to de­fend our po­s­i­tion vig­or­ously.”  

Mi­chael Valentino, a Wyndham spokes­man, noted that the de­cision is lim­ited to the FTC’s power and does not ad­dress wheth­er Wyndham broke the law.

“We con­tin­ue to be­lieve the FTC lacks the au­thor­ity to pur­sue this type of case against Amer­ic­an busi­nesses, and has failed to pub­lish any reg­u­la­tions that would give such busi­nesses fair no­tice of any pro­posed stand­ards for data se­cur­ity,” he said. “We in­tend to de­fend our po­s­i­tion vig­or­ously.” 

Al­though the FTC can or­der com­pan­ies to change their busi­ness prac­tices, the agency has no fin­ing au­thor­ity. Demo­crats are push­ing sev­er­al bills in Con­gress that would ex­pand the FTC’s au­thor­ity over data se­cur­ity, in­clud­ing give the agency the power to fine com­pan­ies for non­com­pli­ance.

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