United States: Recent FTC Cybersecurity Settlements Highlight Benefits And Risks Of Settling vs. Litigating

Last Updated: August 23 2019
Article by Jonathan A. Direnfeld, David T. Cohen and Monica A. Svetoslavov

Amidst mounting pressure to pursue cybersecurity more aggressively, the Federal Trade Commission ("FTC"), the federal government's most active enforcer in the space, has recently imposed increasingly stringent cybersecurity requirements in its consent orders. Given that FTC consent orders typically carry 20-year terms and a potential fine of $42,530 (which the FTC may contend applies to each consumer subject to a breach), it is vital for companies faced with an FTC cybersecurity investigation to take every possible step to narrow the scope of relief requested by the FTC. Several recent FTC cybersecurity settlements illustrate an emerging pattern: a company that litigates may secure a better deal than it would have received in an initial settlement, if not defeat the action entirely. But when considering whether to settle or litigate with the FTC, companies must still balance the various legal, business, and reputational risks at stake.

How the decision to settle or litigate can directly affect the relief imposed is evident in the FTC's 2019 cybersecurity settlements: Unixiz, ClixSense, LightYear, Equifax, and D-Link.

The FTC Has Been More Aggressive in Cybersecurity Enforcement

In April 2019, the FTC announced its first settlements of the year related to cybersecurity. In conjunction with this announcement, the FTC released an official statement highlighting the new "strong injunctive provisions" in the settlements that went "beyond the requirements from previous data security orders." The FTC announcement made clear that these new requirements "reflect[ed] the beginning of [its] thinking" on how to "strengthen[] and improve[]...in the areas of privacy and data security." True to its word, the FTC's subsequent settlements have been even more stringent.

Every 2019 cybersecurity settlement contained two key provisions not found in previous orders. First, a senior officer must annually certify compliance with the order. Second, a defendant must cooperate with a third-party assessor under much stricter requirements, including a prohibition against making misrepresentations to the assessor and assessor requirements related to document preservation.

But the FTC did not stop with merely adding some new provisions: it also bolstered old ones. Provisions relating to a company's information security program have been increasingly more stringent. For example, in the FTC's 2018 settlement with Blu Products, the information security program listed a handful of general requirements, including employing and monitoring safeguards to protect from risks. The LightYear Order in 2019, however, added five specific safeguard requirements (including data access controls and encryption) as well as specific requirements to test the effectiveness of safeguards (including vulnerability and penetration testing). The LightYear Order also included a new requirement that the information security program be presented annually to the board of directors (or similar governing body).

Despite significantly expanded provisions in the Unixiz, ClixSense, and LightYear settlements, these were just a warm-up. For its main act, the FTC presents Equifax. The information security program in the Equifax Order contains eight pages of requirements compared to a mere three pages in the Unixiz order. While the Equifax Order contains many of the same security program provisions as other orders, it takes each one giant leap forward. It does not just require that a program be documented in writing; it specifies particular information that must be included in the documentation (e.g., risk assessments). It does not just require safeguards; it specifies particular safeguards that must be included (e.g., patch management policies and information security training programs). It does not just require periodic testing of safeguards; it specifies particular safeguard tests that must be included (e.g., vulnerability and penetration testing). These heightened and painstakingly specific provisions are particularly significant given the requirements will continue for two decades.

To be sure, companies welcome guidance from regulators as to what measures they can take to maintain a legally adequate cybersecurity program. Indeed, in LabMD v. FTC, one company successfully persuaded the U.S. Court of Appeals for the Eleventh Circuit last year to overturn an FTC cybersecurity order—the first time a court had ever done so—precisely because the order failed to provide any such guidance.1 Critically, however, most of the 2019 FTC orders do not fix the FTC's prior mistake, because their provisions merely state that the steps taken by the company must "include" those that are listed in the order, not that the listed measures comprise the entire universe of what the company must do. In other words, while the 2019 orders list particular measures that are necessary for compliance, most of them continue to leave companies guessing as to what would be sufficient. This lack of guidance increases the likelihood of further liability down the line.2

The FTC has also recently taken other steps to ramp up the relief it seeks in its cybersecurity consent orders, including seeking opportunities to impose monetary relief (which it obtained from Equifax as part of a coordinated settlement of consumer class actions) and individual officer liability.

Companies That Litigate May Get Narrower Relief

One of the 2019 FTC consent orders, however, is significantly better for the defendant than the others. It was obtained by a company that, before settling, litigated with the FTC to the eve of trial. In January 2017, the FTC brought claims of unfair and deceptive practices against D-Link in connection with allegedly insecure Internet routers and cameras. Nine months later, a California judge granted D-Link's motion to dismiss three of the FTC's six counts.3 After extensive pre-trial briefing on the remaining counts in which D-Link highlighted the many weaknesses in the FTC's case, the FTC announced a settlement with D-Link on July 2, 2019.

Notably, the information security program requirement in the D-Link consent order contained a safe harbor provision in D-Link's favor: if D-Link obtains a certification from an assessor that D-Link complies with a particular software security standard and provides notice to consumers when product security updates are discontinued, then D-Link is deemed to have satisfied the requirement to have a comprehensive software security program, no matter what objections the FTC might otherwise have to D-Link's implementation of that program. The order thus gives D-Link a clear, understandable and achievable avenue to maintain compliance. Such a safe harbor provision is not standard in FTC cybersecurity consent orders and is a far cry from the eight pages of specific requirements imposed on Equifax.

In fact, only one other FTC settlement has ever contained a similar safe harbor provision—the agency's 2015 settlement with Wyndham. Just like D-Link, Wyndham litigated against the FTC, which survived an initial motion to dismiss but then faced numerous obstacles to succeeding at trial.4 Wyndham's efforts proved fruitful, as it obtained the first-ever information security program safe harbor provision in a consent order from the FTC. Safe harbors for obtaining certifications are beneficial not only in the clarity they provide, but also because the companies in question may already be obtaining the certifications in the ordinary course of business. In this way the order's substantive requirements may impose no additional burden on the company.

The D-Link consent order also contains other similarities to the Wyndham consent order, including, among other things, a lack of any restrictions on the company's consumer-facing statements about cybersecurity (even though the complaints alleged the companies made deceptive statements about cybersecurity) and the absence of any significant injunctive relief against the company's parent corporations.

And, as noted above, the only other company to litigate significantly against the FTC—LabMD—persuaded a court to overturn the FTC's action altogether.

The Decision: Settle or Litigate

The beneficial outcomes achieved by the three companies who have engaged in significant litigation with the FTC—D-Link, Wyndham, and LabMD—are not flukes. The FTC's authority in the cybersecurity space is subject to important limits. A company that demonstrates a willingness to assert those limits in court puts the FTC on notice that it may well lose at trial, making the agency more willing to settle on better terms. By contrast, the FTC will likely insist on relief more favorable to the agency if it knows that no court will ever test it on the merits.

To be sure, a company must weigh numerous factors when deciding whether to settle or litigate—not just the strength of its legal arguments (including arguments against the relief the FTC is seeking), but also business considerations, litigation costs, and reputational risks. But given the experience of D-Link, Wyndham, and LabMD, the upside in what a consent decree might contain by pressing forward with litigation cannot be ignored. Narrower relief in a consent order (or no relief at all) translates into significantly reduced litigation risk, because violations of such orders are subject to substantial civil penalties—a remedy the FTC typically cannot otherwise impose.

Our Cyber, Privacy & Data Innovation Team has immense experience in this area, including leading the LabMD and Wyndham matters discussed above. Should your company be faced with an inquiry or investigation by the FTC, you may eventually be faced with this decision: settle or litigate. And even from the moment the FTC investigation is opened, there are numerous opportunities to persuade the FTC that the agency should drop its investigation altogether. Our team can arm you with the knowledge and guidance you need to decide the best path forward.

Footnotes

1. LabMD, Inc. v. Fed. Trade Comm'n, 894 F.3d 1221 (11th Cir. 2018).

2. See, e.g., Fed. Trade Comm'n, LifeLock to Pay $100 Million to Consumers to Settle FTC Charges it Violated 2010 Order (Feb. 17, 2015), https://www.ftc.gov/news-events/press-releases/2015/12/lifelock-pay-100-million-consumers-settle-ftc-charges-it-violated (LifeLock paid $100 million to settle claims it violated FTC order requirements to establish and maintain a comprehensive information security program).

3. Fed. Trade Comm'n v. D-Link Sys., Inc., No. 3:17-CV-00039-JD, 2017 WL 4150873, at *3-5 (N.D. Cal. Sept. 19, 2017) (dismissing two of five deception claims for lack of specificity and sole unfairness claim for failing to allege any consumer injury).

4. Fed. Trade Comm'n v. Wyndham Worldwide Corp., 799 F.3d 236 (3d Cir. 2015) (affirming denial of Wyndham's motion to dismiss).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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