Third Circuit Affirms Judge Salas in FTC v. Wyndham

In a 47-page ruling, the United States Court of Appeals for the Third Circuit affirmed today an April 7, 2014 ruling of Judge Esther Salas against Wyndham Worldwide.  In affirming the district court ruling, the Third Circuit left intact Judge Salas’s decision that the FTC has power to regulate “unfair trade practices” based on the alleged failed data security of Wyndham.

The Third Circuit recast Wyndham’s argument and ultimately rejected what was potentially viable on appeal as “[t]oo little and too late.”  As recognized by the Court:

Wyndham repeatedly argued there is no FTC interpretation of § 45(a) or (n) to which the federal courts must defer in this case, and, as a result, the courts must interpret the meaning of the statute as it applies to Wyndham’s conduct in the first instance. Thus, Wyndham cannot argue it was entitled to know with ascertainable certainty the cybersecurity standards by which the FTC expected it to conform. Instead, the company can only claim that it lacked fair notice of the meaning of the statute itself – a theory it did not meaningfully raise and that we strongly suspect would be unpersuasive under the facts of this case..

In what was a sua sponte rejection of Wyndham’s “implied” argument that it was not provided with sufficient statutory notice of the century-old Federal Trade Commission Act, the Court of Appeals recognized:

Moreover, Wyndham is entitled to a relatively low level of statutory notice for several reasons. Subsection 45(a) does not implicate any constitutional rights here. [citation omitted] It is a civil rather than criminal statute. [citation omitted] And statutes regulating economic activity receive a “less strict” test because their “subject matter is often more narrow, and because businesses, which face economic demands to plan behavior carefully, can be expected to consult relevant legislation in advance of action.” [citation omitted]

In other words, one of Wyndham’s arguments deemed potentially viable, i.e., that it should not be held to a standard never actually put forth by the FTC in any prior ruling, will likely be rejected on summary judgment.    According to the Court, the relevant standard “considers a number of relevant factors, including the probability and expected size of reasonably unavoidable harms to consumers given a certain level of cybersecurity and the costs to consumers that would arise from investment in stronger cybersecurity.”  It is this applicable standard that the Court found Wyndham should have been on notice of prior to the FTC Complaint being filed against it.

In a section of the opinion that may come back to haunt Wyndham – as well as future victims of a major data incident, the Court was quite blunt in its assessment as to whether this statutory standard was potentially satisfied.  Id. at 41 (“Wyndham’s as-applied challenge is even weaker given it was hacked not one or two, but three, times. At least after the second attack, it should have been painfully clear to Wyndham that a court could find its conduct failed the cost-benefit analysis. That said, we leave for another day whether Wyndham’s alleged cybersecurity practices do in fact fail, an issue the parties did not brief. We merely note that certainly after the second time Wyndham was hacked, it was on notice of the possibility that a court could find that its practices fail the cost-benefit analysis.”).

The import of this decision obviously reaches well beyond the Third Circuit.  As the only appellate court to affirm the FTC’s authority to enforce what it considers applicable cybersecurity standards — “standards” that no other governmental body uses as aggressively as the FTC, the FTC will have even greater leverage in future settlement agreements.  Given the scorched earth tactics taken during this litigation, it is possible the United States Supreme Court will be asked by Wyndham to weigh in.   There is certainly an argument to be made that Wyndham’s time and money would be better spent mending fences with the FTC.

UPDATE:   On the heels of this victory, the FTC announced on August 28, 2015 that it was going to hold a free “PrivacyCon” conference on January 14, 2016 at its Constitution Center offices.  According to the event description, PrivacyCon will “bring together a diverse group of stakeholders, including whitehat researchers, academics, industry representatives, consumer advocates, academics, and a range of government regulators, to discuss the latest research and trends related to consumer privacy and data security.”  Given that there is a call for “presentations seeking original research on new vulnerabilities and how they might be exploited to harm consumers” hopefully the attendee list to this free event does not have too many “John Smiths” listed.