D-Link Continues Challenges to FTC’s Data Security Authority

Sep 26, 2018

By Linda Henry


See all of Our JDSupra Posts by Clicking the Badge Below

View Patrick Law Group, LLC

On September 21, 2018, the FTC and D-Link Systems Inc. each filed a motion for summary judgement in one of the most closely watched recent enforcement actions in privacy and data security law (FTC v. D-Link Systems Inc., No. 3:17-cv-00039).  The dispute, which dates back to early 2017, may have widespread implications on companies’ potential liability for lax security practices, even in the absence of actual consumer harm.

In January 2017, the FTC sued D-Link for engaging in unfair or deceptive acts in violation of Section 5 of the FTC Act in connection with D-Link’s failure to take reasonable steps to secure its routers and Internet-protocol cameras from widely known and reasonably foreseeable security risks.   The FTC’s complaint focused on D-Link’s marketing practices, noting that D-Link’s marketing materials and user manuals included statements in bold, italicized, all-capitalized text that D-Link’s routers were “easy to secure” with “advanced network security.”  D-Link also promoted the security of its IP cameras in its marketing materials, specifically referencing the device’s security in large capital letters.  In addition, the IP camera packaging also listed security claims, such as “secure-connection” next to a lock icon as one of the product features.

Although a U.S. district court judge dismissed three of the FTC’s six claims in September 2017, the judge also rejected D-Link’s argument that the FTC lacked statutory authority to regulate data security for IoT companies as an unfair practice under Section 5 of the FTC Act.  In the court’s Order Regarding Motion to Dismiss, the court stated that “the fact that data security is not expressly enumerated as within the FTC’s enforcement powers is of no moment to the exercise of its statutory authority.”  With respect to the court’s dismissal of the FTC’s unfairness claim, the court agreed with D-Link that the FTC had failed to provide any concrete facts demonstrating actual harm to consumers, and reasoned that the absence of any concrete facts makes it just as possible that D-Link’s devices would not cause substantial harm to consumers and that “the FTC cannot rely on wholly conclusory allegations about potential injury to tilt the balance in its favor.”

Despite the court’s dismissal of the FTC’s unfairness claim, the court indicated that the claim might have survived a motion to dismiss if the FTC had tied the unfairness claim to the representations underlying the deception claims.  The court stated that “a consumer’s purchase of a device that fails to be reasonably secure — let alone as secure as advertised — would likely be in the ballpark of a “substantial injury,” particularly when aggregated across a large group of consumers.”   Although the court’s reasoning indicates that there are limits to the FTC’s data security enforcement capabilities, it did not completely foreclose the possibility that lax security practices might be deemed to violate the unfairness prong of the FTC Act even in the absence of evidence of actual harm to consumers.

The FTC argued in its September 2018 motion for summary judgment that summary judgment is appropriate because there is no dispute that D-Link made representations regarding the security of its devices from unauthorized access, the devices contained numerous vulnerabilities that made them susceptible to unauthorized access and D-Link’s security statements were material to consumers.  The FTC noted that “there is no genuine dispute that D-Link routers and IP cameras have contained serious, foreseeable, and easily preventable vulnerabilities permitting unauthorized access; that D-Link knew of these vulnerabilities; and that D-Link sold and marketed these devices as secure anyway.”

In D-Link’s motion for summary judgment, D-Link argued that the FTC’s remaining deception claims were based on “expert conjecture” with no evidentiary support.  D-Link stressed that the FTC’s failure to present any evidence that an identifiable consumer was deceived by D-Link’s marketing statements or that any of the routers or cameras were actually compromised demonstrated that there was no harm for the court to remedy.

D-Link is significant because the outcome may have a substantial impact on the FTC’s ability to successfully pursue a claim under Section 5 of the FTC Act in the absence of evidence that there has been an actual harm or injury to consumers. In addition, the outcome of D-Link may shape the FTC’s approach to classifying informational harm that impacts consumers following a data breach.

Even if the D-Link decision offers more clarity around the scope of the FTC’s regulatory authority on data security, the FTC’s past guidance regarding data security and privacy remains useful when evaluating a company’s data security practices.  Over the past few years, the FTC has repeatedly stressed that a company’s failure to implement reasonable security measures may be considered deceptive or unfair, and has stated that “the touchstone of the FTC’s approach to data security is reasonableness: a company’s data security measures must be reasonable in light of the sensitivity and volume of consumer information it holds, the size and complexity of its data operations, and the cost of available tools to improve security and reduce vulnerabilities.” In addition, the FTC’s motions in D-Link confirm that a company should ensure that it actually follows all security practices it claims to follow.

OTHER THOUGHT LEADERSHIP POSTS:

The Weight of “GDPR Lite”

By Dawn Ingley | In June, 2018, California’s legislature took the first steps to ensure that the state’s approach to data privacy was trending more closely to the European Union’s General Data Protection Regulation (GDPR), the de facto global industry standard for data protection. Though legislators have acknowledged that further refinements to the California Consumer Privacy Act (CCPA) will be necessary in the coming months, its salient requirements are known.

The ABA’s Valentine’s Gift to Same-Sex Couples: Formal Opinion 458 Requires Judges to Perform Marriages

By Jennifer Thompson | On Valentine’s Day, the American Bar Association (ABA) Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 485, entitled “Judges Performing Same-Sex Marriages,” stating that judges may not decline to perform marriages for couples of the same sex.

The Intersection of Artificial Intelligence and the Model Rules of Professional Conduct

By Linda Henry | Artificial intelligence is transforming the legal profession and attorneys are increasingly using AI-powered software to assist with a wide rage of tasks, ranging from due diligence review, issue spotting during the contract negotiation process and predicting case outcomes.

Follow the Leader: Will Congressional and Corporate Push for Federal Privacy Regulations Leave Some Technology Giants in the Dust?

By Dawn Ingley | On October 24, 2018, Apple CEO Tim Cook, one of the keynote speakers at the International Conference of Data Protection and Privacy Commissioners Conference, threw down the gauntlet when he assured an audience of data protection professionals that Apple fully supports a “GDPR-like” federal data privacy law in the United States.

Yes, Lawyers Too! ABA Formal Opinion 483 and the Affirmative Duty to Inform Clients of Data Breaches

By Jennifer Thompson | Developments in the rules and regulations governing data breaches happen as quickly as you can click through the headlines on your favorite news media site.  Now, the American Bar Association (“ABA”) has gotten in on the action and is mandating that attorneys notify current clients of real or substantially likely data breaches where confidential client information is or may be compromised.

GDPR Compliance and Blockchain: The French Data Protection Authority Offers Initial Guidance

By Linda Henry | The French Data Protection Authority (“CNIL”) recently became the first data protection authority to provide guidance as to how the European Union’s General Data Protection Regulation (“GDPR”) applies to blockchain.

D-Link Continues Challenges to FTC’s Data Security Authority

By Linda Henry | On September 21, 2018, the FTC and D-Link Systems Inc. each filed a motion for summary judgement in one of the most closely watched recent enforcement actions in privacy and data security law (FTC v. D-Link Systems Inc., No. 3:17-cv-00039).  The dispute, which dates back to early 2017, may have widespread implications on companies’ potential liability for lax security practices, even in the absence of actual consumer harm.

Good, Bad or Ugly? Implementation of Ethical Standards In the Age of AI

By Dawn Ingley | With the explosion of artificial intelligence (AI) implementations, several technology organizations have established AI ethics teams to ensure that their respective and myriad uses across platforms are reasonable, fair and non-discriminatory.  Yet, to date, very few details have emerged regarding those teams—Who are the members?  What standards are applied to creation and implementation of AI?  Axon, the manufacturer behind community policing products and services such as body cameras and related video analytics, has embarked upon creation of an ethics board.  Google’s DeepMind Ethics and Society division (DeepMind) also seeks to temper the innovative potential of AI with the dangers of a technology that is not inherently “value-neutral” and that could lead to outcomes ranging from good to bad to downright ugly.  Indeed, a peak behind both ethics programs may offer some interesting insights into the direction of all corporate AI ethics programs.

IoT Device Companies: The FTC is Monitoring Your COPPA Data Deletion Duties and More

By Jennifer Thompson | Recent Federal Trade Commission (FTC) activities with respect to the Children’s Online Privacy Protection Act (COPPA) demonstrate a continued interest in, and increased scrutiny of, companies subject to COPPA. While the FTC has pursued companies for alleged violations of all facets of its COPPA Six Step Compliance Plan, most recently the FTC has focused on the obligation to promptly and securely delete all data collected if it is no longer needed. Taken as a whole, recent FTC activity may indicate a desire on the part of the FTC to expand its regulatory reach.

Predictive Algorithms in Sentencing: Are We Automating Bias?

By Linda Henry | Although algorithms are often presumed to be objective and unbiased, recent investigations into algorithms used in the criminal justice system to predict recidivism have produced compelling evidence that such algorithms may be racially biased.  As a result of one such investigation by ProPublica, the New York City Council recently passed the first bill in the country designed to address algorithmic discrimination in government agencies. The goal of New York City’s algorithmic accountability bill is to monitor algorithms used by municipal agencies and provide recommendations as to how to make the City’s algorithms fairer and more transparent.