Critics question FTC's authority to bring data security complaints

The agency has no specific data security rules and operates from a vague statute, critics say

The U.S. Federal Trade Commission should back away from its claim of broad authority to seek sanctions against companies for data breaches when it has no clearly defined data security standards, critics of the agency said Thursday.

The FTC should back away from authority it says it has under a vague section of law that doesn't mention data security, said the critics, including Mike Daugherty, CEO of Atlanta diagnostic lab LabMD, which is fighting an FTC complaint.

The agency should instead seek specific authority to enforce data security rules from the U.S. Congress and should define what data security standards it expects from companies, instead of seeking sanctions on a case-by-case basis, said speakers during a discussion on FTC authority sponsored by TechFreedom, an antiregulation think tank, and Cause of Action, a government watchdog group defending LabMD.

The FTC's complaint against the small lab wasn't based on established rules that agency officials could point to, Daugherty said.

The FTC, instead of looking for real consumer harm, seems to be saying, "We're going to take one victim and going to hold them accountable," said Gerry Stegmeier, a privacy and data security lawyer.

Daugherty said he's "incredulous" that the agency can use Section 5 of the FTC Act, which allows it to prevent unfair or deceptive business practices, to file complaints about data security practices.

"If you want to upset [FTC officials], ask them what the standards are," he said. "I need to know what the laws and boundaries are. You mean you can make them up as you go along?"

In the past 11 years, the FTC has brought nearly 50 data security complaints against companies, and has settled all but two, with LabMD and Wyndham Worldwide fighting recent complaints.

LabMD fought the complaint, Daugherty said, because it was "a life or death situation" for the company. If the company settles a data security complaint, competitors will use that information to spread "innuendo" against it, he said.

LabMD's trouble started in 2008, when peer-to-peer security vendor Tiversa contacted the company, saying it had found a LabMD customer spreadsheet on a P-to-P network. The file contained personal information for more than 9,000 consumers, including names, Social Security numbers and medical treatment codes.

LabMD discovered that a business manager had Limewire P-to-P software installed on her computer, against company policy, and had inadvertently shared the file, Daugherty said.

The security vendor later reported the incident to the FTC, Daugherty said. After the FTC investigated LabMD for more than three years, the agency filed a data security complaint against the company in August. The company failed to take reasonable steps to protect consumer information, the agency alleged.

The incident happened in 2008, "when no one understood the vulnerability of P-to-P," Daugherty said.

However, researchers first raised concerns about inadvertent file sharing on P-to-P networks back in 2002, and a congressional committee explored the issue in a 2003 hearing.

Still, the FTC issued no guidance on the dangers of P-to-P software until 2010, after the LabMD incident, and the agency worked with Limewire for years on inadvertent file sharing before filing a complaint against P-to-P vendor Frostwire in 2011, noted Tom Sydnor, a senior fellow for intellectual property at the Association for Competitive Technology.

Instead of filing a complaint against LabMD, the agency should have long ago targeted P-to-P vendors for "tricking" users into sharing files they wanted to keep private, Sydnor said.

Most of the speakers at Thursday's event questioned the FTC's authority in data security, but Justin Brookman, director of the consumer privacy project at the Center for Democracy and Technology, defended the agency.

Congress wrote the FTC Act broadly to give the agency authority to act when new types of unfair or deceptive business practices pop up, he said. The agency shouldn't have to seek new congressional authority for every type of unfair business practice, he said.

Responding to criticisms that the FTC doesn't have specific data security standards, Brookman said he doesn't want to see a federal agency make security rules that every company has to follow. It would be "insane" for the FTC to require companies to spend a certain percentage of their revenue on security, he said.

Instead, the agency is picking cases to highlight bad security practices and give guidance to other companies on what practices to avoid going forward, he added. "They're bringing the cases they think are important to change behavior going forward," Brookman said.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is

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Tags U.S. Federal Trade CommissionWyndham WorldwideregulationGerry StegmeierJustin BrookmanTiversaCause of ActionMike DaughertyTom Sydnorsecuritydata breachTechFreedomCenter for Democracy and TechnologygovernmentAssociation for Competitive TechnologyLabMD

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