Court: FTC can bring down the hammer on companies with sloppy cybersecurity

Hotel chain Wyndham had challenged the FTC's authority to mandate cybersecurity standards

The U.S. Federal Trade Commission has the authority to take action against companies that fail to protect customer data, an appeals court ruled Monday.

The U.S. Court of Appeals for the Third Circuit upheld the FTC's 2012 lawsuit against hotel and time-share operator Wyndham Worldwide. The FTC filed a complaint against Wyndham for three data breaches in 2008 and 2009 that led to more than US $10.6 million in fraudulent charges. 

The appeals court ruling, upholding a 2014 district court decision, suggests the FTC can hold companies responsible for failing to use reasonable security practices.

Wyndham was one of two companies that had challenged the FTC's authority to enforce cybersecurity standards under the unfair and deceptive practices provisions of the FTC Act. Critics have argued the agency has no clearly defined cybersecurity standards for companies to follow. 

Wyndham said it was disappointed by the ruling, but noted that the decision was based only on its motion to dismiss the case, requiring the appeals court to take the FTC's allegations at "face value." Wyndham's challenge of the FTC will continue in court, the company said.

"We continue to contend 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," the company said in a statement. "With the dramatic increase in the number and severity of cyberattacks on both public and private institutions, we believe consumers will be best served by the government and businesses working together collaboratively rather than as adversaries."

The FTC said it welcomed the court ruling.

The court decision "reaffirms the FTC's authority to hold companies accountable for failing to safeguard consumer data," agency Chairwoman Edith Ramirez said in a statement. "It is not only appropriate, but critical, that the FTC has the ability to take action on behalf of consumers when companies fail to take reasonable steps to secure sensitive consumer information."

The FTC accused the hotel operator of using cybersecurity practices that "unreasonably and unnecessarily exposed consumers' personal data to unauthorized access and theft."

The company's hotels stored payment card information in clear, readable text, and it used easily guessed passwords to access its property management systems, the FTC alleged. The company also failed to use "readily available security measures" such as firewalls to limit access between the company's property management systems, its corporate network and the Internet, the FTC charged.

Wyndham's privacy policy said the company safeguards customer data "using industry-standard practices," the FTC said.

Wyndham argued on appeal that its conduct did not meet the congressional definition in the FTC Act of "unfair." The company argued that its actions were not unfair because it was the victim of criminals.

Appeals court Judge Thomas Ambro rejected that argument. The company "offers no reasoning or authority for this principle, and we can think of none ourselves," he wrote in Monday's decision.

A company's action can be unfair if it is likely to cause customer injury, and the injuries caused by a third party were foreseeable, he wrote.

Ambro also rejected Wyndham's argument that the FTC's cybersecurity rules are too vague. The unfairness standard in the FTC Act focuses on the substantial injury to consumers that they cannot reasonably avoid themselves, he wrote. "While far from precise, this standard informs parties that the relevant inquiry here is a cost-benefit analysis," he added.

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