The Wyndham Data Breach Settlement Shakes Up Privacy Law

The Federal Trade Commission (FTC) made waves when it announced earlier this week that it reached a proposed settlement with Wyndham Worldwide Corporation (Wyndham).

The agency’s enforcement action against Wyndham alleged that the company’s lax data security practices resulted in three separate consumer data breaches.

In defending the suit,Wyndham unsuccessfully challenged the FTC’s authority to police corporate cybersecurity practices under the Federal Trade Commission Act (FTC Act). Under the terms of the settlement, Wyndham must obtain an independent auditor to verify that it has established a comprehensive data security program to protect cardholder data and conduct annual information security audits every year for the next 20 years.

FTC’s Authority under the FTC Act

In recent years, the FTC has been increasingly bringing administrative actions against businesses that suffered data breaches due to allegedly deficient cybersecurity. When pursuing a data breach investigation, the FTC relies on Section 5(a) of FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” The statute broadly defines unfair practices as those that “cause or [are] likely to cause substantial injury to consumers…not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.”

The Wyndham Lawsuit

During 2008 and 2009, hackers breached Wyndham’s computer network on three separate occasions. In total, they stole personal and financial information for hundreds of thousands of consumers, which resulted in more than $10.6 million dollars in fraudulent charges.

The FTC filed suit under the FTC Act, alleging that Wyndham’s conduct was an unfair practice and that its privacy policy was deceptive. The FTC specifically maintained that contrary to Wyndham’s stated data privacy and security policy, the hotelier failed to employ encryption, firewalls, and other commercially reasonable methods for protecting consumer data. In defense of the suit, Wyndham argued that the FTC lacked the authority to regulate cybersecurity under the FTC Act.

In a precedential decision, the Third Circuit Court of Appeals affirmed the cybersecurity authority of the FTC to impose liability for data breaches under Section 5 of the FTC Act. “A company does not act equitably when it publishes a privacy policy to attract customers who are concerned about data privacy, fails to make good on that promise by investing inadequate resources in cybersecurity, exposes its unsuspecting customers to substantial financial injury, and retains the profits of their business,” the panel wrote. The appeals court further held that Wyndham was on notice of the potential liability under the FTC Act, citing that the agency filed complaints and entered into consent decrees in administrative cases raising unfairness claims based on inadequate corporate cybersecurity prior to the company’s data breach.

The Proposed Wyndham Data Breach Settlement

Under the terms of the consent order, Wyndham must establish a comprehensive information security program to protect cardholder data and specifically address the risks arising from network connections between Wyndham-branded hotels and the corporate data center. In addition, the company must conduct related annual information security audits every year for the next 20 years.

Wyndham must also obtain an annual independent assessment under the Payment Card Industry Data Security Standard or PCI DSS. The independent third-party auditor must also certify that: Wyndham safeguards the connections with its franchisee hotels; Wyndham engages in a comprehensive risk assessment as laid out in the PCI-DSS risk assessment guidelines; and the auditor is truly independent from Wyndham.

“This settlement marks the end of a significant case in the FTC’s efforts to protect consumers from the harm caused by unreasonable data security,” FTC Chairwoman Edith Ramirez said in a statement. “The court rulings in the case have affirmed the vital role the FTC plays in this important area.”

The Message for Businesses

Prior to the Wyndham lawsuit, challenges to FTC authority concerning privacy were very rare.  Most companies acquiesced when the FTC came knocking. However, Wyndham decided to challenge the FTC’s authority instead. After the Third Circuit confirmed the FTC’s authority to bring the suit, it appears that the company has since reassessed its strategy and decided to settle. This development is certainly remarkable and is likely to embolden the FTC in its quest to be the top federal privacy watchdog on consumer privacy issues within a federal statutory scheme that lacks a central regulatory body to handle such issues.