United States: FTC Toughening Stance On Data Security – Five Key Takeaways From Recent Consent Orders

The Federal Trade Commission is putting more teeth into the multiyear compliance obligations of consent orders it enters into with companies to settle enforcement actions related to data breaches. The FTC recently issued a pair of consent orders mandating the adoption and implementation of comprehensive information security programs and annual assessments for two companies that allegedly failed to take reasonable steps to protect their consumers' data. In an accompanying statement, the FTC said the orders "include new requirements" to "provide greater assurances that consumers' data will be protected going forward." The FTC is "particularly committed to strengthening the...provisions regarding data security assessments of companies by third parties" in future consent orders.

Allegations Against ClixSense

ClixSense is a rewards website that pays its users to view advertisements and perform other online tasks. The company collects personal information such as names, addresses, dates of birth, account credentials and, in some cases, social security numbers of its users. According to the FTC's complaint, ClixSense published a deceptive FAQ on its website stating it "utilizes the latest security and encryption techniques to ensure the security of your account information." The FTC alleged that, contrary to this characterization, ClixSense did not adopt even the minimal data security measures prescribed by most data security professionals. For example, ClixSense maintained passwords in clear text and failed to change default logins for networking resources.The FTC further alleged that ClixSense engaged in unreasonable security practices when ClixSense downloaded and used a browser extension that inadvertently gave hackers access to the company's internal network, thereby exposing the personal information of 6.6 million consumers.

Allegations Against i-Dressup

The website i-Dressup.com allowed users to play dress-up games, design clothes and decorate online spaces. The FTC alleged the site's operators knew many of its users were under 13 but failed to comply with Children's Online Privacy Protection Act's parental consent and data security requirements. With respect to the latter requirement, the FTC alleged i-Dressup maintained users' personal information in clear text and failed to assess its vulnerability to known or reasonably foreseeable attacks, implement safeguards against intrusion or monitor its logs for security incidents. The FTC alleged a hacker exploited these vulnerabilities and gained access to information of over 2 million users, including 245,000 users who indicated they were children.

Mandated Information Security Programs and Annual Self-Assessments

Like past FTC consent orders in information security enforcement actions, the new orders require the respective companies to implement rigorous and comprehensive information security programs. Each company must appoint one or more employees as responsible for the program, identify internal and external risks to personal information, and design, implement, test and monitor the effectiveness of safeguards that address the risks. The companies must also retain service providers capable of protecting personal information and evaluate and adjust their programs as necessary. Furthermore, the companies must retain independent third-party assessors to evaluate the effectiveness of their programs.

Importantly, the new consent orders contain explicit timing and documentation requirements for the companies' self-assessments. The orders specify that the companies must conduct self-assessments of the risks and the sufficiency of security safeguards to address those risks at least annually and following an unauthorized disclosure of personal information. Each company must also evaluate and adjust the information security program at least annually or in light of changes to the business or operations or following an incident of unauthorized disclosure. The orders also require the companies to document the relevant internal and external risks and the relevant safeguards, and require each company to document the "content, implementation, and maintenance" of the program.

The companies must obtain initial and biennial assessments from the third-party assessors. The new consent orders alter the scope of these assessments. Previous consent orders required the third-party assessor to set forth the specific safeguards implemented by the company, explain why the safeguards are appropriate, explain how the safeguards provide protection for consumers' personal information collected by the company, and certify that the company's program is operating with sufficient effectiveness. The third-party assessor is now required to determine whether the company has implemented the provisions of the mandated information security program, assess the effectiveness of the implementation and management of the program and identify any gaps or weaknesses in the program.

Unlike past orders, the new consent orders specifically prohibit the companies from making misrepresentations to the third-party assessors. Each order also requires the company to provide the FTC with an annual certification from a senior manager or officer indicating the company has established, implemented and maintained the required information security program and is not aware of any material noncompliance that has not been corrected or disclosed to the FTC. The certification must also briefly describe any unauthorized disclosures of personal information. This certification must be based on personal knowledge or subject matter experts upon whom the manager or officer reasonably relies. The new certification requirement raises the bar from previous consent orders, which required companies to file "true and accurate" reports with the FTC.

LabMD Context for New Requirements

The new requirements may be seen in part as a response to the outcome of the FTC's enforcement action against LabMD. In that action, the FTC found LabMD "failed to implement reasonable security measures" and, therefore, "LabMD's 'data security practices were unfair under Section 5.'" However, a panel of the U.S. Court of Appeals for the Eleventh Circuit found the FTC's cease and desist order unenforceable because "it mandate[d] a complete overhaul of LabMD's data-security program and [said] precious little about how this is to be accomplished." This finding may have spurred the FTC to revamp its consent orders and make the changes described above.

Key Takeaways

Here are the key takeaways for companies handling personal information in view of the new consent orders:

  1. Confirm governance. Formally appoint a senior manager to coordinate and be responsible for the information security program. The appointed person should have appropriate authority to oversee the program and interface regularly with any subject matter experts who are designing controls and implementing the program.
  2. Assess the current security program in light of the FTC's new tougher posture. Review the information security program by comparing it with a standard industry framework or customized integrated framework that addresses any specific regulatory obligations to identify risks to personal information and the sufficiency of safeguards in place to address the risks. Review the company's practices involving encryption, authentication, password management and data de-identification. Also test and monitor the effectiveness of the safeguards (e.g., conduct vulnerability and penetration testing, intrusion simulation testing and employee training).
  3. Conduct independent security program assessments annually and after a breach. Review the information security program annually in view of changes to operations or business processes. Conduct additional review and testing immediately after a breach or upon a major change to the business. Identify and address any security recommendations from prior assessments that have not yet been implemented because regulators may focus on these aspects of the security program.
  4. Institute vendor assessment questionnaires and risk management programs to demonstrate vendor capability to protect personal information. Both the recent and older consent orders require companies to "select and retain service providers capable" of safeguarding consumers' personal information. Similar obligations arise under the General Data Protection Regulation and California Consumer Privacy Act. Including vendor security questionnaires during the contracting process will help fulfill these obligations and align with best practices.
  5. Create a strategy for assessment communications under legal privilege. Conduct voluntary assessments using frameworks that provide legal privilege, where possible, to allow for frank discussions about the information security program. That said, consider providing written assessments and other materials willingly if requested by a regulator, depending upon the circumstances, context and content of the materials.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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