On July 9, 2015, the Federal Communications Commission settled its first data security case with two related telecommunications carriers – TerraCom, Inc. and YourTel America, Inc. – for $3.5 million. The settlement resolves the FCC’s investigation into whether the carriers violated the federal Communications Act of 1934, 47 U.S.C. section 151 et. seq. (the “Act”) by failing to protect the confidentiality of personal information they received from more than 300,000 consumers.

TerraCom and its affiliate YourTel collected sensitive data on consumers in order to establish eligibility for the Lifeline program, a government-sponsored program that provides discounted phone services to low-income individuals. To prove their eligibility, potential customers were asked for personal information, including their names, addresses, Social Security numbers, dates of birth, and driver’s license numbers. In their privacy policies, the companies claimed to have in place “technology and security features to safeguard the privacy of your customer specific information from unauthorized access.”

However, despite their pledge, the carriers’ third-party vendor inadvertently stored the personal information of more than 300,000 customers in “clear, readable text” on unprotected Internet servers that “anyone in the world could access with a search engine and basic manipulation.” From September 2012 through April 2013, the information had been stored on the third-party vendor’s servers, in two publicly accessible folders that lacked any password protection or encryption, according to the FCC. After being put on notice of the security lapse, TerraCom and YourTel failed to notify all potentially affected customers, depriving those individuals of the opportunity to protect their personal information.

Last October, the FCC found that the “carriers’ failure to reasonably secure their customers’ personal information violate[d] the companies’ statutory duty under [section 222 of] the Communications Act to protect that information, and also constitute[d] an unjust and unreasonable practice in violation of [section 201 of] the Act…” Consequently, and by a sharply divided vote of 3-2, the FCC issued a Notice of Apparent Liability proposing a $10 million forfeiture penalty on the carriers.

Section 222(a) of the Act imposes a duty on every telecommunications carrier “to protect the confidentiality of [customers’] proprietary information.” Notably, this section has previously only been applied in the context of protecting a specific category of customer data known as “customer proprietary network information,” or CPNI (generally defined as phone-call-related data, such as the phone numbers called and the frequency, duration and timing of such calls).

In this case, however, the FCC took a significant step to require the protection of information beyond CPNI, holding that the Act’s protections extend to “all types of information that should not be exposed widely to the public, whether because that information is sensitive for economic reasons or for reasons of personal privacy”—a breathtakingly broad standard. The FCC further stated that section 222(a)’s protection of proprietary information should be read to include “privileged information, trade secrets, and personally identifiable information (PII)—information that can be used on its own or with other information to identify, contact, or locate a single person, or to identify an individual in context.” Applying this definition, the FCC determined that all of the information submitted by applicants to TerraCom and YourTel constituted proprietary information and, in doing so, asserted its authority over information that has no bearing upon the call-specific information that served as the genesis of section 222. Consequently, the FCC has greatly expanded the extent of personal information that telecommunications companies must now protect.

Section 201(b) of the Act bars telecommunications carriers from engaging in any “unjust and unreasonable” practice. In this case, the FCC broadly interpreted its authority to regulate “unjust and unreasonable” practices to cover a telecommunication carrier’s data security practices under section 201 of the Act. Specifically, the Commission concluded that the carriers engaged in such practices by: (1) lacking basic security measures to protect the confidentiality of consumers’ proprietary information (e.g., password protection or encryption), (2) misrepresenting their security practices to consumers, and (3) failing to notify all affected consumers who could have been breached by the carriers’ lax security practices.

The FCC’s action is also notable because it marks the first time the FCC has determined that a failure to employ reasonable data security practices to protect customer data constitutes an “unjust and unreasonable” practice in violation of section 201(b) of the Communications Act. In doing so, the FCC appears be following the FTC’s and other regulators’ lead in requiring companies to take industry-appropriate steps to protect certain types of sensitive customer data.

Although this action marked the FCC’s first foray into data security, it did not come without controversy as Commissioners Ajit Pai and Michael O’Rielly dissented in separate statements,available here and here, saying the Commission lacked the legal basis to act on the matter and that its action likely would not stand up under judicial scrutiny. They criticized their colleagues’ interpretation of the Act as imposing a duty to protect PII, and disputed the notion that section 222 extends to anything beyond CPNI as defined in the statute. They also took exception to the majority’s issuance of a fine in the absence of “prior fair warning.” As Commissioner Pai noted in his dissent, “[t]he Commission has never interpreted the Act to impose an enforceable duty on carriers to ‘employ reasonable data security practices to protect’ PII.” However, the validity of those objections will not be tested in this case, as the Consent Decree reiterates the FCC’s interpretation of sections 201 and 222 of the Act and, for purposes of this settlement, TerraCom and YourTel had admitted that their actions violated those provisions.

In addition to paying the $3.5 million civil penalty, the carriers will have to notify all consumers whose information was subject to unauthorized access and provide complimentary credit monitoring to all affected individuals. The companies have also agreed to take several steps to improve their security practices, such as by implementing both a written information security plan and a data breach response plan, and maintaining stricter oversight of vendors. With respect to the latter requirement, the Consent Decree requires the carriers to exercise up-front due diligence and care in selecting vendors – which, the FCC noted, was completely absent in this case – and also requires clear communications to the carriers’ vendor(s) regarding information security expectations through contractual provisions and by sharing the carriers’ required compliance manual. In addition, the Consent Decree requires both TerraCom and YourTel to demand that its vendors (and the vendors’ employees) participate in the carriers’ compliance training program. All of this must be accompanied by continuous monitoring and enforcement of vendors. Although the FCC’s opinion neither defines the contractual relationship between the carriers and their third-party vendor nor identifies the vendor’s duties and obligations thereunder, the above-listed requirements provide useful guidance on how companies can potentially avoid liability by establishing an appropriate level of oversight with their third-party vendors.

The TerraCom and YourTel Consent Decree reflects an emerging trend in the FCC’s approach to privacy and data security enforcement actions. The terms of the compliance plan are very similar to the terms of a recent $25 million AT&T Consent Decree over compromised personal information and CPNI. In both instances, the FCC found the companies liable for insufficient data security practices by citing alleged violations of sections 222 and 201 of the Act. Collectively, these two consent decrees appear to provide a roadmap of the FCC’s expectations in the area of data security going forward.