The Federal Trade Commission demonstrated its intention to fight for the power to regulate data security by filing a 111-page brief with the U.S. Court of Appeals for the Eleventh Circuit in which it argued that the agency properly found that LabMD's practices ran afoul of the law.

Last July, in an opinion authored by then-Chair of the FTC Edith Ramirez, the Commission reversed an initial decision by an administrative law judge (ALJ) and determined that LabMD engaged in "unfair" practices in violation of Section 5 of the Federal Trade Commission Act.

From 2001 until 2014, LabMD operated as a clinical laboratory that conducted tests on patient specimen samples and reported the test results to its physician customers. Over the years, LabMD collected sensitive personal information—including medical information—from over 750,000 patients, such as their names, addresses, Social Security numbers, diagnosis codes, and insurance information.

But according to the complaint, LabMD did not have even basic data security practices in place for its network, which also lacked file integrity monitoring or an intrusion detection system. The company also failed to provide data security training to employees in violation of its own internal compliance program, it neglected to update its software to protect against known vulnerabilities, it utilized a lax password policy, and it provided administrative rights to employees over their computers, the agency asserted.

For example, employees could change security settings and download software applications and files from the Internet, including peer-to-peer file-sharing applications that were unrelated to the business. Using a P2P network, a forensic analyst discovered and downloaded a copy of one of LabMD's reports that contained 1,718 pages of sensitive personal information for approximately 9,300 consumers.

LabMD responded to the complaint with a motion to dismiss, challenging the FTC's authority to bring the enforcement action. That argument was rejected by the Commission as well as a district court judge and the Eleventh Circuit in a collateral attempt to enjoin the action in federal court.

After an evidentiary hearing, an ALJ determined that the FTC's counsel failed to prove that LabMD's computer data security practices "caused" or were "likely to cause" substantial consumer injury as required by Section 5.

On appeal, the full Commission concluded that the ALJ applied the incorrect standard for unfairness and reversed. "[T]he exposure of sensitive medical and personal information via a peer-to-peer file-sharing application was likely to cause substantial injury and … the disclosure of sensitive medical information did cause substantial injury," Ramirez wrote.

LabMD appealed the decision to the Eleventh Circuit, challenging the Commission's conclusion that it violated the FTC Act and arguing that it did not have fair notice of the agency's standards and that the remedial order exceeded the FTC's discretion.

In its reply brief, the FTC came out swinging. As "the nation's premier consumer protection authority," the agency has broad discretion to prevent acts or practices that injuriously affect the general public, the agency argued. The Commission has "long used" its unfairness authority to protect consumers from harms caused by the unauthorized exposure of their personal data and has provided "extensive guidance" on proper data security practices through written publications, videos, and other media.

Noting that medical data "is perhaps consumers' most sensitive information," the FTC detailed "LabMD's culture of lax data security" despite assurances about keeping patient data secure and private. The Commission properly determined that the exposure of the file containing data on 9,300 consumers was "likely to cause substantial injury," a term which encompasses "the intangible but concrete harm caused by the disclosure of sensitive medical information," the agency told the court.

"Under the law, an invasion-of-privacy harm is not purely emotional or subjective," the FTC wrote, and "invasion of privacy has long been recognized as a concrete harm separate and distinct from 'mental distress.'"

LabMD's contention that the FTC "reduced beyond recognition" the meaning of "likely" was "a smokescreen," the agency told the Eleventh Circuit. "This case does not involve a low probability of harm," the Commission emphasized, as LabMD's actions were "the equivalent of leaving your wallet on a crowded sidewalk."

The FTC also argued that its unfairness finding did not violate due process, citing the Third Circuit's recent decision in FTC v. Wyndham Worldwide Corporation that "Section 5(n) itself provides constitutionally adequate fair notice to businesses that they may be subject to FTC Act liability for data security practices that cause substantial and unjustified consumer injury." LabMD did not require "ascertainable certainty" as to the specific security measures it needed to take, the agency said, because the touchstone of the FTC's data security standard is reasonableness.

"A reasonableness standard is not unconstitutionally vague," the FTC wrote. "All businesses know that if they fail to take reasonable precautions they can be held liable under ordinary tort law. Just as LabMD did not need to be told to remove hazards from its workplace, it required no special notice that, having collected highly sensitive medical information entrusted to it by doctors and patients, it had to take reasonable measures to protect the data. LabMD is no more entitled to detailed guidance for data protection before FTC enforcement than it would be before a lawsuit by private plaintiffs injured by its negligence."

"Nor does due process demand that the FTC promulgate data security rules," the agency argued. "It is long settled that [the] agency may develop and apply standards through case-by-case adjudication, rather than up-front rulemaking."

Substantial guidance on reasonable data security measures was available to LabMD, the FTC told the court, from written guidance such as the agency's "Protecting Personal Information: A Guide for Business," to complaints and consent decrees that reveal the types of security failures the agency deems unreasonable, to standards published by other government agencies, such as the National Institute of Standards and Technology.

Finally, the FTC defended its power to enter a remedial order to establish a data security program and notify affected consumers. Despite the fact LabMD voluntarily discontinued its business, the company's owner testified he would try to resume business and the company retained patient data for approximately 750,000 consumers. Similar to the agency directing a false advertiser to engage in corrective advertising, the order to notify victims of the data breach was appropriate, the FTC argued.

Just because LabMD's actions occurred in the past did not change the FTC's ability to bring suit, the agency said, and the balance of benefits and costs found that several of LabMD's data security failures could have been remedied with inexpensive solutions that would not have yielded higher prices for consumers.

The Commission's instructions to establish a security program "spelled out the standards for LabMD to craft a reasonable security program, while giving LabMD the flexibility to tailor its compliance to fit its business operations as they evolve," the agency said.

To read the FTC's brief in LabMD v. FTC, click here.

Why it matters: The FTC did not back down one inch in its reply brief to the Eleventh Circuit, defending each and every conclusion by the Commission and pushing hard for recognition of its power to regulate data security. If the court affirms the Commission's decision against LabMD, businesses would have an uphill battle challenging FTC authority. On the other hand, if the Eleventh Circuit reverses the decision, it would create a split with the Third Circuit opinion in Wyndham, potentially setting up a Supreme Court showdown on data security regulation.