The U.S. Federal Trade Commission (“FTC”) has filed a lawsuit against device manufacturer D-link for allegedly deceiving the marketplace about the security of its products and, in turn, unfairly placing customer privacy at risk.

Overview

Taiwan-based manufacturers D-Link Corporation and D-Link Systems, Inc. (collectively, “D-Link”) design a variety of home network devices, such as routers, IP cameras, and baby monitors. Devices such as these are susceptible to hacking when they are connected to each other and to the internet (in what is often referred to as the “Internet of Things” or “IoT”), and weak security measures therefore pose a significant security concern. Judging from D-Link’s advertisements for its products, the company is certainly aware of these risks. D-Link boasted that its routers are safelocked from hackers thanks to “Advanced Network Security,” its baby monitors and cameras assure a “Secure Connection” to protect the livestream view of a sleeping child, and promises of an “easy” and “safe” network appear repeatedly during the set up process for a D-Link device with an online interface. As the FTC explains in its lawsuit claims like those made by D-Link are not only misleading but also dangerous.

Despite an apparent awareness of consumers’ cybersecurity concerns, the FTC alleges that D-Link neglected to build common security measures into the devices it sells. The allegations are startling: mobile app credentials were stored unsecured in plain text on consumer devices; a private company key code was accidentally made viewable online for six months; hard-coded login credentials in camera software left video feeds vulnerable to unauthorized viewers. And that’s just the beginning. More details are listed in the FTC’s complaint filed in a U.S. District Court in California on January 5, 2017.  These lapses and D-Link’s deceptive advertising prompted the FTC to charge the company with a violation of Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. §45.

As of January 10th, D-link has denied the allegations outlined in the complaint and has retained the Cause of Action Institute as counsel to defend against the action.

The growing IoT problem

In recent years, the FTC has tried to keep pace with mounting concerns over the IoT industry by filing a handful of complaints focused on consumer protection.  For example, it went after the company TRENDnet after the firm’s faulty software allowed hundreds of personal security cameras to be hacked. It also filed an action against computer parts manufacturer ASUS after its cloud services were compromised and the personal information of thousands of consumers was posted online. These isolated mistakes add up; when millions of unsecured and seemingly innocuous WiFi-enabled devices join the global network, they can serve as a massive launchpad for crippling cyber attacks like the one that overwhelmed internet traffic operator Dyn and shut down several major websites in October 2016. The efforts of the FTC are aimed at mitigating such attacks and encouraging technology developers to invest effort and resources in order to secure their IoT devices before they hit the marketplace.

Search for solutions

Both the FTC and the National institute of Standards and Technology (NIST) have released reports offering guidelines and technical standards for building reliable security into the framework of new systems and devices.  As we wrote about recently, the White House has also left the incoming Trump administration an extensive report on cybersecurity recommendations. Achieving these standards will require a combination of regular agency enforcement and greater market demand for safe, secure devices. In the meantime, some digital vigilantes are working to stop cyber-attacks before they start. Netgear, for instance, has launched a “bug bounty program” offering cash rewards of $150-$15,000 for eager hackers to track and report security gaps in its devices, applications, and APIS.  Indeed, incentivizing solutions rather than quietly overlooking mistakes, and searching for loopholes in our laws, will make a substantial difference in safeguarding the IoT landscape.

Google’s recent changes to its privacy policy are coming under fire from a complaint filed late last year with the Federal Trade Commission (“FTC”) that accuses the company of downplaying “transformational change” in its handling of user data.  #MLWashingtonCyberWatch will be keeping track of how the 2017 FTC addresses this complaint.

On June 28, 2016, Google notified its users of changes to its privacy policy that would “give you more control over the data Google collects and how it’s used, while allowing Google to show you more relevant ads.” However, a complaint submitted by advocacy groups Consumer Watchdog and Privacy Rights Clearinghouse on December 5th (the “Complaint”) alleges that not only are the changes themselves in violation of previous agreements between Google and the FTC as well as Section 5 of the Federal Trade Commission Act which prohibits unfair or deceptive acts or practices in or affecting commerce, but also that the announcement of these changes intentionally misled users who, in the words of the Complaint, “had no way to discern from the wording that Google was breaking from a nearly decade-old practice.” Continue Reading #MLWashingtonCyberWatch: 2017 FTC and Google Complaint

An old saw defines insanity as doing the same thing over and over again and expecting a different result.  Wendy’s shareholders recently flouted that maxim by filing a derivative action this week against officers and directors of the fast-food chain seeking recovery on behalf of the corporation for damages arising from a data breach that affected over 1,000 franchise locations between October 2015 and June 2016.  Based on the results in prior data breach derivative actions, the prospects for the Wendy’s derivative claim appear dim.

Continue Reading The Definition of Insanity? Wendy’s Shareholders File Derivative Action Based on 2015-16 Data Breach

Dismissal Of Home Depot Derivative Action Extends Shareholder Losing Streak

An attempt to impose liability on corporate officers and directors for data breach-related losses has once again failed.  On November 30, 2016, a federal judge in Atlanta issued a 30 page decision dismissing a shareholder derivative action arising out of the September 2014 theft of customer credit card data from point-of-sale terminals in Home Depot stores.  The dismissal of the Home Depot derivative action follows earlier dismissals of derivative actions arising from data breaches perpetrated against Wyndham and Target. Continue Reading A Failed Strategy: Another Derivative Action In A Data Breach Case Goes Down To Defeat

In its recent decision in Galaria v. Nationwide Mut. Ins. Co., no. 15-3386 (6th Cir. Sept. 12, 2016). Co., No. 15-3386 (6th Cir. Sept. 12, 2016), a divided Sixth Circuit panel held that plaintiffs had standing to assert claims arising from hackers’ alleged theft of data containing plaintiffs’ sensitive personal data, including dates of birth and Social Security numbers.  In so ruling, the court became the latest to hold that hackers’ targeted theft of personal identifying information (“PII”), standing alone, creates a substantial risk of harm that is sufficient to satisfy the concrete injury requirement for standing under Article III of the United States Constitution.

The lawsuit concerned a 2012 data breach in which hackers stole data that Nationwide collected for purposes of underwriting life insurance policies.  Plaintiffs were among those who received notice that hackers had stolen data containing the names, dates of birth, marital status, genders, occupations, employers, Social Security numbers and driver’s license numbers for individuals who had applied for insurance from Nationwide.  Criminals are increasingly targeting PII like that stolen here because it can be used to engage in fraudulent borrowing or to file false tax returns to obtain illegal refunds, making such data valuable on the black market.  However, as is true in many cases involving PII data breaches, plaintiffs did not allege that their PII had actually been misused.  Also, Nationwide offered a year of free credit monitoring and identity-theft protection insurance to individuals whose information has been stolen.  Based on those protections and plaintiffs’ failure to allege actual misuse of stolen data, the district court granted Nationwide’s motion to dismiss for lack of standing. Continue Reading Sixth Circuit Rules That Theft of PII from Insurance Company Results in Article III Standing

On Friday, the heads of the Federal Trade Commission overruled the decision of the Administrative Law Judge (“ALJ”) in In the Matter of LabMd., Inc. The FTC concluded that the ALJ had erred in dismissing the Commission’s case against a lab testing company LabMD and misapplied the unfairness standard.  The key determination by the FTC was that the mere disclosure of sensitive medical information is cognizable harm under Section 5(c) of the FTC Act, 15 U.S.C. § 45(a), irrespective of whether there is further economic or physical harm.   What does this mean for privacy enforcement?   Read on. Continue Reading FTC Plants A Flag With LabMD Ruling: What This Means for Enforcement

The U.S. Court of Appeals for the Ninth Circuit recently issued a decision that could have far reaching implications for the relationships between companies that provide online services, their customers or users, and third parties. In Facebook v. Vachani, the Ninth Circuit found that Power Ventures violated the Computer Fraud and Abuse Act (“CFAA”) and California Penal Code Section 502.  Power Ventures did this by continuing to access Facebook’s computer system after receiving Facebook’s letter to cease and desist such activity.  Although Power Ventures had permission from relevant Facebook users, the users’ authorization had been revoked by Facebook itself through its letter.

Vachani’s Business Model

Power Ventures (“Power”), is a company founded by CEO Steven Vachani. As part of its business model, Mr. Vachani operated a social networking site, Power.com.  The idea was that Power.com would act as a social network aggregator, by allowing users to see all of their social network contacts across different services on a single page. The user could then use the Power.com service to access the individual social networking sites.

Read on to understand what occurred in the case and what key takeaways it provides for senior decision makers and in-house counsel. Continue Reading Facebook v. Vachani – User Authorization Can Be Revoked By Service Providers

In a terse two-page order, Senior District Court Judge Paul Magnuson dismissed derivative claims brought against officers and directors of Target in connection with the 2013 holiday-season data breach.  The dismissed claims, brought by Target shareholders on behalf of the corporation, alleged that the data breach had resulted from management failures by the defendant officers and directors.  The Target board of directors appointed a special litigation committee (“SLC”) to investigate the shareholders’ allegations and determine whether or not to pursue the claims.  The SLC, composed of two newly-appointed independent directors represented by independent counsel, recommended that Target not pursue claims against the officers and directors.  The SLC then moved to dismiss, as did Target and the defendant officers and directors.  Plaintiffs declined to oppose and the court’s order followed. Continue Reading Fizzled Suit Against Target Officers and Directors Raises Question as to the Value of Derivative Claims in Data Breach Cases

In a decision favorable to the airline industry—but not helpful to other companies—the California Court of Appeal said that a privacy enforcement action against Delta is not going to fly.  On May 25, 2016, the Court of Appeal tossed the California Attorney General’s CalOPPA enforcement action against Delta Airlines, affirming the lower court’s 2013 dismissal of the case with prejudice.

As we previously wrote, California AG’s office has been taking incremental steps toward ensuring that mobile applications comply with CalOPPA.  As early as 2012, its office began sending notices of non-compliance to mobile application developers.  When some companies failed to respond, the Attorney General chose Delta as its pilot case, promptly filing its first-ever enforcement action under CalOPPA.  Over the past three years, we have followed the Attorney General’s CalOPPA compliance campaign, including the Delta case.   Continue Reading Delta Wins CalOPPA Case – But Your Mobile App May Not Fly

Last week, a federal court in Atlanta issued an order preliminarily approving a proposed settlement – valued up to $19.5 million – of the consumer claims arising from the 2014 theft of payment card data from Home Depot.  The cash and noncash terms of the proposed settlement are unexceptional.  What is unusual about this settlement is its timing.  According to plaintiffs’ brief seeking preliminary approval of the settlement, rather than wait for a decision on Home Depot’s still-pending motion to dismiss, the parties conducted a mediation after argument on the motion, and concluded a negotiated settlement before the motion was decided.  The decision to settle early in the case – before discovery or summary judgment – may signal a recognition that the likely settlement value of the case did not warrant the substantial cost of additional litigation for either side.  Insofar as that logic would apply with equal force in just about any consumer payment card data breach case, the early resolution of the Home Depot case could provide a model for future settlements. Continue Reading Early Settlement of the Home Depot Consumer Data Breach Claims – The Start of a Trend?