A New Jersey federal court is allowing the FTC’s case against Wyndham Worldwide Corporation to go forward, denying Wyndham’s Motion to Dismiss on both the unfairness and deception counts.  In this closely watched case, the court emphasized that in denying Wyndham’s request for dismissal, it was not providing the FTC with a “blank check to sustain a lawsuit against every business that has been hacked.”  The far-reaching implications of this decision, though, cannot be ignored.

The Wyndham decision may well prove rocket fuel to an agency already proceeding at break-neck speed to formulate and enforce (often at the same time) new data security law.  Any company that was still waiting for the FTC to go through a formal rulemaking process on data security can wait no more.  The decision by Judge Salas has arguably ratified all of the reams of informal guidance the FTC has provided over the past decade, plus in enforcement actions, panel discussions, white papers, and more, as though they had gone through the formal notice and comment-based rulemaking process.  Unless a company is confident that it knows, has synthesized, and has applied this informal guidance to its own activities, it stands at risk of being the next target for the FTC’s newly affirmed section 5 authority.

The Federal Trade Commission sued Wyndham Worldwide in June 2012 in the District of Arizona.  The FTC alleged that Wyndham’s failure to properly safeguard the personal information in its possession led to a data security breach that exposed thousands of customers to identity theft and other fraud. The case was transferred to the District of New Jersey in March 2013.  Soon thereafter, Wyndham filed its Motion to Dismiss.

Wyndham challenged the FTC’s authority to regulate unfairness in the data security context.  Wyndham further argued that the FTC could not bring unfairness claims unless and until it had promulgated regulations on the issue.  U.S. District Judge Esther Salas rejected both of these challenges, as well as Wyndham’s third challenge, that the FTC failed to sufficiently plead both its unfairness and deception claims.

Wyndham argued that section 5 of the FTC Act does not confer unfairness authority that covers data security.  Wyndham contrasted section 5 of the FTC Act to the Fair Credit Reporting Act (FCRA), the Gramm-Leach-Bliley Act (GLBA), and the Children’s Online Privacy Protection Act (COPPA), all of which include specific authority for the FTC to regulate data security in certain contexts.  Wyndham argued that those statutes, which were enacted after the FTC Act, would be superfluous if the FTC had the general data security authority it seeks to wield in this case.  The court disagreed and ruled that the FTC’s general authority over data security can coexist with more specified authority in the FCRA, GLBA, and COPPA.

Wyndham also argued that the FTC had not provided fair notice of what data-security practices a business had to implement in order to comply with the FTC Act. . In rejecting that argument, the court held that the FTC was not required to engage in rulemaking before enforcing Section 5 in data-security cases, but could instead develop the law on a case-by-case basis. The court also found that fair notice was provided through the FTC’s public complaints, consent agreements, public statements and business guidance brochure. As such, the FTC was not required to also promulgate formal regulations. In addition, the court found that the FTC had pled with enough particularity to satisfy the heightened requirements in Rule 9(b), even though it was no persuaded that this action fell under that rule.

With respect to the deception claim, the ruling also touched on the respective liability between franchisors and franchisees, and issues we’ve written about recently.  Wyndham sought to exclude Wyndham-branded hotels from the case on the grounds that Wyndham Hotels and Resorts is a legally separate entity from Wyndham-branded hotels.  It therefore argued that statements on the Hotels and Resorts website privacy policy could not form the basis for deception claims, where personal information was accessed from Wyndham-branded hotels.  The court reviewed the language from the privacy policy to determine that a reasonable person could conclude that the privacy policy on the Hotels and Resorts website made statements about data security at both the Hotels and Resorts and the Wyndham-branded properties.  Despite the court’s claims of not providing the FTC with carte blanche to pursue companies that fall victim to hackers, the court’s ruling makes clear that when companies experience data breaches, they – and their franchisees – are now more, not less, likely to face the possibility of enforcement action by the FTC.