Three judges of the 11th Circuit Court of Appeals have now joined the chorus of other judicial voices that have expressed concern about the Federal Trade Commission’s (FTC) efforts to appoint itself top cop on the data security beat. In an order (0) issued last week, the judges granted LabMD’s request that the court stay enforcement of the FTC’s decision against LabMD, pending the outcome of the court’s review of that order. Not only did the court grant the stay, but it did so in terms that suggest the court is, at best, highly skeptical of the FTC’s underlying theory. Having been writing about this case – and the infirmities of the FTC’s underlying legal theory – for going (1) on (2) three (3) years, I feel totally comfortable saying “I told you so. (4)”
Once again, a refresher
As a refresher, LabMD was a medical testing company that specialized in cancer detection. Between 2005 and 2008, one of LabMD’s administrative employees ran LimeWire, a peer-to-peer file sharing application, on her computer. She configured this application in a way that unintentionally allowed sensitive files on her computer to be shared on the LimeWire network. Tiversa, a “security consulting” firm in the business of identifying possible security breaches in companies’ networks and offering to fix them for a fee, identified this problem and stole a file containing insurance records for approximately 9,300 patients. With this file in hand, they “offered” to let LabMD hire them as a security consultant. When LabMD refused this “offer,” Tiversa reported LabMD to the FTC.
In late July, after many years of acrimonious litigation, which has involved a congressional investigation and multiple trips to federal court over procedural matters, the FTC issued its final order, finding that LabMD’s conduct from a decade ago constituted an unfair business practice. In issuing this order, the FTC overruled the prior order by the commission’s chief administrative law judge (ALJ). The ALJ had previously roundly rejected the FTC’s claims against LabMD, holding among other things that the mere possibility of harm alleged by the commission was too speculative to support a finding that LabMD’s security practices were “likely to cause substantial injury to consumers.”
An onerous order, and a stay unseemly denied
The commission’s order required LabMD to immediately undertake various actions to secure any client data stored on its computers. This is patently absurd, given that LabMD is, at this point, effectively defunct. It maintains a copy of its former customers’ data on a computer that is turned off and not connected to the internet — it does so because this “data” comprises patient records that need to be made available from time to time to the patients’ doctors. When these records are requested, LabMD literally plugs in the computer, turns it on, prints a physical copy of the records, mails them to the requesting doctor, and turns the computer back off. Regardless, the FTC demands that LabMD incur an estimated $250,000 in expenses to respond to the FTC’s order (that is LabMD’s estimate — the FTC has not provided its own estimate).
LabMD quickly brought suit in the 11th Circuit Court of Appeals to challenge the FTC’s order, and it asked the FTC to stay the requirements of the order pending that appeal. The FTC, continuing to display the good temperament and learned wisdom that has been on display throughout the matter, quickly refused.
Time for some justice
Unfortunately for the FTC, this matter is now out of its hands. Alongside its appeal to the 11th Circuit, LabMD also asked the court to overrule the FTC’s decision on the stay. The judges obliged, last week issuing their own order staying enforcement of the FTC’s order.
In issuing their order, the judges appear to have gone beyond what is required in deciding to issue a stay. Ordinarily, judges consider four factors in deciding to issue a stay of an order pending appeal, all of which must be at least minimally met: 1) that the moving party has a good chance of ultimately winning the case, 2) that that party would be harmed absent the stay, 3) that the stay won’t substantially harm other parties, and 4) that the stay is not otherwise contrary to the public interest.
The 11th Circuit judges focused primarily on the first factor, which I’ll return to in a moment. They flat out disagreed with the FTC’s own analysis of the second and third factors, finding that LabMD would be irreparably harmed if required to comply with the FTC’s order, and that staying that order would not substantially harm others. And they found that the fourth factor — public interest considerations — did not weigh in either direction.
In considering whether LabMD has a good chance of ultimately prevailing against the FTC, the judges’ analysis came down squarely and strongly in LabMD’s favor. The FTC’s core argument in the case is that the Federal Trade Commission Act’s prohibition on conduct that is “likely to cause” substantial consumer injury includes conduct that increases the risk of consumer injury. The 11th Circuit judges, however, read the statute to “require a higher threshold.” The judges say outright that they “do not believe an interpretation that [requires so low a threshold as the FTC argues for] is reasonable.” (And, it should be noted, that this is only one of two issues that the judges considered — both of which they decided adversely to the FTC’s position.)
That’s a remarkable statement in an order granting a stay. The general inquiry is whether the moving party has a good chance at winning. One would expect, for instance, a court to say that “movant has a strong argument that the FTC’s interpretation is unreasonable.” In this case, however, the judges have very nearly said “we think the FTC’s interpretation is unreasonable.” That’s the sort of language one sees in a merits opinion.
Coming home to roost
This is a bad start to the appeal for the FTC. Like, really bad.
At the same time, it’s not really all that surprising. The 11th Circuit judges basically said the same thing that the FTC’s ALJ said — that likely means something more than merely possible.
Perhaps more important, this ups the count of judges that have cast doubt on the FTC’s asserted authority to police firms’ data security practices. To date, nine out of nine judges to have reviewed the FTC’s efforts have recognized that they raise serious legal questions: six circuit court judges, two district court judges, and the FTC’s Chief ALJ. While some of these judges have issued decisions that affirm the outcome of the FTC’s decisions, they have consistently expressed concern about the scope of the FTC’s legal interpretations (5). Indeed, the only “jurists” who seem confident in the FTC’s interpretation of the law are the commissioners of the FTC.
The 11th Circuit’s order signals that the FTC’s data security joy ride may fast be coming to an end. Not a moment too soon. If only it hadn’t taken more than half a decade of litigation that put a cancer testing lab out of business. The FTC wants LabMD to write all of its former customers notes letting them know that there is a chance that some of their information was accessed a decade ago. The truth is that it is the FTC who should be writing the letters, apologizing to everyone who has been denied vital access to a medical testing facility because of the commission’s own vendetta and power lust.