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On July 29, the FTC and the Ohio attorney general announced temporary restraining orders and asset freezes issued by the U.S. District Court for the Western District of Texas against a payment processor and a credit card interest-reduction telemarketing operation (see here and here). According to the FTC, the payment processor defendants allegedly violated the FTC Act, the Telemarketing Sales Rule (TSR), and various Ohio laws by, among other things, generating and processing remotely created payment orders or checks that allowed merchants—including deceptive telemarketing schemes—the ability to withdraw money from consumers’ bank accounts. The FTC asserted that the credit card interest-reduction defendants deceptively promised consumers significant credit card interest rate reductions, along with “a 100 percent money back guarantee if the promised rate reduction failed to materialize or the consumers were otherwise dissatisfied with the service.” However, the FTC claimed that most customers never received the promised rate reduction, were refused refund requests, and often received collection or lawsuit threats. Additionally, the credit card interest-reduction defendants allegedly violated the TSR by charging advance fees, failing to properly identify the service in telemarketing calls, and failing to pay to access the FTC’s National Do Not Call Registry.
FTC and DOJ announce $5 billion privacy settlement with social media company; SEC settles for $100 million
On July 24, the FTC and the DOJ officially announced (see here and here) that the world’s largest social media company will pay a $5 billion penalty to settle allegations that it mishandled its users’ personal information. As previously covered by InfoBytes, it was reported on July 12 that the FTC approved the penalty, in a 3-2 vote. This is the largest privacy penalty ever levied by the agency, almost “20 times greater than the largest privacy or data security penalty ever imposed worldwide,” and one of the largest ever assessed by the U.S. government for any violation. According to the complaint, filed the same day as the settlement, the company allegedly used deceptive disclosures and settings to undermine users’ privacy preferences in violation of a 2012 privacy settlement with the FTC, which allowed the company to share users’ data with third-party apps that were downloaded by users’ “friends.” Moreover, the complaint alleges that many users were unaware the company was sharing the information, and therefore did not take the steps needed to opt-out of the sharing. Relatedly, the FTC also announced a separate action against a British consulting and data analytics firm for allegedly using deceptive tactics to “harvest personal information from millions of [the social media company’s] users.”
In addition to the monetary penalty, the 20-year settlement order overhauls the company’s privacy program. Specifically, the order, among other things, (i) establishes an independent privacy committee of the company’s board of directors; (ii) requires the company to designate privacy program compliance officers who can only be removed by the board’s privacy committee; (iii) requires an independent third-party assessor to perform biennial assessments of the company’s privacy program; (iv) requires the company to conduct a specific privacy review of every new or modified product, service, or practice before it is implemented; and (v) mandates that the company report any incidents in which data of 500 or more users have been compromised to the FTC.
In dissenting statements, Commissioner Chopra and Commissioner Slaughter asserted that the settlement, while historic, does not contain terms that would effectively deter the company from engaging in future violations. Commissioner Slaughter argues, among other things, that the civil penalty is insufficient and believes the order should have contained “meaningful limitations on how [the company] collects, uses, and shares data.” Similarly, Commissioner Chopra argues that the order imposes no meaningful changes to the company’s structure or financial incentives, and the immunity provided to the company’s officers and directors is unwarranted.
On the same day, the SEC announced that the company also agreed to pay $100 million to settle allegations that it mislead investors about the risks it faced related to the misuse of its consumer data. The SEC’s complaint alleges that in 2015, the company was aware of the British consulting and data analytics firm’s misuse of its consumer data but did not correct its disclosures for more than two years. Additionally, the SEC alleges the company failed to have policies and procedures in place during that time that would assess the results of internal investigations for the purposes of making accurate disclosures in public filings. The company neither admitted nor denied the allegations.
On July 22, the CFPB, FTC, and 48 states, the District of Columbia and Puerto Rico announced a settlement of up to $700 million with a major credit reporting agency to resolve federal and state investigations into a 2017 data breach that reportedly compromised sensitive information for approximately 147 million consumers. According to the complaints (see here and here) filed in the U.S. District Court for the Northern District of Georgia, the company allegedly engaged in unfair and deceptive practices by, among other things, (i) failing to provide reasonable security for the sensitive personal information stored within its network; (ii) deceiving consumers about its data security program capabilities; and (iii) failing to patch its network after being alerted in 2017 to a critical security vulnerability.
Under the terms of the proposed settlements (see here and here), pending final court approval, the company will pay up to $425 million in monetary relief to consumers and provide credit monitoring to affected individuals, as well as six free credit reports each year for seven years to all U.S. consumers. The company must also pay $175 million to 48 states, the District of Columbia and Puerto Rico, and a $100 million civil money penalty to the Bureau. The $425 million fund will also compensate consumers who bought credit- or identity-monitoring services from the company and paid other expenses as a result of the breach. The company must also, among other things, implement a comprehensive information security program that will require annual assessments of security risks and safeguard measures, obtain third-party information security assessments, and acquire annual certifications from the board of directors that the company has complied with the settlements.
On July 12, it was reported that the FTC has approved a $5 billion penalty against the world’s largest social media company for allegedly mishandling its users’ personal information. The reported settlement would be the largest privacy penalty ever levied by the agency. According to reports, the settlement, which was approved in a 3-2 vote, resolves allegations that the company allowed a British consulting firm access to 87 million users’ personal data for political consulting purposes in violation of a 2012 privacy settlement with the FTC. Neither the FTC nor the social media company have commented on the reported settlement, which is still pending approval from the Department of Justice.
On July 17, the FTC released a notice seeking comment on a wide range of issues related to the Children’s Online Privacy Protection Rule (COPPA Rule). The FTC last amended COPPA in 2013, and while the FTC usually reviews its rules every 10 years, the FTC notes that “[r]apid changes in technology, including the expanded use of education technology, reinforce the need to re-examine the COPPA Rule at this time.” The notice seeks comment on all major provisions of the COPPA Rule, including definitions, notice and parental consent requirements, exceptions to verifiable parental consent, and the safe harbor provision. Additionally, the notice seeks responses to specific questions, including (i) has the Rule affected the availability of websites or online services directed to children?; (ii) does the Rule correctly articulate the factors to consider in determining whether a website or online service is directed to children, or should additional factors be considered?; and (iii) what are the implications for COPPA enforcement raised by technologies such as interactive television, interactive gaming, or other similar interactive media? Comments must be received within 90 days after publication in the Federal Register.
On July 16, the U.S. Court of Appeals for the 9th Circuit affirmed summary judgment in favor of the FTC in an action alleging two attorneys controlled or participated in a mortgage relief scheme, which falsely told consumers they could join “mass joinder” lawsuits that would save them from foreclosure and provide additional financial awards. In September 2017, the district court granted summary judgment against both defendants, concluding that the defendants knowingly deceived consumers when they falsely marketed that consumers could expect to receive $75,000 in damages or “a judicial determination that the mortgage lien alleged to exist against their particular property is null and void ab initio” if they agreed to join mass joinder lawsuits against their mortgagors. The operation resulted in over $18 million in revenue from the participating consumers.
On appeal from one defendant, the 9th Circuit agreed with the district court, determining the FTC provided “sufficient undisputed facts to hold [the defendant] individually liable for injunctive relief at summary judgment.” Specifically, the appellate court agreed that the FTC sufficiently proved three separate legal entities, one of which the defendant was the co-owner and corporate officer, “operate[d] together as a common enterprise,” which violated the FTC Act and Mortgage Assistance Relief Services Rule with their mortgage relief operation. Moreover, the appellate court determined that the defendant was “at least recklessly indifferent to [the other entities’] misrepresentations,” based on his knowledge of previous schemes operated by the other owners and reliance on a non-lawyer’s assurance that the marketing materials had been “legally approved,” making him “jointly and severally liable for restitution for the corporation’s unjust gains in violation of the FTC Act.”
On July 11, the FTC announced it was charging a student loan debt relief operation with violations of the FTC Act and the Telemarketing Sales Rule for allegedly engaging in deceptive practices when marketing and selling their debt relief services. The complaint alleges the operators of the scheme allegedly, among other things, (i) charged borrowers illegal advance fees; (ii) falsely claimed they would service and pay down their student loans; and (iii) obtained borrowers’ credentials in order to change consumers’ contact information and prevent communications from loan servicers. According to the FTC, the defendants allegedly collected more than $23 million from consumers, and when asked why their payments were not being applied to their loans, the defendants “informed consumers that their entire payments had been collected as ‘handling’ or ‘management’ fees.” On July 10, the U.S. District Court for the Central District of California issued a temporary restraining order and asset freeze at the FTC’s request. The FTC seeks a permanent injunction against the defendants to prevent future violations, as well as redress for injured consumers through “rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.”
On July 1, the FTC announced, together with the New York attorney general, a settlement with two New York-based phantom debt operations and their principals (collectively, “defendants”) resolving allegations that the operations bought, placed for collection, sold lists of, and collected on fake debts that consumers did not owe. As previously covered by InfoBytes, the June 2018 complaint alleged that the defendants ran a deceptive and abusive debt collection scheme in violation of the FTC Act, the FDCPA, and New York state law. The settlement order against one company and its owners bans the defendants from debt collection activities, including buying, placing for collection, and selling debt. The order requires the defendants to pay a combined $676,575, suspending the total judgment of $6.75 million, due to inability to pay. The settlement order against the other company and its owner prohibits the defendants from engaging in unlawful collection practices and requires the payment of $118,000, suspending the total judgment of $4.94 million, due to inability to pay.
On June 27, the FTC held its fourth annual PrivacyCon, which hosted research presentations on a wide range of consumer privacy and security issues. Following opening remarks by FTC Chairman Joseph Simons, the one-day conference featured four plenary sessions covering a number of hot topics:
- Session 1: Privacy Policies, Disclosures, and Permissions. Five presenters discussed various aspects of privacy policies and notices to consumers. The panel discussed current trends showing that privacy notices to consumers have generally become lengthier in recent years, which helps cover the information regulators require, but often results in information overload for consumers more generally. One presenter advocated the concept of a condensed “nutrition label” for privacy, but acknowledged the challenge of distilling complicated activities into short bullets.
- Session 2: Consumer Preferences, Expectations, and Behaviors. This panel addressed research concerning consumer expectations and behaviors with regard to privacy. Among other anecdotal information, the presenters noted that many consumers are aware that personal data is tracked, but consumers are generally unaware of what data collectors ultimately do with the personal data once collected. To that end, one presenter advocated prescriptive limits on data collection in general, which would take the onus off consumers to protect themselves. Separately, with regard to the Children’s Online Privacy Protection Act (COPPA), one presenter noted that the law generally aligns with parents’ privacy expectations, but the implementing regulations and guidelines are too broad and leave too much room for implementation variations.
- Session 3: Tracking and Online Advertising. In the third session, five presenters covered various topics, including privacy implications of free versus paid-for applications to the impact of the EU’s General Data Protection Regulation (GDPR). According to the presenters, current research suggests that the measurable privacy benefits of paying for an app are “tenuous at best,” and consumers cannot be expected to make informed decisions because the necessary privacy information is not always available in the purchase program on a mobile device such as a phone. As for GDPR, the panel agreed that there are notable reductions in web use, with page views falling 9.7 percent in one study, although it is not clear whether such reduction is directly correlated to the May 25, 2018 effective date for enforcement of GDPR.
- Session 4: Vulnerabilities, Leaks, and Breach Notifications. In the final presentation, presenters discussed new research on how companies can mitigate data security vulnerabilities and improve remediation. One presenter discussed the need for proactive identification of vulnerabilities, noting that the goal should be to patch the real vulnerabilities and limit efforts related to vulnerabilities that are unlikely to be exploited. Another presenter analyzed data breach notifications to consumers, noting that all 50 states have data breach notification laws, but there is no consensus as to best practices related to the content or timing of notifications to consumers. The presenter concluded with recommendations for future notification regulations: (i) incorporate readability testing based on standardized methods; (ii) provide concrete guidelines of when customers need to be notified, what content needs to be included, and how the information should be presented; (iii) include visuals to highlight key information; and (iv) leverage the influence of templates, such as the model privacy form for the Gramm-Leach-Bliley Act.
On June 24, the FTC finalized the “Free Electronic Credit Monitoring for Active Duty Military Rule,” which implements the Economic Growth, Regulatory Relief, and Consumer Protection Act requirement for nationwide consumer reporting agencies (CRAs) to provide free electronic credit monitoring services for active duty military consumers. The proposed rule, issued in November 2018 (covered by InfoBytes here), defined the term “electronic credit monitoring service” as a service through which the CRAs provide, at a minimum, electronic notification of material additions or modifications to a consumer’s file and requires CRAs to notify active duty military consumers within 24 hours of any material change. The proposal noted that CRAs may require that active duty military provide contact information, proof of identity, and proof of active duty status in order to use the free service and outlines how a servicemember may prove active duty status, such as with a copy of active duty orders. Additionally, the proposal prohibited CRAs from requiring active duty military consumers to purchase a product in order to obtain the free service.
In response to comments on the proposal, the final rule refers to the definition of “active duty military consumer” in the FCRA, which requires that the servicemember be assigned to service away from their usual duty station, or be a member of the National Guard, regardless of whether the National Guard member is stationed away from their normal duty station. The FTC noted that commenters requested the requirement that the servicemember be stationed away from their normal duty station be eliminated but “the statutory language limit[ed] the Commission’s discretion on [the] topic.” However, the FCRA does not apply the same duty station requirement to the National Guard. Additionally, the final rule, among other things (i) requires CRAs to provide free access to a credit file when it notifies an active duty military consumer about a material change to the file; (ii) extends the amount of time the CRAs have to notify an active duty military consumer of a material change from 24 hours to 48 hours; and (iii) prohibits CRAs from requiring that active duty military consumers agree to terms or conditions as a requirement to obtain their free credit file, unless the terms or conditions are necessary to comply with certain legal requirements.
While the final rule goes into effect three months after publication in the Federal Register, CRAs will be allowed to comply with certain portions of the final rule by offering existing credit monitoring services to active duty military consumers for free, for a period of up to one year from the effective date.
- Daniel P. Stipano to discuss "BSA/AML culture of compliance roundtable" at the FiSCA Annual Conference
- Daniel P. Stipano to discuss "Is there a better way to fight money laundering" at the FiSCA Annual Conference
- Michelle L. Rogers to discuss "What's trending in enforcement" at the Mortgage Bankers Association Annual Convention & Expo
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
- Buckley Webcast: Smoke and mirrors: Navigating the regulatory landscape in banking the marijuana industry
- H Joshua Kotin to discuss "CMS - Components of a successful monitoring program" at the RegList Annual Workshop
- Tim Lange to discuss "Temporary authority to operate - Are you prepared? Hear what the states are doing" at the RegList Annual Workshop
- Sherry-Maria Safchuk to discuss "Cybersecurity" at the RegList Annual Workshop
- Jeffrey P. Naimon to discuss "Hot topics in mortgage origination" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Sherry-Maria Safchuk to discuss "CCPA: Countdown to compliance – A discussion of common questions and what is next on the CA privacy horizon" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "Adapting to the rapidly changing compliance landscape involving marijuana and marijuana-related businesses" at an ACAMS webinar
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference