FTC v. Wyndham Worldwide Corp , 799 F.3d 236 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
No. 14-3514
FEDERAL TRADE COMMISSION
v.
WYNDHAM WORLDWIDE CORPORATION,
a Delaware Corporation
WYNDHAM HOTEL GROUP, LLC,
a Delaware limited liability company;
WYNDHAM HOTELS AND RESORTS, LLC,
a Delaware limited liability company;
WYNDHAM HOTEL MANAGEMENT INCORPORATED,
a Delaware Corporation
Wyndham Hotels and Resorts, LLC,
Appellant
________________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 2-13-cv-01887)
District Judge: Honorable Esther Salas
Argued March 3, 2015
Before: AMBRO, SCIRICA, and ROTH, Circuit Judges
(Opinion filed: August 24, 2015)
Kenneth W. Allen, Esquire
Eugene F. Assaf, Esquire (Argued)
Christopher Landau, Esquire
Susan M. Davies, Esquire
Michael W. McConnell, Esquire
Kirkland & Ellis
655 15th Street, N.W., Suite 1200
Washington, DC 20005
David T. Cohen, Esquire
Ropes & Gray
1211 Avenue of the Americas
New York, NY 10036
Douglas H. Meal, Esquire
Ropes & Gray
800 Boylston Street, Prudential Tower
Boston, MA 02199
Jennifer A. Hradil, Esquire
Justin T. Quinn, Esquire
Gibbons
One Gateway Center
Newark, NJ 07102
Counsel for Appellants
2
Jonathan E. Nuechterlein
General Counsel
David C. Shonka, Sr.
Principal Deputy General Counsel
Joel R. Marcus, Esquire (Argued)
David L. Sieradzki, Esquire
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Counsel for Appellee
Sean M. Marotta, Esquire
Catherine E. Stetson, Esquire
Harriet P. Pearson, Esquire
Bret S. Cohen, Esquire
Adam A. Cooke, Esquire
Hogan Lovells US LLP
555 Thirteenth Street, N.W.
Columbia Square
Washington, DC 20004
Kate Comerford Todd, Esquire
Steven P. Lehotsky, Esquire
Sheldon Gilbert, Esquire
U.S. Chamber Litigation Center, Inc.
1615 H Street, N.W.
Washington, DC 20062
Banks Brown, Esquire
McDermott Will & Emery LLP
340 Madison Ave.
New York, NY 10713
3
Karen R. Harned, Esquire
National Federation of Independent Business
Small Business Legal Center
1201 F Street, N.W., Suite 200
Washington, DC 20004
Counsel for Amicus Appellants
Chamber of Commerce of the USA;
American Hotel & Lodging Association;
National Federation of Independent Business.
Cory L. Andrews, Esquire
Richard A. Samp, Esquire
Washington Legal Foundation
2009 Massachusetts Avenue, N.W.
Washington, DC 20036
John F. Cooney, Esquire
Jeffrey D. Knowles, Esquire
Mitchell Y. Mirviss, Esquire
Leonard L. Gordon, Esquire
Randall K. Miller, Esquire
Venable LLC
575 7th Street, N.W.
Washington, DC 20004
Counsel for Amicus Appellants
Electronic Transactions Association,
Washington Legal Foundation
Scott M. Michelman, Esquire
Jehan A. Patterson, Esquire
Public Citizen Litigation Group
4
1600 20th Street, N.W.
Washington, DC 20009
Counsel for Amicus Appellees
Public Citizen Inc.; Consumer Action;
Center for Digital Democracy.
Marc Rotenberg, Esquire
Alan Butler, Esquire
Julia Horwitz, Esquire
John Tran, Esquire
Electronic Privacy Information Center
1718 Connecticut Avenue, N.W., Suite 200
Washington, DC 20009
Catherine N. Crump, Esquire
American Civil Liberties Union
125 Broad Street, 18th Floor
New York, NY 10004
Chris Jay Hoofnagle, Esquire
Samuelson Law, Technology & Public Policy Clinic
U.C. Berkeley School of Law
Berkeley, CA 94720
Justin Brookman, Esquire
G.S. Hans, Esquire
Center for Democracy & Technology
1634 I Street N.W. Suite 1100
Washington, DC 20006
Lee Tien, Esquire
Electronic Frontier Foundation
5
815 Eddy Street
San Francisco, CA 94109
Counsel for Amicus Appellees
Electronic Privacy Information Center,
American Civil Liberties Union,
Samuelson Law, Technology & Public Policy Clinic,
Center for Democracy & Technology,
Electronic Frontier Foundation
OPINION OF THE COURT
AMBRO, Circuit Judge
The Federal Trade Commission Act prohibits “unfair
or deceptive acts or practices in or affecting commerce.” 15
U.S.C. § 45(a). In 2005 the Federal Trade Commission began
bringing administrative actions under this provision against
companies with allegedly deficient cybersecurity that failed to
protect consumer data against hackers. The vast majority of
these cases have ended in settlement.
On three occasions in 2008 and 2009 hackers
successfully accessed Wyndham Worldwide Corporation’s
computer systems. In total, they stole personal and financial
information for hundreds of thousands of consumers leading
to over $10.6 million dollars in fraudulent charges. The FTC
filed suit in federal District Court, alleging that Wyndham’s
conduct was an unfair practice and that its privacy policy was
deceptive. The District Court denied Wyndham’s motion to
dismiss, and we granted interlocutory appeal on two issues:
6
whether the FTC has authority to regulate cybersecurity under
the unfairness prong of § 45(a); and, if so, whether Wyndham
had fair notice its specific cybersecurity practices could fall
short of that provision.1 We affirm the District Court.
I. Background
A. Wyndham’s Cybersecurity
Wyndham Worldwide is a hospitality company that
franchises and manages hotels and sells timeshares through
three subsidiaries.2 Wyndham licensed its brand name to
approximately 90 independently owned hotels. Each
Wyndham-branded hotel has a property management system
that processes consumer information that includes names,
home addresses, email addresses, telephone numbers,
payment card account numbers, expiration dates, and security
codes. Wyndham “manage[s]” these systems and requires the
hotels to “purchase and configure” them to its own
specifications. Compl. at ¶ 15, 17. It also operates a
computer network in Phoenix, Arizona, that connects its data
center with the property management systems of each of the
Wyndham-branded hotels.
1
On appeal, Wyndham also argues that the FTC fails the
pleading requirements of an unfairness claim. As Wyndham
did not request and we did not grant interlocutory appeal on
this issue, we decline to address it.
2
In addition to Wyndham Worldwide, the defendant entities
are Wyndham Hotel Group, LLC, Wyndham Hotels and
Resorts, LCC, and Wyndham Hotel Management, Inc. For
convenience, we refer to all defendants jointly as Wyndham.
7
The FTC alleges that, at least since April 2008,
Wyndham engaged in unfair cybersecurity practices that,
“taken together, unreasonably and unnecessarily exposed
consumers’ personal data to unauthorized access and theft.”
Id. at ¶ 24. This claim is fleshed out as follows.
1. The company allowed Wyndham-branded hotels to
store payment card information in clear readable text.
2. Wyndham allowed the use of easily guessed
passwords to access the property management systems. For
example, to gain “remote access to at least one hotel’s
system,” which was developed by Micros Systems, Inc., the
user ID and password were both “micros.” Id. at ¶ 24(f).
3. Wyndham failed to use “readily available security
measures”—such as firewalls—to “limit access between [the]
hotels’ property management systems, . . . corporate network,
and the Internet.” Id. at ¶ 24(a).
4. Wyndham allowed hotel property management
systems to connect to its network without taking appropriate
cybersecurity precautions. It did not ensure that the hotels
implemented “adequate information security policies and
procedures.” Id. at ¶ 24(c). Also, it knowingly allowed at
least one hotel to connect to the Wyndham network with an
out-of-date operating system that had not received a security
update in over three years. It allowed hotel servers to connect
to Wyndham’s network even though “default user IDs and
passwords were enabled . . . , which were easily available to
hackers through simple Internet searches.” Id. And, because
it failed to maintain an “adequate[] inventory [of] computers
connected to [Wyndham’s] network [to] manage the devices,”
it was unable to identify the source of at least one of the
cybersecurity attacks. Id. at ¶ 24(g).
8
5. Wyndham failed to “adequately restrict” the access
of third-party vendors to its network and the servers of
Wyndham-branded hotels. Id. at ¶ 24(j). For example, it did
not “restrict[] connections to specified IP addresses or grant[]
temporary, limited access, as necessary.” Id.
6. It failed to employ “reasonable measures to detect
and prevent unauthorized access” to its computer network or
to “conduct security investigations.” Id. at ¶ 24(h).
7. It did not follow “proper incident response
procedures.” Id. at ¶ 24(i). The hackers used similar methods
in each attack, and yet Wyndham failed to monitor its
network for malware used in the previous intrusions.
Although not before us on appeal, the complaint also
raises a deception claim, alleging that since 2008 Wyndham
has published a privacy policy on its website that overstates
the company’s cybersecurity.
We safeguard our Customers’ personally
identifiable information by using industry
standard practices. Although “guaranteed
security” does not exist either on or off the
Internet, we make commercially reasonable
efforts to make our collection of such
[i]nformation consistent with all applicable laws
and regulations. Currently, our Web sites
utilize a variety of different security measures
designed to protect personally identifiable
information from unauthorized access by users
both inside and outside of our company,
including the use of 128-bit encryption based on
a Class 3 Digital Certificate issued by Verisign
Inc. This allows for utilization of Secure
Sockets Layer, which is a method for
9
encrypting data. This protects confidential
information—such as credit card numbers,
online forms, and financial data—from loss,
misuse, interception and hacking. We take
commercially reasonable efforts to create and
maintain “fire walls” and other appropriate
safeguards . . . .
Id. at ¶ 21. The FTC alleges that, contrary to this policy,
Wyndham did not use encryption, firewalls, and other
commercially reasonable methods for protecting consumer
data.
B. The Three Cybersecurity Attacks
As noted, on three occasions in 2008 and 2009 hackers
accessed Wyndham’s network and the property management
systems of Wyndham-branded hotels. In April 2008, hackers
first broke into the local network of a hotel in Phoenix,
Arizona, which was connected to Wyndham’s network and
the Internet. They then used the brute-force method—
repeatedly guessing users’ login IDs and passwords—to
access an administrator account on Wyndham’s network.
This enabled them to obtain consumer data on computers
throughout the network. In total, the hackers obtained
unencrypted information for over 500,000 accounts, which
they sent to a domain in Russia.
In March 2009, hackers attacked again, this time by
accessing Wyndham’s network through an administrative
account. The FTC claims that Wyndham was unaware of the
attack for two months until consumers filed complaints about
fraudulent charges. Wyndham then discovered “memory-
scraping malware” used in the previous attack on more than
thirty hotels’ computer systems. Id. at ¶ 34. The FTC asserts
that, due to Wyndham’s “failure to monitor [the network] for
10
the malware used in the previous attack, hackers had
unauthorized access to [its] network for approximately two
months.” Id. In this second attack, the hackers obtained
unencrypted payment card information for approximately
50,000 consumers from the property management systems of
39 hotels.
Hackers in late 2009 breached Wyndham’s
cybersecurity a third time by accessing an administrator
account on one of its networks. Because Wyndham “had still
not adequately limited access between . . . the Wyndham-
branded hotels’ property management systems, [Wyndham’s
network], and the Internet,” the hackers had access to the
property management servers of multiple hotels. Id. at ¶ 37.
Wyndham only learned of the intrusion in January 2010 when
a credit card company received complaints from cardholders.
In this third attack, hackers obtained payment card
information for approximately 69,000 customers from the
property management systems of 28 hotels.
The FTC alleges that, in total, the hackers obtained
payment card information from over 619,000 consumers,
which (as noted) resulted in at least $10.6 million in fraud
loss. It further states that consumers suffered financial injury
through “unreimbursed fraudulent charges, increased costs,
and lost access to funds or credit,” Id. at ¶ 40, and that they
“expended time and money resolving fraudulent charges and
mitigating subsequent harm.” Id.
C. Procedural History
The FTC filed suit in the U.S. District Court for the
District of Arizona in June 2012 claiming that Wyndham
engaged in “unfair” and “deceptive” practices in violation of
§ 45(a). At Wyndham’s request, the Court transferred the
case to the U.S. District Court for the District of New Jersey.
11
Wyndham then filed a Rule 12(b)(6) motion to dismiss both
the unfair practice and deceptive practice claims. The District
Court denied the motion but certified its decision on the
unfairness claim for interlocutory appeal. We granted
Wyndham’s application for appeal.
II. Jurisdiction and Standards of Review
The District Court has subject-matter jurisdiction
under 28 U.S.C. §§ 1331, 1337(a), and 1345. We have
jurisdiction under 28 U.S.C. § 1292(b).
We have plenary review of a district court’s ruling on
a motion to dismiss for failure to state a claim under Rule
12(b)(6). Farber v. City of Paterson, 440 F.3d 131, 134 (3d
Cir. 2006). In this review, “we accept all factual allegations
as true, construe the complaint in the light most favorable to
the plaintiff, and determine whether, under any reasonable
reading of the complaint, the plaintiff may be entitled to
relief.” Pinker v. Roche Holdings Ltd., 292 F.3d 361, 374 n.7
(3d Cir. 2002).
III. FTC’s Regulatory Authority Under § 45(a)
A. Legal Background
The Federal Trade Commission Act of 1914 prohibited
“unfair methods of competition in commerce.” Pub. L. No.
63-203, § 5, 38 Stat. 717, 719 (codified as amended at 15
U.S.C. § 45(a)). Congress “explicitly considered, and
rejected, the notion that it reduce the ambiguity of the phrase
‘unfair methods of competition’ . . . by enumerating the
particular practices to which it was intended to apply.” FTC
v. Sperry & Hutchinson Co., 405 U.S. 233, 239–40 (1972)
(citing S. Rep. No. 63-597, at 13 (1914)); see also S. Rep. No.
63-597, at 13 (“The committee gave careful consideration to
12
the question as to whether it would attempt to define the
many and variable unfair practices which prevail in
commerce . . . . It concluded that . . . there were too many
unfair practices to define, and after writing 20 of them into
the law it would be quite possible to invent others.” (emphasis
added)). The takeaway is that Congress designed the term as
a “flexible concept with evolving content,” FTC v. Bunte
Bros., 312 U.S. 349, 353 (1941), and “intentionally left [its]
development . . . to the Commission,” Atl. Ref. Co. v. FTC,
381 U.S. 357, 367 (1965).
After several early cases limited “unfair methods of
competition” to practices harming competitors and not
consumers, see, e.g., FTC v. Raladam Co., 283 U.S. 643
(1931), Congress inserted an additional prohibition in § 45(a)
against “unfair or deceptive acts or practices in or affecting
commerce,” Wheeler-Lea Act, Pub. L. No. 75-447, § 5, 52
Stat. 111, 111 (1938).
For the next few decades, the FTC interpreted the
unfair-practices prong primarily through agency adjudication.
But in 1964 it issued a “Statement of Basis and Purpose” for
unfair or deceptive advertising and labeling of cigarettes, 29
Fed. Reg. 8324, 8355 (July 2, 1964), which explained that the
following three factors governed unfairness determinations:
(1) whether the practice, without necessarily
having been previously considered unlawful,
offends public policy as it has been established
by statutes, the common law, or otherwise—
whether, in other words, it is within at least the
penumbra of some common-law, statutory or
other established concept of unfairness; (2)
whether it is immoral, unethical, oppressive, or
unscrupulous; [and] (3) whether it causes
13
substantial injury to consumers (or competitors
or other businessmen).
Id. Almost a decade later, the Supreme Court implicitly
approved these factors, apparently acknowledging their
applicability to contexts other than cigarette advertising and
labeling. Sperry, 405 U.S. at 244 n.5. The Court also held
that, under the policy statement, the FTC could deem a
practice unfair based on the third prong—substantial
consumer injury—without finding that at least one of the
other two prongs was also satisfied. Id.
During the 1970s, the FTC embarked on a
controversial campaign to regulate children’s advertising
through the unfair-practices prong of § 45(a). At the request
of Congress, the FTC issued a second policy statement in
1980 that clarified the three factors. FTC Unfairness Policy
Statement, Letter from the FTC to Hon. Wendell Ford and
Hon. John Danforth, Senate Comm. on Commerce, Sci., and
Transp. (Dec. 17, 1980), appended to Int’l Harvester Co., 104
F.T.C. 949, 1070 (1984) [hereinafter 1980 Policy Statement].
It explained that public policy considerations are relevant in
determining whether a particular practice causes substantial
consumer injury. Id. at 1074–76. Next, it “abandoned” the
“theory of immoral or unscrupulous conduct . . . altogether”
as an “independent” basis for an unfairness claim. Int’l
Harvester Co., 104 F.T.C. at 1061 n.43; 1980 Policy
Statement, supra at 1076 (“The Commission has . . . never
relied on [this factor] as an independent basis for a finding of
unfairness, and it will act in the future only on the basis of the
[other] two.”). And finally, the Commission explained that
“[u]njustified consumer injury is the primary focus of the
FTC Act” and that such an injury “[b]y itself . . . can be
sufficient to warrant a finding of unfairness.” 1980 Policy
Statement, supra at 1073. This “does not mean that every
consumer injury is legally ‘unfair.’” Id. Indeed,
14
 [t]o justify a finding of unfairness the injury
must satisfy three tests. [1] It must be
substantial; [2] it must not be outweighed by
any countervailing benefits to consumers or
competition that the practice produces; and [3]
it must be an injury that consumers themselves
could not reasonably have avoided.
Id.
In 1994, Congress codified the 1980 Policy Statement
at 15 U.S.C. § 45(n):
The Commission shall have no authority under
this section . . . to declare unlawful an act or
practice on the grounds that such act or practice
is unfair unless the act or practice causes or is
likely to cause substantial injury to consumers
which is not reasonably avoidable by consumers
themselves and not outweighed by
countervailing benefits to consumers or to
competition. In determining whether an act or
practice is unfair, the Commission may consider
established public policies as evidence to be
considered with all other evidence. Such public
policy considerations may not serve as a
primary basis for such determination.
FTC Act Amendments of 1994, Pub. L. No. 103-312, § 9, 108
Stat. 1691, 1695. Like the 1980 Policy Statement, § 45(n)
requires substantial injury that is not reasonably avoidable by
consumers and that is not outweighed by the benefits to
consumers or competition. It also acknowledges the potential
significance of public policy and does not expressly require
that an unfair practice be immoral, unethical, unscrupulous, or
oppressive.
15
B. Plain Meaning of Unfairness
Wyndham argues (for the first time on appeal) that the
three requirements of 15 U.S.C. § 45(n) are necessary but
insufficient conditions of an unfair practice and that the plain
meaning of the word “unfair” imposes independent
requirements that are not met here. Arguably, § 45(n) may
not identify all of the requirements for an unfairness claim.
(While the provision forbids the FTC from declaring an act
unfair “unless” the act satisfies the three specified
requirements, it does not answer whether these are the only
requirements for a finding of unfairness.) Even if so, some of
Wyndham’s proposed requirements are unpersuasive, and the
rest are satisfied by the allegations in the FTC’s complaint.
First, citing FTC v. R.F. Keppel & Brother, Inc., 291
U.S. 304 (1934), Wyndham argues that conduct is only unfair
when it injures consumers “through unscrupulous or unethical
behavior.” Wyndham Br. at 20–21. But Keppel nowhere
says that unfair conduct must be unscrupulous or unethical.
Moreover, in Sperry the Supreme Court rejected the view that
the FTC’s 1964 policy statement required unfair conduct to
be “unscrupulous” or “unethical.” 405 U.S. at 244 n.5.3
3
Id. (“[Petitioner] argues that . . . [the 1964 statement]
commits the FTC to the view that misconduct in respect of
the third of these criteria is not subject to constraint as
‘unfair’ absent a concomitant showing of misconduct
according to the first or second of these criteria. But all the
FTC said in the [1964] statement . . . was that ‘[t]he wide
variety of decisions interpreting the elusive concept of
unfairness at least makes clear that a method of selling
violates Section 5 if it is exploitive or inequitable and if, in
addition to being morally objectionable, it is seriously
16
Wyndham points to no subsequent FTC policy statements,
adjudications, judicial opinions, or statutes that would suggest
any change since Sperry.
Next, citing one dictionary, Wyndham argues that a
practice is only “unfair” if it is “not equitable” or is “marked
by injustice, partiality, or deception.” Wyndham Br. at 18–19
(citing Webster’s Ninth New Collegiate Dictionary (1988)).
Whether these are requirements of an unfairness claim makes
little difference here. A company does not act equitably when
it publishes a privacy policy to attract customers who are
concerned about data privacy, fails to make good on that
promise by investing inadequate resources in cybersecurity,
exposes its unsuspecting customers to substantial financial
injury, and retains the profits of their business.
We recognize this analysis of unfairness encompasses
some facts relevant to the FTC’s deceptive practices claim.
But facts relevant to unfairness and deception claims
frequently overlap. See, e.g., Am. Fin. Servs. Ass’n v. FTC,
767 F.2d 957, 980 n.27 (D.C. Cir. 1985) (“The FTC has
determined that . . . making unsubstantiated advertising
claims may be both an unfair and a deceptive practice.”);
Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1367 (11th
Cir. 1988) (“[A] practice may be both deceptive and
unfair . . . .”).4 We cannot completely disentangle the two
detrimental to consumers or others.’” (emphasis and some
alterations in original, citation omitted)).
4
The FTC has on occasion described deception as a subset of
unfairness. See Int’l Harvester Co., 104 F.T.C. at 1060 (“The
Commission’s unfairness jurisdiction provides a more general
basis for action against acts or practices which cause
significant consumer injury. This part of our jurisdiction is
17
theories here. The FTC argued in the District Court that
consumers could not reasonably avoid injury by booking with
another hotel chain because Wyndham had published a
broader than that involving deception, and the standards for
its exercise are correspondingly more stringent . . . .
[U]nfairness is the set of general principles of which
deception is a particularly well-established and streamlined
subset.”); Figgie Int’l, 107 F.T.C. 313, 373 n.5 (1986)
(“[U]nfair practices are not always deceptive but deceptive
practices are always unfair.”); Orkin Exterminating Co., 108
F.T.C. 263, 363 n.78 (1986). So have several FTC staff
members. See, e.g., J. Howard Beales, Director of the Bureau
of Consumer Protection, FTC, Marketing and Public Policy
Conference, The FTC’s Use of Unfairness Authority: Its Rise,
Fall, and Resurrection (May 30, 2003) (“Although, in the
past, they have sometimes been viewed as mutually exclusive
legal theories, Commission precedent incorporated in the
statutory codification makes clear that deception is properly
viewed as a subset of unfairness.”); Neil W. Averitt, The
Meaning of “Unfair Acts or Practices” in Section 5 of the
Federal Trade Commission Act, 70 Geo. L.J. 225, 265–66
(1981) (“Although deception is generally regarded as a
separate aspect of section 5, in its underlying rationale it is
really just one specific form of unfair consumer practice . . . .
[For example, the] Commission has held that it is deceptive
for a merchant to make an advertising claim for which he
lacks a reasonable basis, regardless of whether the claim is
eventually proven true or false . . . . Precisely because
unsubstantiated ads are deceptive in this manner, . . . they also
affect the exercise of consumer sovereignty and thus
constitute an unfair act or practice.”).
18
misleading privacy policy that overstated its cybersecurity.
Plaintiff’s Response in Opposition to the Motion to Dismiss
by Defendant at 5, FTC v. Wyndham Worldwide Corp., 10 F.
Supp. 3d 602 (D.N.J. 2014) (No. 13-1887) (“Consumers
could not take steps to avoid Wyndham’s unreasonable data
security [before providing their personal information] because
Wyndham falsely told consumers that it followed ‘industry
standard practices.’”); see JA 203 (“On the reasonabl[y]
avoidable part, . . . consumers certainly would not have
known that Wyndham had unreasonable data security
practices in this case . . . . We also allege that in
[Wyndham’s] privacy policy they deceive consumers by
saying we do have reasonable security data practices. That is
one way consumers couldn’t possibly have avoided providing
a credit card to a company.”). Wyndham did not challenge
this argument in the District Court nor does it do so now. If
Wyndham’s conduct satisfies the reasonably avoidable
requirement at least partially because of its privacy policy—
an inference we find plausible at this stage of the litigation—
then the policy is directly relevant to whether Wyndham’s
conduct was unfair.5
Continuing on, Wyndham asserts that a business “does
not treat its customers in an ‘unfair’ manner when the
business itself is victimized by criminals.” Wyndham Br. at
5
No doubt there is an argument that consumers could not
reasonably avoid injury even absent the misleading privacy
policy. See, e.g., James P. Nehf, Shopping for Privacy
Online: Consumer Decision-Making Strategies and the
Emerging Market for Information Privacy, 2005 U. Ill. J.L.
Tech. & Pol’y. 1 (arguing that consumers may care about data
privacy, but be unable to consider it when making credit card
purchases). We have no occasion to reach this question, as
the parties have not raised it.
19
21 (emphasis in original). It offers no reasoning or authority
for this principle, and we can think of none ourselves.
Although unfairness claims “usually involve actual and
completed harms,” Int’l Harvester, 104 F.T.C. at 1061, “they
may also be brought on the basis of likely rather than actual
injury,” id. at 1061 n.45. And the FTC Act expressly
contemplates the possibility that conduct can be unfair before
actual injury occurs. 15 U.S.C. § 45(n) (“[An unfair act or
practice] causes or is likely to cause substantial injury”
(emphasis added)). More importantly, that a company’s
conduct was not the most proximate cause of an injury
generally does not immunize liability from foreseeable harms.
See Restatement (Second) of Torts § 449 (1965) (“If the
likelihood that a third person may act in a particular manner is
the hazard or one of the hazards which makes the actor
negligent, such an act[,] whether innocent, negligent,
intentionally tortious, or criminal[,] does not prevent the actor
from being liable for harm caused thereby.”); Westfarm
Assocs. v. Wash. Suburban Sanitary Comm’n, 66 F.3d 669,
688 (4th Cir. 1995) (“Proximate cause may be found even
where the conduct of the third party is . . . criminal, so long as
the conduct was facilitated by the first party and reasonably
foreseeable, and some ultimate harm was reasonably
foreseeable.”). For good reason, Wyndham does not argue
that the cybersecurity intrusions were unforeseeable. That
would be particularly implausible as to the second and third
attacks.
Finally, Wyndham posits a reductio ad absurdum,
arguing that if the FTC’s unfairness authority extends to
Wyndham’s conduct, then the FTC also has the authority to
“regulate the locks on hotel room doors, . . . to require every
store in the land to post an armed guard at the door,”
Wyndham Br. at 23, and to sue supermarkets that are “sloppy
about sweeping up banana peels,” Wyndham Reply Br. at 6.
The argument is alarmist to say the least. And it invites the
20
tart retort that, were Wyndham a supermarket, leaving so
many banana peels all over the place that 619,000 customers
fall hardly suggests it should be immune from liability under
§ 45(a).
We are therefore not persuaded by Wyndham’s
arguments that the alleged conduct falls outside the plain
meaning of “unfair.”
C. Subsequent Congressional Action
Wyndham next argues that, even if cybersecurity were
covered by § 45(a) as initially enacted, three legislative acts
since the subsection was amended in 1938 have reshaped the
provision’s meaning to exclude cybersecurity. A recent
amendment to the Fair Credit Reporting Act directed the FTC
and other agencies to develop regulations for the proper
disposal of consumer data. See Pub. L. No. 108-159,
§ 216(a), 117 Stat. 1952, 1985–86 (2003) (codified as
amended at 15 U.S.C. § 1681w). The Gramm-Leach-Bliley
Act required the FTC to establish standards for financial
institutions to protect consumers’ personal information. See
Pub. L. No. 106-102, § 501(b), 113 Stat. 1338, 1436–37
(1999) (codified as amended at 15 U.S.C. § 6801(b)). And
the Children’s Online Privacy Protection Act ordered the FTC
to promulgate regulations requiring children’s websites,
among other things, to provide notice of “what information is
collected from children . . . , how the operator uses such
information, and the operator’s disclosure practices for such
information.” Pub. L. No. 105-277, § 1303, 112 Stat. 2681,
2681-730–732 (1998) (codified as amended at 15 U.S.C.
§ 6502).6 Wyndham contends these “tailored grants of
6
Wyndham also points to a variety of cybersecurity bills that
Congress has considered and not passed. “[S]ubsequent
legislative history . . . is particularly dangerous ground on
21
substantive authority to the FTC in the cybersecurity field
would be inexplicable if the Commission already had general
substantive authority over this field.” Wyndham Br. at 25.
Citing FDA v. Brown & Williamson Tobacco Corp., 529 U.S.
120, 143 (2000), Wyndham concludes that Congress excluded
cybersecurity from the FTC’s unfairness authority by
enacting these measures.
We are not persuaded. The inference to congressional
intent based on post-enactment legislative activity in Brown
& Williamson was far stronger. There, the Food and Drug
Administration had repeatedly disclaimed regulatory
authority over tobacco products for decades. Id. at 144.
During that period, Congress enacted six statutes regulating
tobacco. Id. at 143–44. The FDA later shifted its position,
claiming authority over tobacco products. The Supreme
Court held that Congress excluded tobacco-related products
from the FDA’s authority in enacting the statutes. As tobacco
products would necessarily be banned if subject to the FDA’s
regulatory authority, any interpretation to the contrary would
contradict congressional intent to regulate rather than ban
tobacco products outright. Id. 137–39; Massachusetts v.
EPA, 549 U.S. 497, 530–31 (2007). Wyndham does not argue
that recent privacy laws contradict reading corporate
cybersecurity into § 45(a). Instead, it merely asserts that
Congress had no reason to enact them if the FTC could
already regulate cybersecurity through that provision.
Wyndham Br. at 25–26.
We disagree that Congress lacked reason to pass the
recent legislation if the FTC already had regulatory authority
over some cybersecurity issues. The Fair Credit Reporting
which to rest an interpretation of a prior statute when it
concerns . . . a proposal that does not become law.” Pension
Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 650 (1990).
22
Act requires (rather than authorizes) the FTC to issue
regulations, 15 U.S.C. § 1681w (“The Federal Trade
Commission . . . shall issue final regulations requiring . . . .”
(emphasis added)); id. § 1681m(e)(1)(B) (“The [FTC and
other agencies] shall jointly . . . prescribe regulations
requiring each financial institution . . . .” (emphasis added)),
and expands the scope of the FTC’s authority, id.
§ 1681s(a)(1) (“[A] violation of any requirement or
prohibition imposed under this subchapter shall constitute an
unfair or deceptive act or practice in commerce . . . and shall
be subject to enforcement by the [FTC] . . . irrespective of
whether that person is engaged in commerce or meets any
other jurisdictional tests under the [FTC] Act.”). The
Gramm-Leach-Bliley Act similarly requires the FTC to
promulgate regulations, id. § 6801(b) (“[The FTC] shall
establish appropriate standards for the financial institutions
subject to [its] jurisdiction . . . .”), and relieves some of the
burdensome § 45(n) requirements for declaring acts unfair, id.
§ 6801(b) (“[The FTC] shall establish appropriate standards .
. . to protect against unauthorized access to or use of . . .
records . . . which could result in substantial harm or
inconvenience to any customer.” (emphasis added)). And the
Children’s Online Privacy Protection Act required the FTC to
issue regulations and empowered it to do so under the
procedures of the Administrative Procedure Act, id. § 6502(b)
(citing 5 U.S.C. § 553), rather than the more burdensome
Magnuson-Moss procedures under which the FTC must
usually issue regulations, 15 U.S.C. § 57a. Thus none of the
recent privacy legislation was “inexplicable” if the FTC
already had some authority to regulate corporate
cybersecurity through § 45(a).
Next, Wyndham claims that the FTC’s interpretation
of § 45(a) is “inconsistent with its repeated efforts to obtain
from Congress the very authority it purports to wield here.”
Wyndham Br. at 28. Yet again we disagree. In two of the
23
statements cited by Wyndham, the FTC clearly said that some
cybersecurity practices are “unfair” under the statute. See
Consumer Data Protection: Hearing Before the Subcomm. on
Commerce, Mfg. & Trade of the H. Comm. on Energy &
Commerce, 2011 WL 2358081, at *6 (June 15, 2011)
(statement of Edith Ramirez, Comm’r, FTC) (“[T]he
Commission enforces the FTC Act’s proscription against
unfair . . . acts . . . in cases where a business[’s] . . . failure to
employ reasonable security measures causes or is likely to
cause substantial consumer injury.”); Data Theft Issues:
Hearing Before the Subcomm. on Commerce, Mfg. & Trade
of the H. Comm. on Energy & Commerce, 2011 WL 1971214,
at *7 (May 4, 2011) (statement of David C. Vladeck,
Director, FTC Bureau of Consumer Protection) (same).
In the two other cited statements, given in 1998 and
2000, the FTC only acknowledged that it cannot require
companies to adopt “fair information practice policies.” See
FTC, Privacy Online: Fair Information Practices in the
Electronic Marketplace—A Report to Congress 34 (2000)
[hereinafter Privacy Online]; Privacy in Cyberspace: Hearing
Before the Subcomm. on Telecomms., Trade & Consumer
Prot. of the H. Comm. on Commerce, 1998 WL 546441 (July
21, 1998) (statement of Robert Pitofsky, Chairman, FTC).
These policies would protect consumers from far more than
the kind of “substantial injury” typically covered by § 45(a).
In addition to imposing some cybersecurity requirements,
they would require companies to give notice about what data
they collect from consumers, to permit those consumers to
decide how the data is used, and to permit them to review and
correct inaccuracies. Privacy Online, supra at 36–37. As the
FTC explained in the District Court, the primary concern
driving the adoption of these policies in the late 1990s was
that “companies . . . were capable of collecting enormous
amounts of information about consumers, and people were
suddenly realizing this.” JA 106 (emphasis added). The FTC
24
thus could not require companies to adopt broad fair
information practice policies because they were “just
collecting th[e] information, and consumers [were not]
injured.” Id.; see also Order Denying Respondent LabMD’s
Motion to Dismiss, No. 9357, slip op. at 7 (Jan. 16, 2014)
[hereinafter LabMD Order or LabMD] (“[T]he sentences
from the 1998 and 2000 reports . . . simply recognize that the
Commission’s existing authority may not be sufficient to
effectively protect consumers with regard to all data privacy
issues of potential concern (such as aspects of children’s
online privacy) . . . .” (emphasis in original)). Our conclusion
is this: that the FTC later brought unfairness actions against
companies whose inadequate cybersecurity resulted in
consumer harm is not inconsistent with the agency’s earlier
position.
Having rejected Wyndham’s arguments that its
conduct cannot be unfair, we assume for the remainder of this
opinion that it was.
IV. Fair Notice
A conviction or punishment violates the Due Process
Clause of our Constitution if the statute or regulation under
which it is obtained “fails to provide a person of ordinary
intelligence fair notice of what is prohibited, or is so
standardless that it authorizes or encourages seriously
discriminatory enforcement.” FCC v. Fox Television
Stations, Inc., 132 S. Ct. 2307, 2317 (2012) (internal
quotation marks omitted). Wyndham claims that,
notwithstanding whether its conduct was unfair under § 45(a),
25
the FTC failed to give fair notice of the specific cybersecurity
standards the company was required to follow.7
A. Legal Standard
The level of required notice for a person to be subject
to liability varies by circumstance. In Bouie v. City of
Columbia, the Supreme Court held that a “judicial
construction of a criminal statute” violates due process if it is
“unexpected and indefensible by reference to the law which
had been expressed prior to the conduct in issue.” 378 U.S.
347, 354 (1964) (internal quotation marks omitted); see also
Rogers v. Tennessee, 532 U.S. 451, 457 (2001); In re Surrick,
338 F.3d 224, 233–34 (3d Cir. 2003). The precise meaning of
“unexpected and indefensible” is not entirely clear, United
States v. Lata, 415 F.3d 107, 111 (1st Cir. 2005), but we and
our sister circuits frequently use language implying that a
conviction violates due process if the defendant could not
reasonably foresee that a court might adopt the new
interpretation of the statute.8
7
We do not read Wyndham’s briefing as raising a meaningful
argument under the “discriminatory enforcement” prong. A
few sentences in a reply brief are not enough. See Wyndham
Reply Br. at 26 (“To provide the notice required by due
process, a statement must in some sense declare what conduct
the law proscribes and thereby constrain enforcement
discretion . . . . Here, the consent decrees at issue . . . do not
limit the Commission’s enforcement authority in any way.”
(citation omitted)).
8
See Ortiz v. N.Y.S. Parole, 586 F.3d 149, 159 (2d Cir. 2009)
(holding that the “unexpected and indefensible” standard
“requires only that the law . . . not lull the potential defendant
26
The fair notice doctrine extends to civil cases,
particularly where a penalty is imposed. See Fox Television
Stations, Inc., 132 S. Ct. at 2317–20; Boutilier v. INS, 387
U.S. 118, 123 (1967). “Lesser degrees of specificity” are
allowed in civil cases because the consequences are smaller
than in the criminal context. San Filippo v. Bongiovanni, 961
F.2d 1125, 1135 (3d Cir. 1992). The standards are especially
lax for civil statutes that regulate economic activities. For
those statutes, a party lacks fair notice when the relevant
standard is “so vague as to be no rule or standard at all.”
into a false sense of security, giving him no reason even to
suspect that his conduct might be within its scope.”
(emphases added)); In re Surrick, 338 F.3d at 234 (“[We]
reject [the] contention that . . . nothing in the history of [the
relevant provision] had stated or even foreshadowed that
reckless conduct could violate it. Indeed, in view of the
foregoing, the [state court’s] decision . . . was neither
‘unexpected’ nor ‘indefensible’ by reference to the law which
had been expressed prior to the conduct in issue.” (emphases
added)); Warner v. Zent, 997 F.2d 116, 125 (6th Cir. 1993)
(“‘The underlying principle is that no man shall be held
criminally responsible for conduct which he could not
reasonably understand to be proscribed.’” (emphasis added)
(quoting United States v. Harriss, 347 U.S. 612, 617 (1954));
id. at 127 (“It was by no means unforeseeable . . . that the
[court] would [construe the statute as it did].” (emphasis
added)); see also Lata, 415 F.3d at 112 (“[S]omeone in [the
defendant’s] position could not reasonably be surprised by
the sentence he eventually received . . . . We reserve for the
future the case . . . in which a sentence is imposed . . . that is
higher than any that might realistically have been imagined at
the time of the crime . . . .” (emphases added)).
27
CMR D.N. Corp. v. City of Phila., 703 F.3d 612, 631–32 (3d
Cir. 2013) (internal quotation marks omitted).9
A different set of considerations is implicated when
agencies are involved in statutory or regulatory interpretation.
Broadly speaking, agencies interpret in at least three
contexts. One is where an agency administers a statute
without any special authority to create new rights or
obligations. When disputes arise under this kind of agency
interpretation, the courts give respect to the agency’s view to
the extent it is persuasive, but they retain the primary
responsibility for construing the statute.10 As such, the
9
See also Bongiovanni, 961 F.2d at 1138; Boutilier, 387 U.S.
at 123; Leib v. Hillsborough Cnty. Pub. Transp. Comm’n, 558
F.3d 1301, 1310 (11th Cir. 2009); Ford Motor Co. v. Tex.
Dep’t of Transp., 264 F.3d 493, 507 (5th Cir. 2001);
Columbia Nat’l Res., Inc. v. Tatum, 58 F.3d 1101, 1108 (6th
Cir. 1995).
10
See Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)
(“[The agency interpretation is] not controlling upon the
courts by reason of [its] authority [but is a] body of
experience and informed judgment to which courts . . . may
properly resort for guidance.”); Christenson v. Harris Cnty.,
529 U.S. 576, 587 (2000) (“[Agency interpretations are]
entitled to respect under [Skidmore], but only to the extent
that [they] have the power to persuade.” (internal quotation
marks omitted)); see also Peter L. Strauss, “Deference” is
Too Confusing—Let’s Call Them “Chevron Space” and
“Skidmore Weight”, 112 Colum. L. Rev. 1143, 1147 (2012)
(“Skidmore . . . is grounded in a construct of the agency as
responsible expert, arguably possessing special knowledge of
28
standard of notice afforded to litigants about the meaning of
the statute is not dissimilar to the standard of notice for civil
statutes generally because the court, not the agency, is the
ultimate arbiter of the statute’s meaning.
The second context is where an agency exercises its
authority to fill gaps in a statutory scheme. There the agency
is primarily responsible for interpreting the statute because
the courts must defer to any reasonable construction it adopts.
See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc.,
467 U.S. 837 (1984). Courts appear to apply a more stringent
standard of notice to civil regulations than civil statutes:
parties are entitled to have “ascertainable certainty” of what
conduct is legally required by the regulation. See Chem.
Waste Mgmt., Inc. v. EPA, 976 F.2d 2, 29 (D.C. Cir. 1992)
(per curiam) (denying petitioners’ challenge that a recently
promulgated EPA regulation fails fair notice principles); Nat’l
Oilseed Processors Ass’n. v. OSHA, 769 F.3d 1173, 1183–84
(D.C. Cir. 2014) (denying petitioners’ challenge that a
recently promulgated OSHA regulation fails fair notice
principles).
The third context is where an agency interprets the
meaning of its own regulation. Here also courts typically
must defer to the agency’s reasonable interpretation.11 We
the statutory meaning a court should consider in reaching its
own judgment.” (emphasis added)).
11
See Auer v. Robbins, 519 U.S. 452, 461 (1997) (“Because
the salary-basis test is a creature of the Secretary’s own
regulations, his interpretation of it is . . . controlling unless
plainly erroneous or inconsistent with the regulation.”
(internal quotation marks omitted)); Decker v. Nw. Envtl. Def.
Ctr., 133 S. Ct. 1326, 1337 (2013) (“When an agency
29
and several of our sister circuits have stated that private
parties are entitled to know with “ascertainable certainty” an
agency’s interpretation of its regulation. Sec’y of Labor v.
Beverly Healthcare-Hillview, 541 F.3d 193, 202 (3d Cir.
2008); Dravo Corp. v. Occupational Safety & Health Rev.
Comm’n, 613 F.2d 1227, 1232–33 (3d Cir. 1980).12 Indeed,
interprets its own regulation, the Court, as a general rule,
defers to it unless that interpretation is plainly erroneous or
inconsistent with the regulation.” (internal quotation marks
omitted)); Martin v. Occupational Safety & Health Rev.
Comm’n, 499 U.S. 144, 150–51 (1991) (“In situations in
which the meaning of [regulatory] language is not free from
doubt, the reviewing court should give effect to the agency’s
interpretation so long as it is reasonable.” (alterations in
original, internal quotations omitted)); Columbia Gas
Transp., LLC v. 1.01 Acres, More or Less in Penn Twp., 768
F.3d 300, 313 (3d Cir. 2014) (“[A]s an agency interpretation
of its own regulation, it is deserving of deference.” (citing
Decker)).
12
See also Wis. Res. Prot. Council v. Flambeau Mining Co.,
727 F.3d 700, 708 (7th Cir. 2013); AJP Const., Inc. v. Sec’y
of Labor, 357 F.3d 70, 75–76 (D.C. Cir. 2004) (quoting Gen.
Elec. Co. v. EPA, 53 F.3d 1324, 1329 (D.C. Cir. 1995)); Tex.
Mun. Power Agency v. EPA, 89 F.3d 858, 872 (D.C. Cir.
1996); Ga. Pac. Corp. v. Occupational Safety & Health Rev.
Comm’n, 25 F.3d 999, 1005 (11th Cir. 1994); Diamond
Roofing Co. v. Occupational Safety & Health Rev. Comm’n,
528 F.2d 645, 649 (5th Cir. 1976). In fact, the Supreme Court
applied Skidmore to an interpretation by an agency of a
regulation it adopted instead of deferring to that interpretation
because the latter would have “seriously undermine[d] the
principle that agencies should provide regulated parties fair
30
“the due process clause prevents . . . deference from
validating the application of a regulation that fails to give fair
warning of the conduct it prohibits or requires.” AJP Const.,
Inc., 357 F.3d at 75 (internal quotation marks omitted).
A higher standard of fair notice applies in the second
and third contexts than in the typical civil statutory
interpretation case because agencies engage in interpretation
differently than courts. See Frank H. Easterbook, Judicial
Discretion in Statutory Interpretation, 57 Okla. L. Rev. 1, 3
(2004) (“A judge who announces deference is approving a
shift in interpretive method, not just a shift in the identity of
the decider, as if a suit were being transferred to a court in a
different venue.”). In resolving ambiguity in statutes or
regulations, courts generally adopt the best or most
reasonable interpretation. But, as the agency is often free to
adopt any reasonable construction, it may impose higher
legal obligations than required by the best interpretation.13
warning of the conduct [a regulation] prohibits or requires.”
Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156,
2167 & n.15 (2012) (second alteration in original, internal
quotation marks omitted) (citing Dravo, 613 F.2d at 1232–33
and the “ascertainable certainty” standard).
13
See Nat’l Cable & Telecomms. Ass’n v. Brand X Internet
Servs., 545 U.S. 967, 980 (2005) (“If a statute is ambiguous,
and if the implementing agency’s construction is reasonable,
Chevron requires a federal court to accept the agency’s
construction of the statute, even if the agency’s reading
differs from what the court believes is the best statutory
interpretation.”); Decker, 133 S. Ct. at 1337 (“It is well
established that an agency’s interpretation need not be the
only possible reading of a regulation—or even the best one—
31
Furthermore, courts generally resolve statutory
ambiguity by applying traditional methods of construction.
Private parties can reliably predict the court’s interpretation
by applying the same methods. In contrast, an agency may
also rely on technical expertise and political values.14 It is
harder to predict how an agency will construe a statute or
regulation at some unspecified point in the future, particularly
when that interpretation will depend on the “political views of
to prevail. When an agency interprets its own regulation, the
Court, as a general rule, defers to it unless that interpretation
is plainly erroneous or inconsistent with the regulation.”
(internal quotation marks omitted)); Auer, 519 U.S. at 462–63
(“[The rule that Fair Labor Standards Act] exemptions are to
be narrowly construed against . . . employers . . . is a rule
governing judicial interpretation of statutes and regulations,
not a limitation on the Secretary’s power to resolve
ambiguities in his own regulations. A rule requiring the
Secretary to construe his own regulations narrowly would
make little sense, since he is free to write the regulations as
broadly as he wishes, subject only to the limits imposed by
the statute.” (internal quotation marks omitted)).
14
See Garfias-Rodriguez v. Holder, 702 F.3d 504, 518 (9th
Cir. 2012) (rejecting the applicability of the judicial
retroactivity test to a new Board of Immigration Appeals’
interpretation because the “decision fill[ed] a statutory gap
and [was] an exercise [of the agency’s] policymaking
function”); Easterbrook, supra at 3 (“Judges in their own
work forswear the methods that agencies employ” to interpret
statutes, which include relying on “political pressure, the
President’s view of happy outcomes, cost-benefit studies . . .
and the other tools of policy wonks . . . .”).
32
the President in office at [that] time.” Strauss, supra at
1147.15
Wyndham argues it was entitled to “ascertainable
certainty” of the FTC’s interpretation of what specific
cybersecurity practices are required by § 45(a). Yet it has
contended repeatedly—no less than seven separate occasions
in this case—that there is no FTC rule or adjudication about
cybersecurity that merits deference here. The necessary
implication, one that Wyndham itself has explicitly drawn on
two occasions noted below, is that federal courts are to
interpret § 45(a) in the first instance to decide whether
Wyndham’s conduct was unfair.
Wyndham’s argument has focused on the FTC’s
motion to dismiss order in LabMD, an administrative case in
which the agency is pursuing an unfairness claim based on
allegedly inadequate cybersecurity. LabMD Order, supra.
Wyndham first argued in the District Court that the LabMD
Order does not merit Chevron deference because “self-
serving, litigation-driven decisions . . . are entitled to no
deference at all” and because the opinion adopted an
impermissible construction of the statute. Wyndham’s
15
See also Brand X Internet Servs., 545 U.S. at 981 (“[T]he
agency . . . must consider varying interpretations and the
wisdom of its policy on a continuing basis . . . in response
to . . . a change in administrations.” (internal quotation marks
omitted, first omission in original)); Motor Vehicle Mfrs.
Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 59 (1983) (Rehnquist, J., dissenting in part) (“A change in
administration brought about by the people casting their votes
is a perfectly reasonable basis for an executive agency’s
reappraisal of the costs and benefits of its . . . regulations.”).
33
January 29, 2014 Letter at 1–2, FTC v. Wyndham Worldwide
Corp., 10 F. Supp. 3d 602 (D.N.J. 2014) (No. 13-1887).
Second, Wyndham switched gears in its opening brief
on appeal to us, arguing that LabMD does not merit Chevron
deference because courts owe no deference to an agency’s
interpretation of the “boundaries of Congress’ statutory
delegation of authority to the agency.” Wyndham Br. at 19–
20.
Third, in its reply brief it argued again that LabMD
does not merit Chevron deference because it adopted an
impermissible construction of the statute. Wyndham Reply
Br. at 14.
Fourth, Wyndham switched gears once more in a Rule
28(j) letter, arguing that LabMD does not merit Chevron
deference because the decision was nonfinal. Wyndham’s
February 6, 2015 Letter (citing LabMD, Inc. v. FTC, 776 F.3d
1275 (11th Cir. 2015)).
Fifth, at oral argument we asked Wyndham whether
the FTC has decided that cybersecurity practices are unfair.
Counsel answered: “No. I don’t think consent decrees count,
I don’t think the 2007 brochure counts, and I don’t think
Chevron deference applies. So are . . . they asking this
federal court in the first instance . . . [?] I think the answer to
that question is yes . . . .” Oral Arg. Tr. at 19.
Sixth, due to our continuing confusion about the
parties’ positions on a number of issues in the case, we asked
for supplemental briefing on certain questions, including
whether the FTC had declared that cybersecurity practices
can be unfair. In response, Wyndham asserted that “the FTC
has not declared unreasonable cybersecurity practices
‘unfair.’” Wyndham’s Supp. Memo. at 3. Wyndham
34
explained further: “It follows from [our] answer to [that]
question that the FTC is asking the federal courts to
determine in the first instance that unreasonable cybersecurity
practices qualify as ‘unfair’ trade practices under the FTC
Act.” Id. at 4.
Seventh, and most recently, Wyndham submitted a
Rule 28(j) letter arguing that LabMD does not merit Chevron
deference because it decided a question of “deep economic
and political significance.” Wyndham’s June 30, 2015 Letter
(quoting King v. Burwell, 135 S. Ct. 2480 (2015)).
Wyndham’s position is unmistakable: the FTC has not
yet declared that cybersecurity practices can be unfair; there
is no relevant FTC rule, adjudication or document that merits
deference; and the FTC is asking the federal courts to
interpret § 45(a) in the first instance to decide whether it
prohibits the alleged conduct here. The implication of this
position is similarly clear: if the federal courts are to decide
whether Wyndham’s conduct was unfair in the first instance
under the statute without deferring to any FTC interpretation,
then this case involves ordinary judicial interpretation of a
civil statute, and the ascertainable certainty standard does not
apply. The relevant question is not whether Wyndham had
fair notice of the FTC’s interpretation of the statute, but
whether Wyndham had fair notice of what the statute itself
requires.
Indeed, at oral argument we asked Wyndham whether
the cases cited in its brief that apply the “ascertainable
certainty” standard—all of which involve a court reviewing
an agency adjudication16 or at least a court being asked to
16
See Fox Television Stations, Inc., 132 S. Ct. 2307 (vacating
an FCC adjudication for lack of fair notice of an agency
interpretation); PMD Produce Brokerage Corp. v. USDA, 234
35
defer to an agency interpretation17—apply where the court is
to decide the meaning of the statute in the first instance.18
Wyndham’s counsel responded, “I think it would, your
Honor. I think if you go to Ford Motor [Co. v. FTC, 673 F.2d
1008 (9th Cir. 1981)], I think that’s what was happening
there.” Oral Arg. Tr. at 61. But Ford Motor is readily
distinguishable. Unlike Wyndham, the petitioners there did
not bring a fair notice claim under the Due Process Clause.
Instead, they argued that, per NLRB v. Bell Aerospace Co.,
416 U.S. 267 (1974), the FTC abused its discretion by
proceeding through agency adjudication rather than
F.3d 48 (D.C. Cir. 2000) (vacating the dismissal of an
administrative appeal issued by a Judicial Officer in the
Department of Agriculture because the agency’s Rules of
Practice failed to give fair notice of the deadline for filing an
appeal); Gen. Elec. Co., 53 F.3d 1324 (vacating an EPA
adjudication for lack of fair notice of the agency’s
interpretation of a regulation); FTC v. Colgate-Palmolive Co.,
380 U.S. 374 (1965) (reviewing an FTC adjudication that
found liability).
17
See In re Metro-East Mfg. Co., 655 F.2d 805, 810–12 (7th
Cir. 1981) (declining to defer to an agency’s interpretation of
its own regulation because the defendant could not have
known with ascertainable certainty the agency’s
interpretation).
18
We asked, “All of your cases on fair notice pertain to an
agency’s interpretation of its own regulation or the statute
that governs that agency. Does this fair notice doctrine apply
where it is a court announcing an interpretation of a statute in
the first instance?” Oral Arg. Tr. at 60 (emphases added).
36
rulemaking.19 More importantly, the Ninth Circuit was
reviewing an agency adjudication; it was not interpreting the
meaning of the FTC Act in the first instance.
In addition, our understanding of Wyndham’s position
is consistent with the District Court’s opinion, which
concluded that the FTC has stated a claim under § 45(a) based
on the Court’s interpretation of the statute and without any
reference to LabMD or any other agency adjudication or
19
To the extent Wyndham could have raised this argument,
we do not read its briefs to do so. Indeed, its opening brief
appears to repudiate the theory. Wyndham Br. at 38–39
(“The district court below framed the fair notice issue here as
whether ‘the FTC must formally promulgate regulations
before bringing its unfairness claim.’ With all respect, that
characterization of Wyndham’s position is a straw man.
Wyndham has never disputed the general principle that
administrative agencies have discretion to regulate through
either rulemaking or adjudication. See, e.g., [Bell Aerospace
Co., 416 U.S. at 290–95]. Rather, Wyndham’s point is only
that, however an agency chooses to proceed, it must provide
regulated entities with constitutionally requisite fair notice.”
(internal citations omitted)). Moreover, the Supreme Court
has explained that where “it is doubtful [that] any generalized
standard could be framed which would have more than
marginal utility[, the agency] has reason to . . . develop[] its
standards in a case-by-case manner.” Bell Aerospace Co.,
416 U.S. at 294. An agency’s “judgment that adjudication
best serves this purpose is entitled to great weight.” Id.
Wyndham’s opening brief acknowledges that the FTC has
given this rationale for proceeding by adjudication, Wyndham
Br. at 37–38, but, the company offers no ground to challenge
it.
37
regulation. See FTC v. Wyndham Worldwide Corp., 10 F.
Supp. 3d 602, 621–26 (D.N.J. 2014).
We thus conclude that Wyndham was not entitled to
know with ascertainable certainty the FTC’s interpretation of
what cybersecurity practices are required by § 45(a). Instead,
the relevant question in this appeal is whether Wyndham had
fair notice that its conduct could fall within the meaning of
the statute. If later proceedings in this case develop such that
the proper resolution is to defer to an agency interpretation
that gives rise to Wyndham’s liability, we leave to that time a
fuller exploration of the level of notice required. For now,
however, it is enough to say that we accept Wyndham’s
forceful contention that we are interpreting the FTC Act (as
the District Court did). As a necessary consequence,
Wyndham is only entitled to notice of the meaning of the
statute and not to the agency’s interpretation of the statute.
B. Did Wyndham Have Fair Notice of the Meaning of
§ 45(a)?
Having decided that Wyndham is entitled to notice of
the meaning of the statute, we next consider whether the case
should be dismissed based on fair notice principles. We do
not read Wyndham’s briefs as arguing the company lacked
fair notice that cybersecurity practices can, as a general
matter, form the basis of an unfair practice under § 45(a).
Wyndham argues instead it lacked notice of what specific
cybersecurity practices are necessary to avoid liability. We
have little trouble rejecting this claim.
To begin with, Wyndham’s briefing focuses on the
FTC’s failure to give notice of its interpretation of the statute
and does not meaningfully argue that the statute itself fails
fair notice principles. We think it imprudent to hold a 100-
38
year-old statute unconstitutional as applied to the facts of this
case when we have not expressly been asked to do so.
Moreover, Wyndham is entitled to a relatively low
level of statutory notice for several reasons. Subsection 45(a)
does not implicate any constitutional rights here. Vill. of
Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S.
489, 499 (1982). It is a civil rather than criminal statute.20 Id.
at 498–99. And statutes regulating economic activity receive
a “less strict” test because their “subject matter is often more
narrow, and because businesses, which face economic
demands to plan behavior carefully, can be expected to
consult relevant legislation in advance of action.” Id. at 498.
In this context, the relevant legal rule is not “so vague
as to be ‘no rule or standard at all.’” CMR D.N. Corp., 703
F.3d at 632 (quoting Boutilier, 387 U.S. at 123). Subsection
45(n) asks whether “the act or practice causes or is likely to
cause substantial injury to consumers which is not reasonably
avoidable by consumers themselves and not outweighed by
countervailing benefits to consumers or to competition.”
While far from precise, this standard informs parties that the
relevant inquiry here is a cost-benefit analysis, Pa. Funeral
Dirs. Ass’n v. FTC, 41 F.3d 81, 89–92 (3d Cir. 1992); Am.
Fin. Servs. Ass’n, 767 F.2d at 975, that considers a number of
relevant factors, including the probability and expected size
of reasonably unavoidable harms to consumers given a
certain level of cybersecurity and the costs to consumers that
20
While civil statutes containing “quasi-criminal penalties
may be subject to the more stringent review afforded criminal
statutes,” Ford Motor Co., 264 F.3d at 508, we do not know
what remedy, if any, the District Court will impose. And
Wyndham’s briefing does not indicate what kinds of remedies
it is exposed to in this proceeding.
39
would arise from investment in stronger cybersecurity. We
acknowledge there will be borderline cases where it is unclear
if a particular company’s conduct falls below the requisite
legal threshold. But under a due process analysis a company
is not entitled to such precision as would eliminate all close
calls. Cf. Nash v. United States, 229 U.S. 373, 377 (1913)
(“[T]he law is full of instances where a man’s fate depends on
his estimating rightly, that is, as the jury subsequently
estimates it, some matter of degree.”). Fair notice is satisfied
here as long as the company can reasonably foresee that a
court could construe its conduct as falling within the meaning
of the statute.
What appears to us is that Wyndham’s fair notice
claim must be reviewed as an as-applied challenge. See
United States v. Mazurie, 419 U.S. 544, 550 (1975); San
Filippo, 961 F.2d at 1136. Yet Wyndham does not argue that
its cybersecurity practices survive a reasonable interpretation
of the cost-benefit analysis required by § 45(n). One sentence
in Wyndham’s reply brief says that its “view of what data-
security practices are unreasonable . . . is not necessarily the
same as the FTC’s.” Wyndham Reply Br. at 23. Too little
and too late.
Wyndham’s as-applied challenge falls well short given
the allegations in the FTC’s complaint. As the FTC points
out in its brief, the complaint does not allege that Wyndham
used weak firewalls, IP address restrictions, encryption
software, and passwords. Rather, it alleges that Wyndham
failed to use any firewall at critical network points, Compl. at
¶ 24(a), did not restrict specific IP addresses at all, id. at
¶ 24(j), did not use any encryption for certain customer files,
id. at ¶ 24(b), and did not require some users to change their
default or factory-setting passwords at all, id. at ¶ 24(f).
Wyndham did not respond to this argument in its reply brief.
40
Wyndham’s as-applied challenge is even weaker given
it was hacked not one or two, but three, times. At least after
the second attack, it should have been painfully clear to
Wyndham that a court could find its conduct failed the cost-
benefit analysis. That said, we leave for another day whether
Wyndham’s alleged cybersecurity practices do in fact fail, an
issue the parties did not brief. We merely note that certainly
after the second time Wyndham was hacked, it was on notice
of the possibility that a court could find that its practices fail
the cost-benefit analysis.
Several other considerations reinforce our conclusion
that Wyndham’s fair notice challenge fails. In 2007 the FTC
issued a guidebook, Protecting Personal Information: A
Guide for Business, FTC Response Br. Attachment 1
[hereinafter FTC Guidebook], which describes a “checklist[]”
of practices that form a “sound data security plan.” Id. at 3.
The guidebook does not state that any particular practice is
required by § 45(a),21 but it does counsel against many of the
specific practices alleged here. For instance, it recommends
that companies “consider encrypting sensitive information
that is stored on [a] computer network . . . [, c]heck . . .
software vendors’ websites regularly for alerts about new
vulnerabilities, and implement policies for installing vendor-
approved patches.” Id. at 10. It recommends using “a
firewall to protect [a] computer from hacker attacks while it is
connected to the Internet,” deciding “whether [to] install a
‘border’ firewall where [a] network connects to the Internet,”
and setting access controls that “determine who gets through
21
For this reason, we agree with Wyndham that the
guidebook could not, on its own, provide “ascertainable
certainty” of the FTC’s interpretation of what specific
cybersecurity practices fail § 45(n). But as we have already
explained, this is not the relevant question.
41
the firewall and what they will be allowed to see . . . to allow
only trusted employees with a legitimate business need to
access the network.” Id. at 14. It recommends “requiring that
employees use ‘strong’ passwords” and cautions that
“[h]ackers will first try words like . . . the software’s default
password[] and other easy-to-guess choices.” Id. at 12. And
it recommends implementing a “breach response plan,” id. at
16, which includes “[i]nvestigat[ing] security incidents
immediately and tak[ing] steps to close off existing
vulnerabilities or threats to personal information,” id. at 23.
As the agency responsible for administering the
statute, the FTC’s expert views about the characteristics of a
“sound data security plan” could certainly have helped
Wyndham determine in advance that its conduct might not
survive the cost-benefit analysis.
Before the attacks, the FTC also filed complaints and
entered into consent decrees in administrative cases raising
unfairness claims based on inadequate corporate
cybersecurity. FTC Br. at 47 n.16. The agency published
these materials on its website and provided notice of proposed
consent orders in the Federal Register. Wyndham responds
that the complaints cannot satisfy fair notice principles
because they are not “adjudications on the merits.”22
Wyndham Br. at 41. But even where the “ascertainable
certainty” standard applies to fair notice claims, courts
regularly consider materials that are neither regulations nor
“adjudications on the merits.” See, e.g., United States v.
22
We agree with Wyndham that the consent orders, which
admit no liability and which focus on prospective
requirements on the defendant, were of little use to it in trying
to understand the specific requirements imposed by § 45(a).
42
Lachman, 387 F.3d 42, 57 (1st Cir. 2004) (noting that fair
notice principles can be satisfied even where a regulation is
vague if the agency “provide[d] a sufficient, publicly
accessible statement” of the agency’s interpretation of the
regulation); Beverly Healthcare-Hillview, 541 F.3d at 202
(citing Lachman and treating an OSHA opinion letter as a
“sufficient, publicly accessible statement”); Gen. Elec. Co.,
53 F.3d at 1329. That the FTC commissioners—who must
vote on whether to issue a complaint, 16 C.F.R. § 3.11(a);
ABA Section of Antitrust Law, FTC Practice and Procedure
Manual 160–61 (2007)—believe that alleged cybersecurity
practices fail the cost-benefit analysis of § 45(n) certainly
helps companies with similar practices apprehend the
possibility that their cybersecurity could fail as well.23
23
We recognize it may be unfair to expect private parties
back in 2008 to have examined FTC complaints or consent
decrees. Indeed, these may not be the kinds of legal
documents they typically consulted. At oral argument we
asked how private parties in 2008 would have known to
consult them. The FTC’s only answer was that “if you’re a
careful general counsel you do pay attention to what the FTC
is doing, and you do look at these things.” Oral Arg. Tr. at
51. We also asked whether the FTC has “informed the public
that it needs to look at complaints and consent decrees for
guidance,” and the Commission could offer no examples. Id.
at 52. But Wyndham does not appear to argue it was unaware
of the consent decrees and complaints; it claims only that they
did not give notice of what the law requires. Wyndham
Reply Br. at 25 (“The fact that the FTC publishes these
materials on its website and provides notice in the Federal
Register, moreover, is immaterial—the problem is not that
Wyndham lacked notice of the consent decrees [which
43
Wyndham next contends that the individual allegations
in the complaints are too vague to be relevant to the fair
notice analysis. Wyndham Br. at 41–42. It does not,
however, identify any specific examples. And as the Table
below reveals, the individual allegations were specific and
similar to those here in at least one of the four or five24
cybersecurity-related unfair-practice complaints that issued
prior to the first attack.
Wyndham also argues that, even if the individual
allegations are not vague, the complaints “fail to spell out
what specific cybersecurity practices . . . actually triggered
the alleged violation, . . . provid[ing] only a . . . description of
certain alleged problems that, ‘taken together,’” fail the cost-
benefit analysis. Wyndham Br. at 42 (emphasis in original).
We part with it on two fronts. First, even if the complaints do
not specify which allegations, in the Commission’s view,
form the necessary and sufficient conditions of the alleged
violation, they can still help companies apprehend the
possibility of liability under the statute. Second, as the Table
below shows, Wyndham cannot argue that the complaints fail
to give notice of the necessary and sufficient conditions of an
reference the complaints] but that consent decrees [and
presumably complaints] by their nature do not give notice of
what Section 5 requires.” (emphases in original, citations and
internal quotations omitted)).
24
The FTC asserts that five such complaints issued prior to
the first attack in April 2008. See FTC Br. at 47–48 n.16.
There is some ambiguity, however, about whether one of
them issued several months later. See Complaint, TJX Co.,
No. C-4227 (FTC 2008) (stating that the complaint was
issued on July 29, 2008). We note that this complaint also
shares significant parallels with the allegations here.
44
alleged § 45(a) violation when all of the allegations in at least
one of the relevant four or five complaints have close
corollaries here. See Complaint, CardSystems Solutions, Inc.,
No. C-4168 (FTC 2006) [hereinafter CCS].
Table: Comparing CSS and Wyndham Complaints
CSS Wyndham
1 Created unnecessary risks to Allowed software at hotels to
personal information by storing store payment card information
it in a vulnerable format for up in clear readable text, Compl. at
to 30 days, CSS at ¶ 6(1). ¶ 24(b).
2 Did not adequately assess the Failed to monitor network for
vulnerability of its web the malware used in a previous
application and computer intrusion, Compl. at ¶ 24(i),
network to commonly known or which was then reused by
reasonably foreseeable attacks; hackers later to access the
did not implement simple, low- system again, id. at ¶ 34.
cost and readily available
defenses to such attacks, CSS at
¶ 6(2)–(3).
3 Failed to use strong passwords Did not employ common
to prevent a hacker from gaining methods to require user IDs and
control over computers on its passwords that are difficult for
computer network and access to hackers to guess. E.g., allowed
personal information stored on remote access to a hotel’s
the network, CSS at ¶ 6(4). property management system
that used default/factory setting
passwords, Compl. at ¶ 24(f).
45
4 Did not use readily available Did not use readily available
security measures to limit access security measures, such as
between computers on its firewalls, to limit access
network and between those between and among hotels’
computers and the Internet, CSS property management systems,
at ¶ 6(5). the Wyndham network, and the
Internet, Compl. at ¶ 24(a).
5 Failed to employ sufficient Failed to employ reasonable
measures to detect unauthorized measures to detect and prevent
access to personal information or unauthorized access to computer
to conduct security network or to conduct security
investigations, CSS at ¶ 6(6). investigations, Compl. at
¶ 24(h).
In sum, we have little trouble rejecting Wyndham’s
fair notice claim.
V. Conclusion
The three requirements in § 45(n) may be necessary
rather than sufficient conditions of an unfair practice, but we
are not persuaded that any other requirements proposed by
Wyndham pose a serious challenge to the FTC’s claim here.
Furthermore, Wyndham repeatedly argued there is no FTC
interpretation of § 45(a) or (n) to which the federal courts
must defer in this case, and, as a result, the courts must
interpret the meaning of the statute as it applies to
Wyndham’s conduct in the first instance. Thus, Wyndham
cannot argue it was entitled to know with ascertainable
certainty the cybersecurity standards by which the FTC
expected it to conform. Instead, the company can only claim
that it lacked fair notice of the meaning of the statute itself—a
46
theory it did not meaningfully raise and that we strongly
suspect would be unpersuasive under the facts of this case.
We thus affirm the District Court’s decision.
47