The FTC's 12-page Civil Investigative Demand (CID) letter sought details on what each company knew about the leaked data, when they discovered the leaks, why they had allowed P2P software on company systems and what efforts they had taken to inform affected individuals.
In August 2013, after more than two years of discovery, the FTC filed a formal complaint against LabMD alleging that the company had failed to adequately protect sensitive personal data including healthcare information. The complaint alleged that LabMD had exposed data on close to 10,000 consumers in two separate incidents.
Similar administrative action by the FTC have forced numerous companies into costly settlements over the past few years.
In 2006 for instance, the FTC imposed a $10 million fine on data aggregator ChoicePoint, and more recently, online gaming company RockYou paid $250,000 to settle data breach related charges.
Indeed, the complaint against LabMD included a proposed order that would require the company to implement a comprehensive information security program and submit to third-party security evaluations every two years for the next 20 years.
In response, LabMD, assisted by Cause of Action (CoA) a non-profit watchdog group, challenged the FTC's authority to regulate data security practices.
In pleadings and later in a formal lawsuit filed in November, LabMD and CoA asserted that the FTC can't use a section of the FTC Act that prohibits "unfair" and "deceptive" practices, to go after companies that suffer data breaches. They accused the Commission of trying to hold companies to data security standards that do not formally exist.
They contended that Congress has not authorized the FTC to regulate data security practices, particularly those involving healthcare data.
"Despite the Commission's repeated requests, Congress has refused to confer upon the FTC jurisdiction over such data-security cases," CoA had noted in filing the lawsuit. "Therefore, in an end-run around both the courts and the Congress, the Commission illegally abuses and burdens individual businesses like LabMD."
Robert Schoshinski, assistant director at the FTC's division of privacy and identity protection, said the Commission could not comment because the administrative litigation is pending. But Jesse Rich, the director of the Bureau of Consumer Protection noted in a statement that FTC attorneys would determine how best to protect data that LabMD has collected over the years now that it has announced plans to cease operations.
"The goal in this case has always been to ensure that this sensitive information is appropriately protected," she said in the statement.
The LabMD case is one of two to challenge the FTC's enforcement authority in data security matters. Hotel chain Wyndam Worldwide Corp. filed a compliant in federal court raising issues identical to the ones raised by LabMD.
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