FTC Beat
May 26
2015

Keeping Your Privacy Promises: Retail Tracking and Opt-Out Choices

No time for talking. Cropped image of beautiful young woman in pink dress holding shopping bags and mobile phone

As children, many of us were taught how important it is to “keep your word.” Similarly, it is black letter privacy law that if a company commits (for instance, in a privacy policy or in website statements) to certain actions or practices, such as maintaining certain security features or implementing consumers’ choices on opt-outs, the organization must abide by those practices. Many companies have faced the Federal Trade Commission’s (“FTC”) ire when the agency found the organizations’ practices failed to comport with their privacy promises. Recently, the FTC settled the first action against a retail tracking company, Nomi Technologies, Inc. (“Nomi”). The FTC alleged that Nomi mislead consumers with promises that it would provide an in-store mechanism for consumers to opt-out of tracking and that consumers would be informed when locations were utilizing Nomi’s tracking services. In fact, according to the FTC, Nomi did not provide an in-store opt-out and did not inform consumers of locations where the tracking services were used. This action signals that the FTC will continue to exert its jurisdiction over privacy practices it deems false or deceptive, including those occurring in emerging technologies like retail tracking.

The FTC’s complaint stated that Nomi’s technology (called its “Listen” service) allows retailers to track consumers’ movements through stores. The company places sensors in its clients’ stores, which collect the MAC addresses of consumers’ mobile devices as the devices search for WiFi networks. While Nomi “hashes” the MAC addresses prior to storage in order to hide the specific MAC addresses, the process results in identifiers unique to consumers’ mobile devices which can be tracked over time. Nomi provided its retail clients with aggregated information, such as how long consumers stayed in the store, the types of devices used by consumers, and how many customers had visited a different location in a chain of stores. Between January and September 2013, Nomi collected information on approximately 9 million mobile devices, according to the FTC’s complaint.

What Nomi did wrong, according to the FTC, was fail to honor its privacy policy which “pledged to…always allow consumers to opt out of Nomi’s service on its website as well as at any retailer using Nomi’s technology.” Nomi presented an opt-out on its website, but (per the complaint), no option was available at retailers using Nomi’s service. The FTC also asserted that consumers were not informed of the tracking (contrary to the privacy policy promises). Thus, the FTC alleged that Nomi’s privacy promises were false because no in-store opt-out mechanism was available, nor were consumers informed when the tracking occurred.

Nomi’s settlement does not require any monetary payment but prohibits Nomi from misrepresenting the options through which consumers can exercise control over the collection, use, disclosure or sharing of information collected from or about them or their devices. The settlement also bars Nomi from misrepresenting the extent to which consumers will be provided notice about how data from or about a particular consumer or device is collected, used, disclosed or shared. Nomi is required to maintain certain supporting records for five years. As is typical with FTC consent orders, this agreement remains in force for 20 years.

What can companies learn from Nomi’s settlement, even those not in the retail tracking business?

  • While this is the first FTC action against a retail tracking company, the FTC has repeatedly stated that it will enforce the FTC Act and other laws under its jurisdiction against emerging as well as traditional technologies.
  • Consumers could opt-out on Nomi’s website by providing a MAC address in an online form. The FTC did not seem to have a problem with this part of Nomi’s practices. If Nomi had not promised that consumers could also opt-out at the retail locations, and that they would be notified of tracking, there would not have been an FTC action. In other words, it was Nomi’s words (in its privacy policy) that got it in hot water with the FTC. All companies should review their privacy policies regularly to make sure the language comports with their practices.  If you don’t do it, don’t say it.
  • The FTC noted that Nomi had about 45 clients. Most of those clients did not post a disclosure or notify consumers regarding their use of the Listen service, and Nomi did not mandate such disclosures by its clients. The FTC did not address what, if any, obligation, these businesses may have to make such disclosures. Will it become common/mandated to see a sign in a retail location warning that retail tracking via mobile phones is occurring (similar to signs about video surveillance)? One industry group’s self-regulatory policy requires retail analytics firms to take “reasonable steps to require that companies using their technology display, in a conspicuous location, signage that informs consumers about the collection and use of MLA [mobile location analytics] Data at that location.” This issue will become more prevalent as more retailers and other businesses use tracking technology.
  • Interestingly, the FTC brought this action even though traditional “personal information” was not collected (such as name, address, social security number, etc.). Organizations should not assume that collecting IP addresses, MAC addresses, or other less personalized information presents no issues. The FTC takes privacy statements seriously, whatever the information collected (though certainly there is more sensitivity toward certain categories such as health, financial, and children’s information).

The bottom line is “do what you say” when it comes to privacy practices. All companies should evaluate their privacy policies at least every six months to ensure that they remain accurate and complete, have working links (if any), and reflect a company’s current practices.

Ifrah Law is a leading white-collar criminal defense firm that focuses on e-commerce, and data privacy.

May 20
2015

Yelp Fights for the Right to Complain Anonymously

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In e-commerce, user reviews can make or break a business.  Review sites such as Yelp are a double edged sword for merchants and service providers: on one hand satisfied customers can generate buzz about the company and bring in new customers, and on the other hand dissatisfied customers can use it as a very public platform to air their grievances and discourage new business.

Review sites such as Yelp maintain policies protecting users’ anonymity, a major source of frustration among business owners.  By remaining anonymous, users can make potentially defamatory statements and leave the businesses with little recourse to hold the individuals accountable. A recent ruling by the Virginia Supreme Court has demonstrated the long and tortured road that businesses must take to challenge the anonymity of these unnamed users.

In 2012 a small Virginia company, Hadeed Carpet Cleaning Inc., brought suit against unnamed Doe defendants for allegedly defamatory statements published about Hadeed on the Yelp review website. According to Hadeed, a number of negative reviews did not match up to records of the company’s existing customers, and therefore the company suspected that the false statements were published by individuals who had never used the company’s services.  The Circuit Court for the City of Alexandria, Virginia, issued a subpoena to Yelp requiring it to provide identifying information about the anonymous users.  Yelp refused to comply, and the Circuit Court held Yelp in contempt.

Yelp appealed, arguing that the court’s order violated the First Amendment by forcing the company to identify the anonymous users. In January 2014 the Court of Appeals upheld the Circuit Court’s order, applying a six-prong procedure Virginia’s “unmasking statute,” which provides that the court may issue a subpoena to unveil the identity of an individual speaking anonymously over the internet where (1) notice of the subpoena was served on the anonymous speaker through his internet service provider, (2) the plaintiff has a legitimate, good faith basis to contend that communications may be tortious or illegal, (3) other efforts to identify the speaker have been fruitless, (4) the identity of the communicator is important, (5) there is no pending motion challenging the viability of the lawsuit, and (6) the entity to whom the subpoena is addressed is likely to have responsive information.

The Court of Appeals noted that Hadeed had followed the proper procedure in requesting the subpoena. The court found that the company’s evidence that the reviews did not match customer records was sufficient to establish they were not published by actual customers of the company, and were therefore likely to be false.

Yelp appealed the Circuit Court decision to Virginia’s Supreme Court.  Last month, the Virginia Supreme Court issued an anticlimactic ruling dismissing the case on jurisdictional grounds, stating that the case should have been brought in California where Yelp is headquartered and where the responsive records are located.

If Hadeed chooses to resume the case in California, if will face a somewhat higher burden in obtaining the names of the users.  Notably, Virginia is the only state in the country to have enacted an unmasking statute.  In most states, the courts will no issue a subpoena until the plaintiff has established a prima facie case for defamation—significantly more than the “legitimate, good faith basis” used in Virginia.

Apr 13
2015

Even In The UK, Think Twice Before Using Celebrity Endorsements

Battleship Premiere - RihannaPhoto at vi.wikipedia.org

A recent legal case in the UK between singer Rhianna and fashion retailer Topshop has highlighted differences between publicity rights in the UK and some US jurisdictions. Rhianna sued Topshop for its sale of a t-shirt bearing a large photograph of her.  Rhianna had not approved or endorsed the sale of the t-shirt; rather, an independent photographer had taken the picture and licensed it for use on the shirts.

In the United States, many jurisdictions have laws governing the right of publicity; that is, the right to control the use of your image for commercial gain, or to be compensated for the commercial use of your image.  The UK, however, does not have corresponding laws on image rights.  Instead, Rhianna had to allege that Topshop engaged in “passing off” the shirts as being endorsed by the singer, thereby damaging her goodwill and business.  In support, Rhianna argued that the circumstances of the sale of the shirts were likely to mislead customers into thinking that she had endorsed the product because the photograph was similar to those used in official album promotions, the nature of the shirt itself, and the fact that Topshop is a major and reputable retailer.

The lower court considered Rhianna’s prior connections to the store in considering whether passing off occurred.  It noted that Topshop had previously run a competition in which the winner was awarded with a shopping trip to Topshop. Also, only weeks before the shirts went on sale, Topshop tweeted that Rhianna was shopping at one of its locations.  Against that background, the court noted that the particular photograph on the shirt could have led her fans to believe that it was associated with the marketing campaign for the album, since the particular hairstyle and scarf worn by Rhianna in the photograph were widely used in a music video and associated publicity.

Ultimately Rhianna’s passing off arguments were successful, and the court granted an injunction prohibiting Topshop from selling the shirts without informing customers that they had not been approved or authorized by Rhianna.  However, it is interesting to think what the result might have been in an instance where it was more obvious that Rhianna had not endorsed the product; for instance, if the t-shirts were sold, not through a trusted retailer which has been associated with the singer but instead by an independent seller hawking t-shirts on the street corner.  In such circumstances the case in favor of passing off may have been weaker and Rhianna might not have been able to control the use of her image.

In contrast, the outcome under such a scenario might be very different in a state like California, which has strong right of publicity laws.  California Civil Code §3344(a) forbids the use of another’s likeness “on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods or services, without such person’s prior consent…”   The law establishes liability $750 or actual damages, whichever is greater, as well as “any profits from the unauthorized use that are attributable to the use and are not taken into account in computing the actual damages.”  Punitive damages and attorney’s fees and costs are also available under the statute.

While Rhianna’s victory in UK court does not establish a right of publicity in the country, it does provide an interesting case study in the workarounds that celebrities must use in order to protect their image from being improperly used in jurisdictions which do not have a right of publicity.

Ifrah Law is a leading white-collar criminal defense firm that focuses on e-commerce, and data privacy, and internet advertising.

Apr 02
2015

Telemarketing Tips: What We Can Learn From Caribbean Cruise Lines’ Excursion With The FTC

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The FTC’s “Do Not Call” and “robocall” rules do not apply to political survey calls.  So, if Hillary Clinton sought to “voice blast” a survey about international issues, she could do so without violating the Telemarketing Sales Rule (“TSR”).  (Though under FCC rules she would have an issue calling wireless numbers).  However, companies may not telemarket under the guise of exempt political calls.  Caribbean Cruise Lines (CCL) and several other companies working with CCL recently learned this lesson the hard way. The FTC and a dozen state attorneys general sued CCL and others for offering cruises and vacation “add ons” following purported political calls.  CCL settled, agreeing to pay $500,000 of a $7.2 million dollar penalty, and to comply with multiple compliance mechanisms.

CCL and the other defendants implemented an extensive calling campaign involving 12 to 15 million calls per day for approximately ten months offering a political survey.  However, the survey calls invited consumers to “press one” to receive a “free” two-day cruise to the Bahamas (port taxes would apply).  A live telemarketer working on behalf of CCL then offered consumers pre-cruise hotels, excursions, and other value packages.

While political calls remain exempt under the TSR’s robocall and Do Not Call provisions, if a caller offers a good, product or service during an otherwise exempt call, an “upsell” has occurred and the call is now telemarketing.  FTC rules prohibit robocalls to telemarket except with prior express consent.  Thus, the FTC asserted that CCL violated the TSR’s robocall provision since the called parties had not consented to the recorded sales calls.  While the calls started as political survey calls, they were actually standard telemarketing, subject to all TSR telemarketing rules.  The FTC also alleged violations of the Do Not Call rules, the caller identification rules, and the “company-specific Do Not Call requirements,” among other violations.

In addition to the reminder about “upsells” or “mixed messages,” this action highlights several important TSR enforcement lessons:

bulletThe FTC and State Attorneys General work closely in telemarketing enforcement – in this action, ten state attorneys general joined the FTC’s action.

bulletMany of the State AGs involved tend to be those most active in telemarketing litigation– Florida, Indiana, Mississippi, North Carolina, Ohio, and Washington State.

bulletThe FTC does not require a company to actually make the prohibited calls. An enforcement action will lie where a company paid or directed others to make calls in violation of the TSR.

bulletThe TSR also bars third parties from providing “substantial assistance” to others who violate the rule. Here, the FTC’s complaint charged a group of five companies and their individual owner with assisting and facilitating the illegal cruise calls, by providing robocallers with telephone numbers to use in the caller ID field, to hide the robocallers’ identities.

bulletAs part of its settlements, the FTC may impose a variety of remedies, including requiring the seller (here, CCL) to monitor its lead generators.

bulletThe FTC may also bar the seller from purchasing leads from a lead generator who is determined by the seller to obtain leads through unlawful TSR calling.

bulletThe FTC will carefully review, and proceed against companies who violate other TSR provisions, including caller ID requirements, scrubbing of the federal Do Not Call database, and the company-specific Do Not Call list.

bulletA settlement often requires ongoing recordkeeping. Here, the FTC required CCL to create records for ten years (and retain each one for 5 years), including records of consumer complaints and documentation of all lead generators.

bulletThe FTC and state AGs may proceed against individuals as well as companies.

bulletMany states have their own “do not call” laws, caller ID requirements and TSR-similar rules which can be used to bolster claims and penalties.

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            While it should not come as a surprise that a “mixed message” call must comply with the TSR, the recent joint case against CCL and others serves as a potent reminder that the FTC and state attorneys general continue to monitor robocalling and other mass telemarketing campaigns. Further, the enforcers will use the full panoply of legal requirements and enforcement mechanisms to address telemarketing violations.  The seller, the telemarketer, the lead generator, the caller ID provider, and any other party providing substantial assistance may find themselves at the receiving end of a call from the FTC if they fail to follow each of the TSR’s obligations or engage in activities that the TSR prohibits.

Ifrah Law is a leading white-collar criminal defense firm that focuses on .

Mar 06
2015

Why the FTC Can Go After Companies For Insufficient Data Security Allegations

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FTC seems more confident than ever in its authority to go after companies with insufficient data security measures. As of January 2015, FTC had settled 53 data-security enforcement actions, and FTC Senior Attorney Lesley Fair expects that number to increase.

Not everyone is sanguine about FTC’s enforcement efforts. Companies targeted for administrative action complain that the Commission is acting beyond its delegated powers under the Federal Trade Commission Act (the “FTCA”). So far, courts have declined to intervene in any administrative action that is not yet resolved at the agency level.

One such case involves LabMD, Inc., an Atlanta-based cancer-screening laboratory. At least nine years ago, someone downloaded onto the billing department manager’s computer a peer-to-peer file-sharing application called Limewire. Hundreds of files on the computer were designated for sharing on the network, including an insurance aging report that contained personal information for more than 9,000 LabMD customers. In 2008, a third party notified LabMD that the aging report was available on Limewire. The application was promptly removed from the billing department manager’s computer, but the damage allegedly had been done. According to FTC, authorities discovered in October 2012 that data from the aging report and other LabMD files were being used to commit identify theft against LabMD’s customers.

Ten months later, FTC filed an administrative complaint against LabMD alleging that it had failed to employ reasonable and appropriate data security measures. FTC further alleged that LabMD could have corrected the problems at relatively low cost with readily available security measures. By contrast, LabMD’s customers had no way of knowing about the failures and could not reasonably avoid the potential harms, such as identity theft, medical identity theft, and disclosure of sensitive, private, medical information. On these facts, FTC alleged that LabMD had committed an unfair trade practice in violation of the FTCA.

LabMD tried to get the administrative action dismissed on several grounds, including that the FTCA does not give the Commission express authority to regulate data-security practices. The Commission denied LabMD’s motion, explaining that Congress gave FTC broad jurisdiction to regulate unfair and deceptive practices that meet a three-factor test: section 5(n) provides that, in enforcement actions or rulemaking proceedings, the Commission has authority to determine that an act or practice is “unfair” if (i) it causes or is likely to cause substantial injury to consumers which is (ii) not reasonably avoidable by consumers themselves and (iii) not outweighed by countervailing benefits to consumers or competition. Commissioners noted that the FTCA as passed in 1918 granted FTC the authority to regulate unfair methods of competition. When courts took a narrow view of that authority, Congress responded by amending the FTCA to clarify that the Commission has authority to regulate unfair acts or practices that injure the public, regardless of whether they injure one’s competitors. According to the Commission, the statutory delegation is intentionally broad, giving FTC discretionary authority to define unfair practices on a flexible, incremental basis. For these and other reasons, the administrative action against LabMD would proceed.

Having failed to get the case dismissed, LabMD sought relief from the federal courts to no avail. On January 20, 2015, the U.S. Court of Appeals for the Eleventh Circuit dismissed LabMD’s suit for lack of subject-matter jurisdiction. The court explained that it lacked the power to decide LabMD’s claims in the absence of final agency action. FTC had filed a complaint and issued an order denying LabMD’s motion to dismiss. But neither was a reviewable agency action because neither represented a “consummation of the agency’s decision-making process.” Moreover, “no direct and appreciable legal consequences” flowed from the actions and “no rights or obligations had been determined” by them.

LabMD can challenge FTC’s data-security jurisdiction only after the Commission’s proceedings against it are final. That may well be too late. As a result of FTC’s enforcement action, the company was forced to wind down its operations more than a year ago.

LabMD is one of very few companies to test FTC’s data-security jurisdiction. In 2007, a federal court in Wyoming sided with FTC in holding that the defendant’s unauthorized disclosure of customer phone records was an unfair trade practice in violation of the FTCA. The Tenth Circuit affirmed that decision on appeal.

More recently, a district court in New Jersey gave FTC a preliminary victory against Wyndham Worldwide Corporation. In that case, the court held that FTC’s unfairness jurisdiction extends to data-security practices that meet the three-factor test under Section 5(n). That decision is currently on appeal before the Third Circuit. During oral argument on March 3rd, the three-judge panel signaled little doubt that FTC has authority to regulate unreasonable cybersecurity practices. Instead, the panel was concerned with how the Commission exercises that authority—specifically, whether and how it has given notice as to what data security measures are considered to be “unfair.”

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

Mar 03
2015

Another Class Action Pops Up For Complaints About Pop-Ups

Confused businessman in front of computer

A class action lawsuit recently instituted in federal court in the Northern District of California, Hunter v. Lenovo et al., alleges that Lenovo Inc., a computer manufacturer, violated its customers’ rights by selling computers which came preinstalled with alleged spyware manufactured by Superfish Inc., another named defendant.  The purported class alleges that the Superfish software monitors user activity and displays pop-up ads, among other things, as part of an “image-based search” function which identifies images on the user’s screen and seeks out similar images on the web. The complaint states causes of action for violations of the Electronic Communications Privacy Act and the Stored Communications Act, as well as unjust enrichment.

The Stored Communications Act (“SCA”), 18 U.S.C. §§ 2701-2712 provides criminal penalties for anyone who “intentionally accesses without authorization a facility through which an electronic communication service is provided” or “intentionally exceeds an authorization to access that facility.”  The SCA has been cited by plaintiffs in other class actions in which users allege that a technology company has overstepped its bounds.  For instance, in Perkins v. LinkedIn Corp., No. 13-CV-04303-LHK, 2014 WL 2751053 (N.D. Cal. June 12, 2014), a putative class of LinkedIn users alleged that the social networking company violated the SCA by collecting contacts from users’ external email accounts.  The court granted LinkedIn’s motion to dismiss the SCA claims, noting that the users consented to the collection of email addresses in a prominent disclosure, and therefore LinkedIn was “authorized” to collect the information, an exception to the SCA pursuant to 18 U.S.C. §2701(c).

The complaint in Hunter v. Lenovo attempts to preempt a consent defense, alleging that “Plaintiff never agreed to any terms or conditions regarding the Superfish Surveillance Software.  Accordingly, Plaintiff never consented to Defendants’ monitoring of, access to, and/or interception of his internet communications.”  However, according to a January 23, 2015 forum post by a Lenovo administrator (since edited to link to Lenovo advisory), users had the opportunity to decline the Superfish software Terms of Use, thus disabling the software.  If this proves to be true, then it would be consistent with the court’s determination in LinkedIn that a user’s consent may serve as a defense against an SCA claim.  Unlike LinkedIn, however, the Hunter SCA claim may not be appropriate for resolution at the motion to dismiss stage because it raises an issue of disputed fact which may require discovery.

Although the suit is still pending, Lenovo has reversed course on the Superfish software.  Lenovo has disabled Superfish on computers which came pre-installed with the software, its websites offer instructions for users to uninstall the software altogether, and Lenovo computers no longer come preinstalled with the program.  While these remedial actions may be an appropriate response to user concerns, they do not constitute an admission of legal liability in the class action suit.   The defendants may still argue that users consented to the software, even as they remove it from the computers.

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

Mar 02
2015

The Federal Wiretap Act and the Law of Unintended Consequences

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The law of unintended consequences – a distant cousin of Murphy’s Law – states that the actions of human beings will always have effects that are unanticipated and unintended. The law could prove a perfect fit for recent efforts by class action counsel to rely upon the Federal Wiretap Act in lawsuits arising from adware installed on personal home computers.

Take, for example, the recently filed case of Bennett v. Lenovo (United States), Inc. In that case, the plaintiff seeks to represent a class of purchasers of Lenovo laptop computers complaining that “Superfish” software that was preloaded on the laptops directed them to preferred advertisements based on their internet browsing behavior. The most interesting claim included in the complaint is the assertion that Lenovo and Superfish violated the Federal Wiretap Act.

Wiretap? What wiretap?

The Federal Wiretap Act was originally passed as Title III of the Omnibus Crime Control and Safe Streets Act of 1968. These provisions were included, at least in part, as a result of concerns about investigative techniques used by the FBI and other law enforcement agencies that threatened the privacy rights of individuals. In passing the Wiretap Act, Congress was clearly focused on the need to protect communications between individuals by telephone, telegraph and the like. The Electronic Communications Privacy Act of 1986 (ECPA) broadened the application of the statute by expanding the kinds of communications to which the statute applied. But the focus was still on communications between individuals.

As is often the case, technology is testing the boundaries of this nearly 50-year-old law. The Bennett case is not the first case in which a plaintiff has argued that software on his or her computer that reads the user’s behavior violates the Wire Act.  In some cases, the software in question has been so-called “keylogging” software that captures every one of a user’s keystrokes. Cases considering such claims (or similar claims under state statutes modeled after the federal Act) have been split – some based on the specifics of when and how the software actually captured the information, and others based possibly on differences in the law in different parts of the country.

One of the more interesting cases, Klumb v. Gloan, 2-09-CV 115 (ED Tenn 2012), involved a husband who sued his estranged wife when he discovered that she had placed spyware on his computer.  At trial, the husband demonstrated that during his marriage, his wife installed eBlaster, a program capable of not only recording key strokes, but also intercepting emails and monitoring websites visited.  The husband alleged that once intercepted, the wife altered the emails and other legal documents to make it appear as if the husband was having an affair.  The motive?  Money, of course.  Adultery was a basis to void the pre-nuptial agreement that the parties had executed prior to their ill-fated marriage.  The wife – who was a law school graduate – argued that the installation was consensual.  Although consent is a recognized defense to a claim of violating the Federal Wiretap Act, for a variety of reasons, the court discredited the wife’s testimony regarding the purported consent and awarded damages and attorney’s fees to the husband plaintiff.

The Bennett plaintiffs may or may not succeed in showing the facts and arguing the law sufficient to prevail in their claim, and we know too little about the facts in that case to express a prediction of the result in that case. But we can state with confidence that the continued expansion of how the Wiretap Act is applied will, at some point, require that Congress step in and update the statute to make clear how it applies in the new internet-based world in which we now live.

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

Feb 20
2015

Employers Running Background Checks: Top 10 Tips to Avoid Joining the Fair Credit Reporting Act Litigation “Club”

Human resources and CRM

What do Whole Foods, Chuck E. Cheese, Michael’s Stores, Dollar General, Panera, Publix, and K-Mart have in common?  Each of these companies has faced lawsuits (including class actions) under the Fair Credit Reporting Act (“FCRA”).  Although Congress passed the FCRA way back in 1970 and litigation has focused on credit reporting agencies’ duties under the law, class action plaintiff firms have recently focused on the FCRA’s employer-related provisions.  Several large settlements (such as Publix’s $6.8 million class action settlement, Dollar General’s $4 million, and K-Mart’s $ 3 million) have spurred further litigation.  While some of the alleged FCRA violations may appear minor or technical in nature, these “technical violations” still result in costly lawsuits.  Employers should re-familiarize themselves with the FCRA to avoid becoming class action defendants.

The FCRA’s Employer-Related Provisions

Many employers understandably want to conduct background checks on prospective employees, or current employees who may be obtaining new responsibilities or accessing sensitive information.  In particular, companies in the retail and restaurant sectors, whose employees have access to cash receipts and credit card account numbers, want to guard against employees whose background checks may reveal issues of concern.  Further, organizations whose employees enter homes and businesses (such as service providers – e.g., carpet cleaners, plumbers, contractors) have additional concerns about potential liability.

The FCRA is usually thought of as a federal law that regulates consumer reporting agencies, like credit bureaus.  However, the FCRA also prescribes certain requirements for employers who use consumer reports.  The FCRA broadly defines the term “consumer reports” as information prepared by a consumer reporting agency “bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for—credit or insurance to be used primarily for personal, family, or household purposes; employment purposes” or other permitted purposes. This definition draws in more than a traditional credit report. It can include driving records, civil lawsuits, and reference checks, among other information.

Disclosure and Consent

Employers may not obtain a consumer report from a consumer reporting agency unless they first make a “clear and conspicuous” written disclosure to the prospective employee/employee.  The disclosure document must consist “solely” of the disclosure that a consumer report may be obtained.  The job applicant/employee must provide written permission for the employer to obtain a consumer report.  The FTC has indicated the disclosure form may include a signature line for the individual’s consent.  (In 2001, the FTC also issued an opinion letter stating it believes such consent can be obtained electronically, consistent with the federal E-Sign law).  The employer further certifies to the consumer reporting agency that is has a permissible purpose for the report and that it has complied with the FCRA and applicable equal opportunity laws.

These steps sound simple enough, however, litigation has ensued based upon employers’ alleged failures to comply.  For instance, in the Whole Foods case in federal court in California, the plaintiffs claim the online application process included a liability waiver in the disclosure form for the background check, allegedly violating the FCRA requirement that a disclosure form not include other information.  In a separate case in federal court in Florida involving retailer Nine West, the plaintiff alleges he did not receive a separate form, and that the background check authorization was on a web page with various other types of information.

Adverse Action Based on Report

If the employer intends to take “adverse action” against the prospective employee/employee (based even in part on the information in the report), the FCRA requires the employer to follow certain additional steps. The term “adverse action” includes “a denial of employment or any other decision for employment purposes that adversely affects any current or prospective employee.”

Before the employer takes the adverse action, it must provide a “pre-adverse action” notice to the affected person. This notice must include a copy of the consumer report and a statutory “Summary of Rights.” (This is an updated form, required since January 2013 by the new Consumer Financial Protection Board, which now has responsibility for FCRA rulemaking).  The purpose of this notice requirement is to permit the individual to discuss the report with the employer before the employer implements the adverse action.

Next, if the employer intends to take the adverse action, the FCRA requires the employer to provide an adverse action notice to the individual.  This notice must contain certain information, including:this is a test one

 bulletthe name, address, and telephone number of the consumer reporting agency that provided the report;

 bulleta statement that the consumer reporting agency did not make the adverse decision and is not able to explain why the decision was made;

bulleta statement setting forth the applicant’s or employee’s right to obtain a free disclosure of his or her report from the consumer reporting agency if the individual      requests the disclosure within 60 days; and

bulleta statement regarding the individual’s right to dispute directly with the consumer reporting agency the accuracy or completeness of any information contained in the       report.

In a case involving Domino’s Pizza employees, the company settled a class action that included allegations that it took adverse employment actions against certain individuals based on information contained in consumer reports without providing those individuals the required notice and a copy of such reports in advance.  K-Mart settled a class action suit based upon allegations that the statement of consumer rights provided to individuals after a background check contained outdated disclosures, among other alleged FCRA failures.

Liability and Enforcement

Plaintiffs can pursue a private right of action against employers for negligently or willfully violating the FCRA.  Claims regarding negligent violations allow actual damages and reasonable attorneys’ fees and costs.  Willful violations can result in actual damages or statutory damages ranging between $100 and $1,000, plus punitive damages and attorneys’ fees and costs.  The Federal Trade Commission (“FTC”) has also brought actions against employers for FCRA violations.

10 Steps to Avoid Becoming a FCRA Defendant When Using Employment Background Checks

1.       Review your current background check practices for prospective and current employees, including any online application materials.

2.      Review disclosure/consent forms for compliance. Ensure you are presenting applicants or current employees with a simple, one page disclosure form. The form should inform individuals that you intend to obtain a consumer report for employment purposes.

3.      You must obtain consent from the prospective employee/employee. You may include a line on the disclosure form for the individual to acknowledge and grant consent.  Do not include other material, such as liability waivers, confirmation of at-will employment, or seek other consents.

4.      If your application process is online, ensure the disclosure/consent is displayed separately, on one screen, without other content.

5.      If you intend to conduct background checks periodically during an individual’s employment, state that in the disclosure and consent form.

6.      Do not seek consent verbally. FCRA requires “written” consent (though FTC has stated it may be electronic).

7.      Maintain backup of the disclosure and consent forms for at least 5 years from the date they were provided. (Lawsuits must be brought by the earlier of two years after the date of the plaintiff’s discovery of the violation, or five years after the date on which the violation occurred).

8.      If you intend to take adverse action based on information in the consumer report, you should be providing the individual with a pre-adverse action notice, a copy of the consumer report, and the “Summary of Rights.” Ensure you are using the most updated “Summary of Rights.”

9.      You should wait a reasonable amount of time (at least 5 days) before issuing an adverse action notice. Your company’s adverse action notice must contain the information required under the FCRA (see bulleted information, above).

10.    Check state law regarding background checks for the states in which you operate/solicit employees. Some states have similar requirements to FCRA; others may further restrict the types of information you can request.

 

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The FTC/EEOC have issued a joint statement on background checks.  While many employers need to conduct background checks to avoid liability and risks to their businesses, employers also need to follow the FCRA’s mandates to avoid the deep end of litigation “pool.”

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Jan 28
2015

International Data Privacy Day: Our Top 10 Data Privacy Tips

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It’s International Data Privacy Day!  Every year on January 28, the United States, Canada and 27 countries of the European Union celebrate Data Privacy Day.  This day is designed to raise awareness of and generate discussion about data privacy rights and practices.  Indeed, each day new reports surface about serious data breaches, data practice concerns, and calls for legislation.  How can businesses manage data privacy expectations and risk amid this swirl of activity?

Here, we share some tips from our firm’s practice and some recent FTC guidance.  We don’t have a cake to celebrate International Data Privacy Day but we do have our “Top 10 Data Privacy Tips”:

1. Review Your Organization’s Privacy Policy. Remember that privacy policy you had counsel prepare a few years ago?  It’s a good time to review it and assess whether it still reflects company practices.  What kind of personal information does your company collect? How does it move through your business?  How is it shared?  Has your organization’s policy on sharing personal information changed?  Does the privacy policy reflect legal changes in the states where you operate?  Privacy policies are not meant to be stagnant documents.  You should review them at least twice a year to ensure they are accurate. Even something as simple as the privacy officer’s contact information may need an update.

2. Do What You Say.  When you post a privacy policy, you are committing to the practices in the policy.  If your policy says “we will never share your information with third party marketers” – then you shouldn’t be sharing with third party marketers.  Common sense?  Yes, but companies have faced enforcement actions and litigation for pledging to “never share” when they did share.  Other companies like Snapchat settled with the FTC over statements in their privacy policies concerning how their apps operate and secure information that the FTC claimed were not true. Privacy policies should carve out disclosures for sharing information where sharing is likely to take place, such as in response to legal process, like a court order.  We also recommend a carve out in the event of a sale or reorganization of the business or of its assets. Other carve-outs may be warranted.

3. Ensure Your U.S.-E.U. Safe Harbor Is Up-to-Date. Last year, the FTC took action against several companies, including the Atlanta Falcons and Level 3 Communications, for stating in their privacy policies that they were U.S.-E.U. Safe Harbor Certified by the U.S. Department of Commerce when, in fact, the companies had failed to keep their certification current by reaffirming their compliance annually. While your organization is not required to participate in Safe Harbor, don’t say you are Safe Harbor Certified if you haven’t filed with the U.S. Department of Commerce. And, remember that your company needs to reaffirm compliance annually, including payment of a fee.  You can check your company’s status here.

4. Understand Your Internal Risks. We’ve said this before – while malicious breaches are certainly out there, a significant percentage of breaches (around 30 percent, according to one recent study) occurs due to accidents or malicious acts by employees.  These acts include lack of firewalls, lack of encryption on devices (such as laptops and flash drives), and failing to change authentications when employees leave or are terminated.  Many data breaches are While you are at it, review who has access to confidential information and whether proper restrictions are in place.

5. Educate Your Workforce. While today is International Data Privacy Day, your organization should educate your workforce on privacy issues throughout the year. Depending on the size of the company and the type of information handled (for instance, highly sensitive health information versus standard personal contact details), education efforts may vary. You should review practices like the confidentiality of passwords, creating a secure password and changing it frequently, and avoiding downloading personal or company sensitive information in unsecured forms.  Just last week, a security firm reported that the most popular passwords for 2014 were “123456” and “password.”  At a minimum, these easily guessed passwords should not be allowed in your system.

6. Understand Specific Requirements of Your Industry/Customers/ Jurisdiction. Do you have information on Massachusetts residents?  Massachusetts requires that your company have a Written Information Security Program.  Does your company collect personal information from kids under 13?  The organization must comply with the federal Children’s Online Privacy Protection Act and the FTC’s rules.  The FTC has taken many actions against companies deemed to be collecting children’s information without properly seeking prior express parental consent.

7. Maintain a Data Breach Response Plan. If there were a potential data breach, who would get called?  Legal?  IT?  Human Resources?  Public relations?  Yes, likely all of these. The best defense is a good offense – plan ahead.  Representatives from in-house and outside counsel, IT/IS, human resources, and your communications department should be part of this plan. State data breach notification laws require prompt reporting. Some companies have faced lawsuits for alleged “slow” response times.  If there is potential breach, your company needs to gather resources, investigate, and if required, disclose the breach to governmental authorities, affected individuals, credit reporting agencies, etc.

8. Consider Contractual Obligations. Before your company commits to data security obligations in contracts, ensure that a knowledgeable party, such as in-house or outside counsel, reviews these commitments.  If there is a breach of a contracting party’s information, assess the contractual requirements in addition to those under data breach notification laws. The laws generally require notice to be given promptly when a company’s data is compromised while under the “care” of another company. On the flip side, consider the service providers your company uses and what type of access the providers have to sensitive data. You should require service providers to adhere to reasonable security standards, with more stringent requirements if they handle sensitive data.

9. Review Insurance Coverage. While smaller businesses may think “we’re not Target” and don’t need cyber insurance, that’s a false assumption. In fact, smaller businesses usually have less sophisticated protections and can be more vulnerable to hackers and employee negligence.  Data breaches – requiring investigations, hiring of outside experts such as forensics, paying for credit monitoring, and potential loss of goodwill – can be expensive. Carriers are offering policies that do not break the bank. Cyber insurance is definitely worth exploring.  If you believe you have coverage for a data incident, your company should promptly notify the carrier. Notice should be part of the data breach response plan.

10. Remember the Basics! Many organizations have faced the wrath of the FTC, state attorneys general or private litigants because the companies or its employees failed to follow basic data security procedures. The FTC has settled 53 data security law enforcement actions. Many involve the failure to take common sense steps with data, such as transmitting sensitive data without encryption, or leaving documents with personal information in a dumpster. Every company must have plans to secure physical and electronic information. The FTC looks at whether a company’s practices are “reasonable and appropriate in light of the sensitivity and amount of consumer information you have, the size and complexity of your business, and the availability and cost of tools to improve security and reduce vulnerabilities.” If the FTC calls, you want to have a solid explanation of what you did right, not be searching for answers, or offering excuses.  Additional information on the FTC’s guidance can be found here.

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 Remember, while it may be International Data Privacy Day, data privacy isn’t a one day event. Privacy practices must be reviewed and updated regularly to protect data as well as enable your company to act swiftly and responsively in the event of a data breach incident.

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

Dec 15
2014

Will New Facebook Rules Hurt or Help Small Businesses?

Social media communication

Health cleanses to lose unwanted weight in a matter of weeks!  Images of beautiful jewelry to be purchased at great prices that you can even resell! Personalized handbags made to order! If you have a Facebook account, it is more than likely you have seen many of these and similar posts by “friends” in your news feeds or through sharing or commenting by your friends on others’ posts.  Facebook has announced that it will filter out unpaid promotional materials in user news feeds starting in January 2015.

If you run a business that uses social media as an advertising platform, you will need to be aware of these changes. Alternatively, if you have ever wondered how to curb these marketing posts, which seem to increase daily, your wishes may have been heard.

Specifically, Facebook will utilize a new algorithm to filter out posts that advertise products, such as repurposing paid advertisements and promoting sweepstakes or special deals. At first glance, it would appear that this will make it more difficult for entrepreneurs and small businesses to attain new contacts and customers, promote their brand names, and pitch products.  However, while this initial fear is legitimate, it may be unwarranted in the long term, as much of the benefit that this free advertising once provided has already started to dissipate.

Unpaid as well as paid promotional posts in social media have been widely and increasingly utilized for well over a decade. The Wall Street Journal recently stated that Facebook was used as the top promotional tool by more than 80% of small businesses utilizing social media. Small businesses have lost much of the glory and benefit that unpaid advertising once provided, as news feeds have been flooded by a plethora of entrepreneurial pitches. The unpaid posts have become less effective at building a marketing channel, as users have become desensitized to the promotional pitches. Increasingly, users scroll quickly through the incessant free marketing to read more personal feeds.

Additionally, the reach of unpaid posts on Facebook has fallen in recent years. Research supports the notion that simply racking up “likes” or posting ads repeatedly does not produce the sales that were initially anticipated. In a Forrester Research Report released in November, it was suggested that on average, fewer than .1% of people interact with each post. Rather than simply acquiring numbers of user “likes”, companies should look at the value of each fan and how to more fully connect with and engage the loyal fan base. Many also believe that there is still some value to having a direct Facebook page where users can access and like the page, take advantage of special promotions, and invite friends to like and partake in the offers.

While unpaid marketing posts will be filtered, Facebook will still offer “promoted posts,” that allows businesses to pay a certain amount, starting at $5 and reaching to several thousand dollars, in order to have posts on their pages viewed by a wider pool of users. Facebook is not the only platform to seek payment for wider distribution.  For a fee, Google likewise offers businesses the opportunity to “boost their ranking” in search results. It is likely that if entities have to pay a small fee for advertising, they may take a longer look at the content of the business post or material being promoted to be sure it is interesting and grabs a user’s attention.

Although start-up companies with very little initial cash may take a hit as these rules begin to take effect, small business may not see a big difference in the long term. As the saying goes, nothing of value comes for free, and it seems that the value of unpaid advertising has already fallen dramatically. Social media paid advertising is still rather cost effective when compared to other methods of advertising. Although the quantity of posts by businesses may fall, one can also anticipate that small businesses will value the content in each post.  In other words, if people are paying to advertise, the quality of each post will likely improve.  Small businesses will also look to other social media platforms such as LinkedIn and Twitter or perhaps the next “hot” social media outlet that offers the benefit of unpaid marketing, at least until those platforms likewise become ineffective.  Small businesses may still want to use Facebook for advertising, but in a more creative, targeted way and by means of engaging with their fan base. One thing is for certain, the world of social media is ever changing and evolving, and still offers entrepreneurs and small businesses tremendous benefits, which were not present two decades ago.  Social media platforms will, however, continue to review and modify the types of advertisements and promotions permitted on their sites.

Ifrah Law is a leading white-collar criminal defense firm that focuses on internet advertising.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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