Cybersecurity June 2014 No. 3
© 2014, Blank Rome LLP. Notice: The purpose of this update is to
identify select developments that may be of interest to readers.
The information contained herein is abridged and summarized from
various sources, the accuracy and completeness of which cannot be
assured. This update should not be construed as legal advice or
opinion, and is not a substitute for the advice of counsel. 1201
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Wyndham Secures Interlocutory Appeal Challenging the FTC’s
Authority to Regulate Cybersecurity Practices
BY STEVEN L. CAPONI AND ELIZABETH A. SLOAN
As part of our ongoing effort to advise clients on significant
developments in cybersecurity that are likely to impact their
busi-nesses, we have been actively reporting on the case of in FTC
v. Wyndham Worldwide Corporation, et al., pending before U.S.
District Judge Esther Salas in New Jersey. In April of this year we
issued a client alert discussing the much anticipated April 7,
2014, decision by Judge Salas, which rejected a direct challenge to
the Federal Trade Commission’s (“FTC”) authority to police
corporate cybersecurity practices.
In a surprising development, on June 23, 2014, Judge Salas
issued a Memorandum Opinion and Order granting Wyndham’s motion
seeking immediate appellate review of the April 7 decision—without
holding oral argument. Judge Salas’ reasons for supporting
Wyndham’s request to file an appeal are instructive and suggest the
FTC’s authority to act as the nation’s chief cybersecurity
enforcement agency is far from resolved. Following a careful
analysis, the Court acknowledged that if its interpre-tation the
FTC’s authority was incorrect, it would represent reversible error
on appeal, requiring a grant of Wyndham’s motion to dismiss.
...”
The FTC had sued Wyndham in New Jersey based, in part, on the
belief the FTC possesses the authority to bring equitable actions
challenging cybersecurity practices under Section 5 of the FTC Act,
which prohibits “unfair and deceptive acts or practices.” Moving to
dismiss the action, Wyndham argued Congress, not the FTC, is the
proper body to regulate cybersecurity and the FTC had failed to
publish rules or regulations providing companies with fair notice
of what protections are expected or acceptable.
In what was seen as a complete victory for the FTC, Judge Salas
rejected Wyndham’s narrow interpretation of the FTC’s Section 5
powers. The Court concluded that Congress had vested the FTC with
broad discretionary authority under Section 5 to “define unfair
practices on a flexible, incremental basis.” With regard to issue
of fair notice, the Court concluded the FTC was not required to
formally publish regulations on cybersecurity before bringing an
enforcement action. Judge Salas noted that “courts have
consistently held that where an agency, as in this case, is given
an option to proceed by rulemaking or by individual adju-dication
the choice is one that lies in the informed discretion of the
administrative agency.”
http://www.blankrome.com/index.cfm?contentID=37&itemID=3303http://cybersecuritylawwatch.files.wordpress.com/2014/04/case-213cv-01887-es-jad.pdfhttp://cybersecuritylawwatch.files.wordpress.com/2014/04/case-213cv-01887-es-jad.pdfhttp://www.blankrome.com/siteFiles/FTCvWyndham.pdf
Cybersecurity
To many, what was striking about Judge Salas’ April 7 decision
was the manner in which Wyndham’s arguments were quickly dispatched
in a straightforward and authoritative fashion. There appeared to
be no equivocation or hesitation in the ruling. This led many
commentators to suggest the legality of the FTC’s Section 5 powers
was no longer seriously in doubt. So it came as a surprise when
Judge Salas issued the June 23 Opinion granting the request to seek
an interlocutory appeal and acknowl-edging the prior ruling may not
necessarily be correct.
To place the most recent Opinion in context, it is important to
note, as did Judge Salas, that “interlocutory certification should
be used sparingly and that the District Court should serve as a
diligent gatekeeper to prevent premature and piecemeal appeals.”
Historically district and appellate courts have routinely relied
upon this logic to quickly deny the vast majority of requests for
interlocutory appeal. Before a party can seek an interlocutory
appeal, it must first demonstrate under 28 U.S.C. § 1292(b): (i)
there is a controlling issues of law; (ii) there is substantial
ground for difference of opinion; and (iii) an immediate appeal may
materially advance the ultimate determination of the litigation.
Even if, however, all three criteria under Section 1292(b) are met,
Judge Salas noted “the district court may still deny certification,
as the decision is entirely within the district court’s
discretion.”
In this instance, Judge Salas concluded all three prongs of
Section 1292(b) had been satisfied. With regard to the first prong,
the Court noted the April 7 decision involved two controlling
issues of law: the FTC’s powers under Section 5 to regulate
cybersecurity practices and whether the FTC must “formally
promulgate regulations before bringing its unfairness claim under
Section 5 of the FTC Act.” The Court further concluded an immediate
appeal may advance the ultimate termination of the litigation
because it would potentially reduce the scope of a trial, resolve
complex issues before trial, and materially narrow the scope of
discovery.
For those who have been “handicapping” the likelihood the FTC’s
interpretation of its Section 5 powers will prevail, Judge Salas
concluded Wyndham’s “statutory authority and fair-notice challenges
confront this Court with novel, complex statutory interpretation
issues that give rise to a substantial ground for difference of
opinion.” Citing Reese v. BP Exploration (Alaska) Inc., 643 F.3d
681, 688 (9th Cir. 2011), the Court held this standard was met
because the April 7 decision involved “novel legal issues…on which
fair-minded jurists might reach contradictory conclusions.”
Although resolute in her prior ruling, by recognizing other
“fair minded jurists” may reach a different conclusion, Judge Salas
has sent a clear, cautionary message that the FTC’s authority to
regulate cybersecurity practices is not a foregone conclusion. At
this juncture, all eyes will be on the Third Circuit Court of
Appeals to see if they grant Wyndham’s request for an interlocutory
appeal and, if so, how they ultimately rule on the issues
identified by Judge Salas. Even after the Third Circuit acts, the
scope of the FTC’s authority will not have been definitely decided.
For as noted in the June 23 Opinion, “fair minded jurists” sitting
in districts outside the Third Circuit and other circuit courts of
appeals may reach a different conclusion.
Blank Rome • 2
For additional information, please contact:
Steven L. Caponi
302.425.6408
[email protected]
Elizabeth A. Sloan
302.425.6472
[email protected]