Privacy Advisor

The FTC and Online Privacy: Where are We Now?

August 1, 2003

David Rabinowitz and Marianne Slivkova

In his witty book of short poems, Grooks, Piet Hein gave wise advice about self-imposed rules. He said, in his poem, "On Problems":

Our choicest plans have fallen through,

our airiest castles tumbled over,

because of lines we neatly drew

and later neatly stumbled over.

Hein's cautionary words are apt advice for the Web site owner setting its online privacy policy.

FTC Online Privacy Policy

The Federal Trade Commission became active in protecting the privacy of Internet users in the late 1990s. Rather than promulgate a policy setting rules for the collection, use, and disclosure of users' information by Web sites, or recommend legislation to Congress, and except for the Children's Online Privacy Protection Act of 1998, the FTC adopted a policy of enforcing the privacy policies announced by the Web sites themselves.

The FTC's current policy is summed up as follows:

A key part of the commission's privacy program is making sure companies keep the promises they make to consumers about privacy and, in particular, the precautions they take to secure consumers' personal information. … Using its authority under Section 5 of the FTC Act, which prohibits unfair or deceptive practices, the Commission has brought a number of cases to enforce the promises in privacy statements, including promises about the security of consumers' personal information.

(This excerpt and a full statement of the FTC's approach to online privacy can be found at http://www.ftc.gov/privacy/privacyinitiatives/promises.html.)

Thus, it is the Web site owner that draws the lines that it must mind. This article reviews some of the recent cases filed and resolved by the FTC to show what this policy means in practice five years after its adoption and how the FTC has enforced these privacy "contracts" with the Internet-using public.

FTC Complaints and Resulting Consent Orders

In re GUESS?, Inc. (August 5, 2003)

GUESS? makes clothing and accessories. The FTC alleged that GUESS? misrepresented that the personal information it obtained from consumers through www.guess.com was stored in an unreadable, encrypted format at all times, while in fact a "commonly known attack" could and was used to get consumers' credit card numbers, among other information, and that GUESS? misrepresented having appropriate measures to protect users' personal information against loss, misuse, or alteration. The complaint was resolved by a consent order in which GUESS? agreed, inter alia:

  • not to misrepresent the security of personal information collected from or about users;
  • to maintain a written and comprehensive information security program; and,
  • to obtain periodic third-party certification that GUESS?'s security program conforms to the consent order and protects consumers' personal information.

In Re Educational Research Center of America, Inc. and Student Marketing Group and Marian Sanjana and Jan Stumacher (May 9, 2003)

A group distributing surveys to high school and junior high school students stated in its materials that the information gathered would be used by financial aid offices, scholarship foundations, and colleges in targeting education-related materials to students. The FTC alleged that in reality, the information was shared with and sold to commercial entities, including banks, insurance companies, consumer goods and services providers, and list brokers for use in marketing. The case was resolved by a consent order in which the defendants agreed, inter alia:

  • not to use or disclose the information for any non-educational—related purposes unless clearly and conspicuously disclosed;
  • to describe any marketing purposes that the information would be put to;
  • not to use or disclose for any non-educational—marketing purposes any information collected though surveys distributed prior to July 30, 2002, from students 13 years old and older;
  • to delete all personally identifiable information already collected from students under 13; and,
  • the individual defendants agreed for five years to make available to the FTC documents documenting compliance with the order and to notify FTC of their affiliations with any new businesses collecting personal information for marketing.

 (Similar case and consent order, In Re The National Research Center for College and University Admissions, Inc. and American Student List LLC, and Don Munce [January 29, 2003])

In Re Microsoft (December 24, 2002)

FTC sued Microsoft over its microsoft.net "Passport." The FTC alleged that Microsoft told users that the Passport was designed to prevent unauthorized access to personal information and was "protected by powerful online security technology and a strict privacy policy." The FTC alleged that Microsoft, however, did not do enough to maintain security and misrepresented that its Passport system provided greater security for online purchases than if the purchases were made without using the Passport. With respect to privacy rather than security issues, the FTC alleged (1) that Microsoft's privacy policy represented that Passport did not collect personally identifiable information, but that, in fact, Passport did collect a record of the sites where a passport user signed in and (2) that Microsoft misrepresented that parents could control information that their children could provide as part of a "kid's passport" feature, while actually permitting the child to change the parent's settings.

The case was resolved by a consent order in which Microsoft agreed, inter alia:

  • not to misrepresent its information practices; and,
  • to maintain a comprehensive security program, with periodic third-party confirmation that the system works.

FTC v. Eli Lilly (May 10, 2002)

The FTC alleged that Ely Lilly marketed an e-mail reminder service via its Prozac.com Web site supplying consumers with personal e-mail messages about their medicine or other matters. Its posted privacy policy stated that Ely Lilly would use the information to respond to patient requests, to improve products and services, and only in compliance with applicable laws. Ely Lilly also said that the Web site had information security measures.

In the incident that provoked the FTC complaint, Ely Lilly sent an e-mail message to subscribers terminating the Medi-messenger service, which violated Ely Lilly's privacy policy by disclosing the e-mail addresses of all subscribers. Finding that Ely Lilly failed to properly train employees, test the program, and implement appropriate safeguards, the FTC had Eli Lilly sign a consent order agreeing, inter alia:

  • not to misrepresent the privacy of information collected; and,
  • to establish and maintain an effective information security program.

This case is distinctive in that it shows that the FTC takes an interest not only in systemic privacy policy violations but also in individual incidents where a company, perhaps inadvertently, violates its own privacy policy.

Additional Notes on the Cases

Apart from the overall observation that the FTC is indeed enforcing its policy of requiring Web sites to obey their own privacy policies, the following specific points emerge from these cases:

  • The FTC complaints in some of the cases above show that statements in privacy policies that specify certain uses of user information or kinds of information collected, are interpreted by the FTC as representing, by implication, that only the listed uses will be made and only the listed information will be collected. (See the Educational Research Centers of America case, regarding uses, and the Microsoft case, regarding information collected.)
  • Apart from privacy proper, if a Web site represents that it has a certain level of security (meaning physical, procedural, or technical safeguards in place that actually effectuate its privacy policies), then it must indeed have it. (See the GUESS? and Microsoft cases.) This includes training its employees adequately to make sure that the security is not compromised. (See the Eli Lilly case.)

David Rabinowitz is a partner at Moses & Singer LLP and can be reached at drabinowitz@
mosessinger.com or (212) 554-7800. Marianne Slivkova is an associate at Moses & Singer LLP and can be reached at (212) 554-7800.