Antitrust Law Daily Wrap Up, PRIVACY NEWS: FTC denies LabMD’s request to dismiss data breach suit, (Sep 16, 2015)

By Linda O’Brien, J.D., LL.M.

The FTC has denied LabMD, Inc.’s attempt to dismiss as unconstitutional the administrative proceedings against the medical testing laboratory for failing to reasonably protect the security of consumers’ personal data, including medical information, in violation of the FTC Act. In denying LabMD’s motion to dismiss as without merit, the Commission determined that the proceeding did not contravene the Constitution (In the Matter of LabMD, Inc., File No. 102 3099, Dkt. 9357).

The FTC issued an administrative complaint against LabMD in August 2013, alleging that the now-defunct medical testing laboratory engaged in unfair acts or practices in violation of Section 5 of the FTC Act. Specifically, the Commission claimed that LabMD failed to prevent the unauthorized disclosure of consumer information from its computer systems and that, as a result of data security failures, unauthorized third parties in two security breach incidents obtained consumer information from the company’s computer systems via peer-to-peer file-sharing application Limewire installed on a billing computer. The Sacramento Police Department also purportedly discovered identity thieves in possession of checks payable to LabMD and LabMD documents containing information of at least 500 consumers.

LabMD moved for leave to add a new affirmative defense and to dismiss the proceeding, claiming that the administrative proceeding was unconstitutional because the appointment of an administrative law judge violates the Appointments Clause of the U.S. Constitution.

Inferior officer. The Appointments Clause provides that Congress may vest the appointment of “inferior officers” in the President alone, the courts of law, or in the heads of departments, the FTC explained. LabMD’s contention that administrative law judges (ALJs) employed by the Commission were “inferior officers” for purposes of the Appointments Clause because they are not appointed by the President, court, or department head was rejected. An inferior officer is one who exercises significant authority under the laws of the United States, and the FTC has the discretion to hear a particular administrative matter itself or assign it to a Commission-employed ALJ or to another Commission member. Even if the oversight of an evidentiary hearing is delegated to an ALJ, the Commission retains full authority over any adjudication conducted pursuant to Section 5 of the FTC Act.

When overseeing an administrative hearing, the assigned ALJ issues an initial opinion, which is reviewed by the Commission. Therefore, Commission ALJs are employees with limited authority and not “inferior officers” subject to the Appointments Clause, the FTC noted.

Dual for cause. The Commission also determined that LabMD waived any argument relating to “dual for cause” removal. Article II of the Constitution prohibits the “dual for cause” removal rules for independent federal agencies, which provide that Commissioners may only be removed for cause and may only remove ALJs for cause. According to the FTC, LabMD did not properly raise the argument in its motion or affirmative defense. Furthermore, LabMD’s argument was not based on the Appointments Clause, which was the sole stated ground for LabMD’s new affirmative defense.

Companies: LabMD, Inc.; Tiversa, Inc.

News: Privacy ConsumerProtection FederalTradeCommissionNews