On January 27, 2015 the Federal Trade Commission (the “FTC”) issued a report detailing best practices and recommendations that businesses engaged in the Internet of Things (“IoT”) can follow to protect consumer privacy and security. The IoT refers to the connection of everyday objects to the Internet and the transmission of data between those devices. According to Gartner estimates the IoT services spending will reach $69.5 billion in 2015. The potential benefits of IoT growth include enhanced healthcare through connected medical devices, convenience and cost savings through home automation and improved safety and convenience through connected cars.
In the report the FTC expresses concern about both security and privacy risks associated with the IoT. It identified three primary security risks: (i) the increased number of Internet connected devices increases the number of network vulnerabilities and creates greater possibility of unauthorized access and misuse of personal information; (ii) the proliferation of devices can facilitate attacks on other systems, such as through denial of service attacks; and (iii) the exploitation of vulnerabilities on devices and networks can create risks to personal and physical safety, particularly with regard to healthcare related connected devices, such as smart pacemakers and insulin pumps. According to the report, the inexperience of some IoT companies and the disposable, low-cost nature of many IoT devices exacerbate security issues because of the lower incentive and ability to provide support, patches and encryption for the devices.
Additionally, according to the FTC, the new types and massive amounts of data capture enabled by the IoT present consumers with increased risk to their privacy. Such data can be paired with other available data to infer and tie more sensitive information to individual consumers, such as financial, health and private home behavioral information. The vast amount of data collected by IoT devices may be used behind the scenes in ways that are inconsistent with the context of the interaction between the consumer and the device company. For example, a consumer’s health data from a wearable device could be sold to a data brokerage for advertising purposes, resulting in a use of the recorded consumer behavioral data that is inconsistent with the context of the consumer’s relationship with the manufacturer.
The report generally supports the application of the FTC’s long-standing Fair Information Practice Principles to the IoT ecosystem. These principles include data security, data minimization and consumer notice and choice.
First, the FTC endorses a “security by design” approach to the IoT. Such an approach emphasizes a design process that from the outset includes (i) conducting a privacy or security risk assessment, (ii) implementing smart defaults (e.g., password changes) and (iii) testing security measures before product launch (e.g., testing to ensure backdoors or easy access points have been closed).
Second, the FTC recommends that companies properly train employees on product security and promote security within the organization. One suggestion includes dedicating senior level attention to security so that the prioritization of security permeates throughout the company.
Third, companies must retain service providers capable of maintaining reasonable security practices.
Fourth, the FTC supports a “defense-in-depth” approach. This approach addresses significant risks and vulnerability by the adoption of security measures and encryption at several different levels or at multiple data transit points within the IoT ecosystem, especially withinin consumer home networks.
Fifth, the report promotes the implementation of reasonable access controls. This security measure requires strong authentication.
Finally, according to the report, adequate security for the IoT requires monitoring products throughout their lifecycles and releasing patches or updates as necessary.
Data minimization is a long-standing concept in privacy protection and refers to the practice that companies limit the data they collect to that which needs to be collected for the stated purpose and dispose of it once it has served such purpose. According to the FTC, in the IoT context the danger of large data stores attracting hackers and thieves and the increased risk of data being used against consumer expectations emphasizes the importance of data minimization.
Some commenters challenge the minimization concept because it might prevent the collection of data with potentially valuable future uses and thereby inhibit the growth of the IoT industry, but the FTC suggests that such data could be collected at that future time when the value of that data can actually be realized. The FTC argues for a flexible approach in which companies can (i) decide not to collect data at all, (ii) collect only the fields of data necessary to the product or service being offered, (iii) collect data that is less sensitive or (iv) de-identify the data they collect. When following a de-identified data strategy, the FTC tells companies to ensure that the data cannot be reasonably re-identified both using technical measures and contractual preclusions imposed on third parties with whom they share data.
Notice and Choice
The FTC still considers a consumer notice and choice approach to be the best practice even in the IoT context. In this conventional approach companies give consumers prior notice about privacy and data sharing practices, and consumers have the option to opt-out or give consent to the practice. However, the FTC provides some flexibility to this practice by recognizing and incorporating into its recommendations some elements of a use-based approach. A use-based approach takes into account the context to determine whether a certain data use is consistent with consumer expectations. If the use is consistent with expectations, the company may not need to offer consumers a choice, but if the use is an inconsistent or unexpected use of data, the company should give consumers a clear and conspicuous choice.
The FTC incorporates this flexibility in recognition of the ubiquity of data collection in the IoT context, which could make a constant notice and choice strategy cumbersome for companies and consumers alike, and the alternative user interfaces that accompany IoT devices. Elements of a use-based approach already exist in current regulatory schemes, such as the Fair Credit Reporting Act, which creates certain permissible and impermissible uses of data. However, the FTC has concerns about adopting a solely use-based model because (i) it would be unclear who would determine whether a certain use of data is consistent with consumer expectations (e.g., the companies or consumers); (ii) the ubiquity of data and related privacy and security risks would remain; and (iii) it would not take into account or regulate the collection of sensitive information when it is not shared.
These concerns motivate the FTC’s general endorsement of a continued notice and choice regime even within the IoT ecosystem. The FTC offers alternative methods to present consumers with their choices: offering tutorials, codes or icons linking to more detailed information or choice at points of sale, during device set up, in management dashboards, in dedicated privacy menus, in alerts and notifications or on other connected devices with easier to read user interfaces.
Finally, because the FTC recognizes that there may be pushback that early regulation could stunt the growth of this potentially huge, innovative market, the FTC recommends that Congress enact broad, technology-neutral privacy and data security legislation and counters that consumer trust in the network and technology is just as crucial for the widespread adoption of the IoT. As an example of such technology-neutral regulation, the FTC cites existing data breach notification rules as easily applicable to the IoT ecosystem.
Exactly how the FTC will enforce these new recommendations remains to be seen. The FTC does have authority to take action against some IoT-related practices but cannot mandate certain privacy protections without a specific showing of deception or unfairness. For example, in its action against TRENDnet, Inc., the FTC’s first IoT case, the FTC alleged that the company’s Internet-enabled home security and baby monitoring cameras were falsely described as secure. The FTC’s investigation of the company started after hundreds of consumers’ private camera feeds leaked onto the Internet. In January 2014, the FTC executed a consent order in which the company agreed, among other things, (i) not to misrepresent the security of its devices and consumers’ ability to control the security of the information transmitted by the company’s devices, (ii) to notify customers about the security issues with the cameras and availability of software to update them and (iii) to establish a comprehensive security program. The TRENDnet, Inc. example serves as both validation of the FTC’s concerns about the IoT and as a potential prototype for how the FTC may handle future enforcement actions within the IoT context.