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FTC's <i>Wyndham</i> Ruling Raises Data Security and Privacy Issues for Franchisors

BY David F. Katz, Daniel Lumm
July 02, 2014

In a ruling delivered April 7, a federal judge in New Jersey handed the Federal Trade Commission (FTC) a resounding victory in the first round of an ongoing court battle regarding its authority as the primary regulator of issues related to consumer data security and privacy in the United States. The court denied Wyndham's motion to dismiss the FTC's complaint, which challenged the FTC's authority to bring enforcement actions related to data security issues, and the sufficiency of the allegations in the complaint. See, The Federal Trade Commission vs. Wyndham Worldwide Corporation, 2:13-cv-01887-ES-JAD.

While this case is far from over, for now this ruling provides judicial validation of the FTC's authority to pursue breaches or potential breaches of consumer privacy as deceptive and unfair trade practices subject to the jurisdiction of its regulation under Section 5 of the Federal Trade Commission Act.

Of more concern for franchise business models, the ruling suggests that franchisors are at risk of being found responsible for data security and privacy practices (and breaches) of its franchisees, in the common situations in which the franchisor requires franchisees to implement specified POS and/or computer systems that often connect to the franchisor's network and computer systems. However, the ruling also provides guidance in the area of best practices in privacy policy and franchise agreement drafting to help minimize this risk.

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