FTC Settles with Six Companies with Lapsed Safe Harbor Certifications

By Mehmet Munur

On October 6, 2009, Federal Trade Commission filed six complaints against companies falsely claiming that they were self-certified to the Department of Commerce EU Safe Harbor when their certification had lapsed. This FTC action should serve as a reminder to Safe Harborites either to keep up their annual recertification or to avoid misrepresenting that they are self-certified to the Safe Harbor.

The EU Safe Harbor is one of the methods allowing US corporations to export data from the EU while complying with the Article 25 of the EU data Protection Directive, which requires that data only be transferred to countries with adequate data protections—with exceptions. The Department of Commerce, European Commission, and the Article 29 Working Party negotiated the Safe Harbor. US companies self-certify for the Safe Harbor and the DoC maintains a list of these companies on its export.gov website. However, the Federal Trade Commission and the Department of Transportation have the authority to enforce the Safe Harbor. While the Safe Harbor plays a crucial role for multinational corporations in transferring personal data from the EU without violating the EU Data Protection Directive’s adequacy requirements, now more than ever, failure to abide by the Safe Harbor requirements can result in enforcement actions by the FTC.

Six companies, World Innovators, Inc.; ExpatEdge Partners LLC; Onyx Graphics, Inc.; Directors Desk LLC; Collectify LLC; and Progressive GaitWays LLC, each represented that they were self-certified to the Safe Harbor when in fact their certification had not been renewed for several years. At least three of the companies had failed to either recertify or remove their representations related to their certification from their websites for two to three years. For example, ExpatEdge had certified for the Safe Harbor in 2002 but had failed to recertify since 2006. Onyx Graphics had certified in 2006 but failed to recertify since 2007. Progressive GaitWays had certified in 2004 but failed to recertify since 2006. Since the FTC enforcement, the remaining three companies have recertified for the Safe Harbor.

The six companies each entered into consent agreements with the FTC related to their infringing activities. The consent agreements are similar to the previous FTC settlement on the Safe Harbor. The consent agreements prohibit any of the companies from “misrepresent[ing] in any manner, expressly or by implication, the extent to which respondent is a member of, adheres to, complies with, is certified by, is endorsed by, or otherwise participates in any privacy, security, or any other compliance program sponsored by the government or any other third party.” Furthermore, the companies must make all documents related to compliance with the consent agreement available for inspection for the next 5 years.

In our previous blog post, we had stated that the FTC’s enforcement was tacked onto other issues related shipment of goods. This time the FTC has squarely addressed Safe Harbor violations using its deceptive trade practices powers. According to the FTC policy statement on deception, a material representation, omission, or practice that is likely to mislead the consumer is needed for any enforcement activity. Any “act or practice is likely to affect the consumer's conduct or decision with regard to a product or service” is considered material. Additionally, any express claims are presumed material. Furthermore, the Safe Harbor Principles and FAQ 11 of the Safe Harbor clearly state FTC’s jurisdiction to bring actions against Safe Harborites for deceptive trade practices. Therefore, the companies’ express claims that they were self-certified with the Safe Harbor when their certifications had expired are clearly material misrepresentations that would mislead a reasonable consumer under the circumstances.

The recent enforcement actions in this area are certainly signs of FTC’s willingness to bring enforcement actions in this area in the future. The recent changes to the list showing organizations certified to the Safe Harbor is possibly another indication of things to come. International Trade Administration website used to host the Safe Harbor list. Recently, it has moved to the Department of Commerce’s export.gov/safeharbor/ website, which is where all other Safe Harbor related documents used to reside. The list now more readily identifies non-compliant companies.

The FTC is likely to bring more enforcement actions against companies in the Safe Harbor list that represent that they are certified but have not in fact kept up their certifications with the Department of Commerce. The FTC is also likely to expand its enforcement activities into more substantive issues related to the privacy practices of Safe Harborites in the near future. Therefore, Safe Harborites intending to leave the Safe Harbor should either promptly renew their certifications or remove any public representation that they are certified with the Safe Harbor. This should help alleviate any FTC deceptive trade practices claims. However, note that obligations undertaken by a Safe Harborite do not disappear with the organization leaving the Safe Harbor. Therefore, removing such representations only resolves part of the issues involved in joining then leaving the Safe Harbor.

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FTC Obtains TRO Against E-Commerce Merchant Falsely Claiming Safe Harbor Certification

By Mehmet Munur

On July 31, the Federal Trade Commission obtained a temporary restraining order against a California website for deceptively claiming to be a member of the EU Safe Harbor administered by the Department of Commerce. This is the first FTC enforcement involving the FTC’s authority to prosecute violations involving EU Safe Harbor and FTC’s authority to prosecute an American company for deception of foreign consumers.

According to the FTC complaint, the defendants posed as UK websites, did not deliver on minimal consumer protections, and lied about being in the Safe Harbor. Balls of Kryptonite, LLC, is based out of Pasadena, California. However, it operates under www.bestpricedbrands.co.uk and www.bitesizedeals.co.uk, states prices in pound sterling, and referred to UK competitors and Royal Mail. The website did not specifically state its location, though such a disclosure is required under the Distance Selling Directive. Therefore, the FTC inferred that the websites advertised and sold consumer electronics products to consumers in the UK “under the pretext of being located within the UK.”

The websites shipped products from the US to the UK. Customers also had to pay substantial customs duties and import taxes. Some of these products were incompatible with the UK power grid. The websites also stated that the products would be covered under warranty. The products were not designed for distribution in the UK and, therefore, were not covered by warranty. Further, consumers were not allowed to cancel their orders, charged 50% restocking fees, and items were not shipped for weeks.

Finally, the defendants advertised that they self-certified with the Department of Commerce for the EU Safe Harbor when they were not. However, this false statement defies all logic. It does not help the defendants establish that they are a website based in the UK. A corporation must have a US establishment that receives personal information from the EU/EEA before it can certify to the Safe Harbor. Maybe this was the company’s way of stating that it was transferring data to the US. Maybe, the website owner believed that the Safe Harbor deception would make their website more attractive to UK customers. Nonetheless, Balls of Kryptonite is likely subject to this enforcement not due to inadequate legal advice, but lack of legal advice.

Nevertheless, the temporary restraining order resulting from the enforcement action makes an interesting example due to its scope. The TRO enjoins the defendants from misrepresenting “[t]he extent to which Defendants are members of, adhere to, comply with, are certified by, are endorsed by, or otherwise participate in any privacy, security, or any other compliance program sponsored by any government or third party.” Thus, the FTC enjoined the defendants from misrepresenting that they are members of any third-party privacy program. In effect, the FTC is recognizing that the health of the Safe Harbor Program is intricately linked to the third-party programs. The Safe Harbor Enforcement Principle requires an independent dispute resolution mechanism that TRUSTe’s EU Safe Harbor Program and BBB EU Safe Harbor offer. However, one could argue that third-party privacy seals programs should enforce their own marks and that the FTC should focus on the Safe Harbor program exclusively.

The enforcement action sets a much-needed precedent for false claims related to the Safe Harbor program. Nevertheless, the majority of the complaint was based on false statements concerning the shipment of goods. The Safe Harbor issue appears to be tacked onto the other issues. The Safe Harbor program has been in existence for nearly a decade and studies by the European Commission in 2004 and others in 2008 have argued that enforcement has been lax. One would hope that, in the future, the FTC would bring section five claims exclusively in the data protection realm in addition to mixed consumer protection claims.

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