FTC Action Against Marketer of "Internet of Things"

The FTC is increasingly concerned with consumer privacy and security issues posed by the growing connectivity of consumer devices, such as cars, appliances, medical devices and, apparently, home security systems.

As explained in this Client Alert by Womble Carlyle attorneys Ted Claypoole and Orla O'Hannaidh, the FTC recently entered into a settlement agreement with a home-security camera maker whose cameras could easily be hijacked over the Internet, allowing voyeurs and plotters to spy inside the house of the consumers.  The FTC claimed that the manufacturer failed to implement reasonable security measures and made false promises about the security of its cameras and system, which was marketed under the trade name "SecurView."  Instead of being secure, live feeds of the daily lives of the consumers were accessible over the Internet.

This action is indicative of the FTC's increased concern with the so-called "Internet of Things," which the FTC describes as an "everyday product with interconnectivity to the Internet and other mobile devices."  A few months ago, the FTC sought public comment on privacy and security implications of the "Internet of Things" and announced a public workshop to be held November 19, 2013 in Washington, DC.  The FTC explained:

The ability of everyday devices to communicate with each other and with people is becoming more prevalent and often is referred to as “The Internet of Things.”  Consumers already are able to use their mobile phones to open their car doors, turn off their home lights, adjust their thermostats, and have their vital signs, such as blood pressure, EKG, and blood sugar levels, remotely monitored by their physicians. In the not too distant future, consumers approaching a grocery store might receive messages from their refrigerator reminding them that they are running out of milk.

Connected devices can communicate with consumers, transmit data back to companies, and compile data for third parties such as researchers, health care providers, or even other consumers, who can measure how their product usage compares with that of their neighbors.  The devices can provide important benefits to consumers:  they can handle tasks on a consumer’s behalf, improve efficiency, and enable consumers to control elements of their home or work environment from a distance. At the same time, the data collection and sharing that smart devices and greater connectivity enable pose privacy and security risks.

To avoid an FTC enforcement action, a company selling devices that connect to the Internet should carefully review its products and data security policies to ensure that present practices adequately protect consumer privacy.

Manufacturer Loses Landmark Chinese Antitrust Lawsuit

In the first vertical monopoly ruling in favor of a plaintiff in an antitrust case in China, a manufacturer has been ordered to pay 530,000 Yuan (roughly ($86,000) for setting an artificial price floor.  In the case, the manufacturer was accused of harming consumers by requiring its Chinese distributor to agree to a price floor.  The manufacturer was accused of exercising unlawful control over the medical device market by imposing a required price floor on its dealer.

In its annual renewal contract with its distributor, the manufacturer included a minimum resale requirement with which the distributor was required to comply.  The dispute giving rise to the lawsuit arose when the distributor offered to sell the manufacturer medical products to a hospital for less than the minimum price floor.  After becoming aware of the price proposal, the manufacturer warned its distributor about the price floor, started to refuse to fulfill distributor's orders, and ultimately chose not renew its distributor's contract for the resale of the manufacturer products.

The distributor then sued the manufacturer alleging violation of the antitrust laws and the establishment of an unlawful resale price maintenance scheme.  The Shanghai People's Court found in favor of the distributor and ordered the manufacturer to pay the distributor's damages.  To determine whether the manufacturer violated antitrust laws by unlawfully restricting its resale prices, the court examined the facts under four criteria including market presence, market share, motive, and the landscape of the market.  The manufacturer controlled a significant market share and had a significant market presence and, despite the manufacturer's assertion that the minimum resale price maintenance was necessary to ensure its product quality, the court found the other factors outweighed its concerns and harmed consumers.  Nevertheless, the 530,000 Yuan was only a fraction of the 14,000,000 Yuan requested by the plaintiff.

Although this case is a landmark antitrust decision in China, it is difficult to predict how China and its courts will enforce antitrust laws against companies that utilize resale price maintenance agreements to ensure the quality of its products.  If you have any questions about the legality of terms contained in vertical distributor agreements or supplier integration agreements, we are happy to discuss your questions and any potential legal issues that may arise.