LabMD, FTC Data Security Fight Delayed Again

19 Mar LabMD, FTC Data Security Fight Delayed Again


Screen shot 2014-08-22 at 5.55.03 AMLaw360, New York (March 16, 2015, 8:34 PM ET) —



An administrative law judge has postponed until May 5 the resumption of proceedings in the Federal Trade Commission‘s closely watched data security fight with LabMD Inc., marking the latest delay in a case that has been on hold for almost a year.

In an order dated Thursday, Chief Administrative Law Judge D. Michael Chappell revealed that the evidentiary hearing in the case, which was scheduled to resume on March 19, would instead be rescheduled to May 5.

The order offered no reason for the extension, saying only that the decision was “based upon good cause” and had been made following a conference call with the parties during which there had been no objections. The case has been on hold since May 30, when witness Rick Wallace revealed a congressional investigation into a key player in the FTC’s case.

“The judge told us the hearing was postponed, so we’ll show up on May 5 and we’ll see what Mr. Wallace has to say then,” Reed Rubinstein, a Dinsmore & Shohl LLP partner and the senior vice president of litigation at Cause of Action, which is representing LabMD in the administrative proceeding, told Law360 on Monday.

A spokeswoman for the FTC said that the commission did not have a comment on the extension.

Thursday’s order marks the latest twist in the long-running and hotly contested battle between the regulator and medical testing laboratory.

After a lengthy probe into the laboratory’s data security practices, and shortly after the company’s CEO released an online trailer to his book highlighting corruption at the FTC, the regulator in August 2013 filed an administrative complaint alleging that LabMD violated Section 5 of the FTC Act by failing to safeguard medical and financial information on nearly 10,000 customers.

LabMD shot back that the unfairness prong of Section 5 didn’t give the FTC authority to regulate how a business protects consumer information. And even if it did, LabMD argued, the Health Insurance Portability and Accountability Act would trump it because the information at stake is sensitive medical information.

After the FTC commissioners affirmed the agency’s authority to bring the suit in a January 2014 ruling rejecting the laboratory’s bid to dismiss the action, the focus of the case shifted to whether the data security standards that LabMD had in place to protect consumers’ sensitive medical and personal information could be considered reasonable.

However, shortly after the trial to resolve these issues began, Judge Chappell brought the proceedings to a halt, due to testimony by Wallace that the House Intelligence Committee on Oversight and Government Reform was conducting an investigation into data security firm Tiversa Inc., which had provided the FTC with a the file containing sensitive information that had purportedly been found outside the medical testing laboratory’s internal network.

The FTC’s data security suit rests in large part on Tiversa’s claims that its routine scanning activities found that the LabMD patient file had leaked outside the company, an assertion that Wallace — a former Tiversa employee — is expected to refute by testifying that the file had only been found on the LabMD server.

But while the House Oversight Committee concluded its probe by releasing a Dec. 1 report that Tiversa failed to provide complete information about work it performed, the committee did not address the question of whether Wallace could be granted immunity for his testimony in the administrative proceedings, which Judge Chappell had elected to keep on hold until the immunity issue had been resolved.

The quandary was finally put to rest in January, when after receiving permission from theU.S. Department of Justice, Judge Chappell granted LabMD’s request to give immunity to Wallace, and ordered him to testify at the resumption of the evidentiary hearing, which the judge scheduled for March 3.

As the proceedings were about to get underway, Judge Chappell issued an order granting Wallace’s request to adjourn the trial and his appearance for deposition until March 19, a plan that remained in place until the judge issued his latest extension order Thursday.

LabMD is represented by William A. Sherman II, Reed Rubinstein and Sunni Harris of Dinsmore & Shohl LLP and Hallee Morgan, Kent Huntington, Daniel Epstein, Patrick Massari and Prashant K. Khetan of Cause of Action.

The FTC is represented by Alain Sheer, Laura Riposo VanDruff, Megan Cox, Ryan Mehm, John Krebs and Jarad Brown.

The case is In the Matter of LabMD Inc., docket number 9357, before the Federal Trade Commission Office of the Administrative Law Judges.

–Editing by John Quinn.


Michael Daugherty

Michael Daugherty is President & CEO of LabMD, an Atlanta-based clinical and anatomic medical laboratory with a national client base. Mike founded LabMD in 1996 after 14 years in surgical device sales with U.S. Surgical Corp. and Mentor Corporation. Outside of LabMD, enjoys playing tennis, travel, and flying his Cirrus SR22 Turbo single engine aircraft.