New Technology News

Wednesday, January 6, 2016

Activist investor Starboard Value, which has dogged Yahoo over the years, on Wednesday sent a letter to the company demanding it make changes or face a proxy fight.

Yahoo "made the right decision" by suspending the Alibaba spinoff, but "the continued downward spiral of Yahoo's core Search and Display advertising businesses" has been "frustrating for us, and likely for you," the letter, posted on ValueWalk, states.

The management team hired to turn around the core business "has failed to produce acceptable results" despite more than three years of effort and billions spent on acquisition, the letter says. "It appears that investors have lost all confidence in management and the Board," and most of Yahoo's current value derives from its Alibaba shares.

Starboard demands "dramatically different thinking" and "significant changes across all aspects of the business starting at the board level, and including executive leadership," according to the letter. It wants to see cost-cutting, paring off unprofitable businesses and research projects, and an overhaul of Yahoo's incentives and compensation programs.

Yahoo should look at selling its core businesses, Starboard's letter suggests. Otherwise, an election contest "may very well be needed" to replace members of the board.

Mixed Investor Feelings

The market immediately drove up Yahoo's share prices briefly, but they closed at $32.16, down 4 cents from the previous day but up 35 cents from the opening bell figure.

Given the strong wording of Starboard's letter, the market's reaction might indicate that investors still have some faith in Yahoo CEO Marissa Mayer's vision.

"Yahoo is in the midst of a multiyear transformation," Yahoo said in a statement provided to the E-Commerce Times by spokesperson Rebecca Neufeld.

"We attract more than a billion people every month, and we've built a profitable billion-dollar business in mobile, video, native and social that we expect will drive sustainable growth," Yahoo continued.

The company will "share additional plans for a more focused Yahoo on or before" its fourth-quarter earnings call, it said.

That probably will be held some time later this month.

Starboard's Angst

Starboard is concerned by both the deteriorating financial performance of Yahoo's core business and an "accelerating number of executive leadership departures," the letter states.

Further, annual operating costs have increased by about $500 million despite falling revenues. Yahoo has spent more than $2.3 billion on acquisitions, most of which have "been misguided, poorly overseen, and, ultimately, shut down," Starboard's letter continues. "EBITDA continues to decline quarter after quarter while spending continues at an alarming pace."

Starboard has "attempted to work constructively with management and the Board of Yahoo" behind the scenes for over a year, and has grown increasingly frustrated, the letter maintains.

"It took significant effort for us to convince you it was the right choice to suspend the [Alibaba] spinoff," it says. "Unfortunately, instead of heeding our advice and concurrently announcing that you would explore a sale of the core business, you have now hid behind a plan to spin off the core business and Yahoo Japan without fully understanding the alternative options."

Identity Problem

"Apart from making acquisitions, Yahoo has not diversified," contended Mukul Krishna, a senior global director of research at Frost & Sullivan.

Yahoo "is such a hodgepodge of different things that, unless they have a driving strategy, what you have is a zillion different things and a company that doesn't have an identity," he told the E-Commerce Times.

The board "might be to blame in that they haven't been able to agree among themselves what Yahoo is," Krishna said.

Light at the End of the Tunnel?

Mayer has a great opportunity if she defines Yahoo's identity and strategy and strips out everything that's not in line with that vision, he suggested.

"That means it will shrink in the short term, but in the long term, it will be much better in terms of continuity and moving forward," Krishna remarked. "It'll be a tough 24 to 36 months but, if they stick to that strategy, investors will back them."

Richard Adhikari has written about high-tech for leading industry publications since the 1990s and wonders where it's all leading to. Will implanted RFID chips in humans be the Mark of the Beast? Will nanotech solve our coming food crisis? Does Sturgeon's Law still hold true? You can connect with Richard on Google+.

Investor Calls for Leadership Changes at Yahoo

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Activist investor Starboard Value, which has dogged Yahoo over the years, on Wednesday sent a letter to the company demanding it ma...

Why do so many companies fail at industry analyst relations? Since the best answer might come from an industry analyst, I'll share a few thoughts with you. I'll also share some secrets for building a successful long-term technology analyst program. Hint: It's about being on the growth side of the wave.

This is a good week to address this issue, since CES 2016 is taking place in Las Vegas -- once again, bigger and louder than ever. Companies must find a way to stand out and be heard. That means they must win over the technology analyst community, the media and investors, as well as customers.

As an industry analyst, I get hundreds of requests from companies that want to get on my radar. The noise can be deafening! That's the point. Many companies realize they must get the right message to the analyst community, but they forget they're competing with other companies trying to do the same thing. How do companies get heard?

The Biggest Mistake

The biggest mistake most companies make is thinking every industry analyst business model is the same. In reality, there are many different business models. In order to be successful with the analyst community, a company must understand how key analysts work -- that is, what they focus on, how they share their opinions, and how they earn income.

Then the company must adjust its approach to each analyst accordingly. If it wants good coverage, it should make it easier -- not harder -- for analysts to follow it. The companies that clear the path often will get better results -- and isn't that the goal?

The Importance of Analysts

Technology analysts are important because others value their research and opinions. Analysts spend their time studying industry players and products. They investigate the changes that are reshaping the industry and track the changes that are reshaping the competition.

Investors, customers, workers, partners -- and of course, the media -- respond to analyst opinions about companies, technologies, industry direction, innovation and so on. They're guided by analyst observations on who is leading, who is following, who is winning and losing -- and why.

The media is one important channel for analysts to spread their influence. So are reports, speeches and conferences. However, each analyst is different. Each focuses on a specific group of companies or industries. Analysts share their opinions in different ways. Understanding the differences among analysts is key.

Take me, for example. As an industry analyst, I give media interviews on a daily basis, write columns, speak at meetings and conferences, conduct research, write reports, and so on.

Now multiply what I do by all the key analysts who are important to a company's business. Multiply that by hundreds more general analysts, and it's clear how important it is to have a great analyst relations program.

Best Analyst Briefings

I have participated in more briefings than I can count in the last few decades. In my opinion, the best in-depth briefings are not at shows like CES or CTIA. Rather, the best briefings are individual meetings -- when companies fly me in to visit them in person, or at least start with a personal phone call and private briefing.

Companies that focus on quality rather than numbers typically are ahead of the game from the start. However, companies simply don't have the resources to get close to hundreds or thousands of analysts. They must split the analyst community into groups.

Quality Relationships

The smallest group consists of key analysts who have the greatest impact on a company's sector. They are obviously the most important to the company. A good relationship with that small group is key. They often have different business models, though, so it's important to understand what they cover, how they share their thoughts, how they earn income and so on.

General analysts make up a much larger group. While it is very important for a company to be successful with them as well, the relationships are different -- more general and high level.

When companies rely solely on shows like CES or CTIA to get close to the analyst community, they more often than not miss. Companies that have successful industry analyst programs at these shows likely have robust, year-round programs, and the shows are just one piece of the puzzle.

In my book, the important thing to understand is that it's not the individual briefing at a show that matters. Rather, it's the long-term relationship that's built over time that matters the most. From the company's perspective, I think that's where the real value enters the picture.

What Companies Do Right - and Wrong

I've attended countless briefings over the years, which has given me a valuable perspective on what companies do right and wrong. In my view, only a few companies do a great job. Most want to, but they simply don't know how. Many fail to connect and build strong, long-term relationships. Many simply don't understand the basics.

A strong, positive result with an industry analyst requires more than a quick slam dance and thank you ma'am. The one-night-stand approach doesn't work. It takes time to build a good long-term relationship with each key analyst, based on an understanding of the way each analyst works.

Companies can learn from those that do the best job with analyst relations. The best approach each analyst differently, and when they're on target, they win. Now excuse me -- I have another briefing on the other side of town! Taxi!

E-Commerce Times columnist Jeff Kagan is a wireless analyst, telecom analyst, industry analyst, consultant and speaker who has been sharing his colorful perspectives on the changing industry for 25 years. Email him at jeff@jeffKAGAN.com.

Analyst Briefings at CES: One Shot Is Not Enough high tech news technology news

Analyst Briefings at CES: One Shot Is Not Enough

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Why do so many companies fail at industry analyst relations? Since the best answer might come from an industry analyst, I'll sha...

Tuesday, January 5, 2016

Yahoo has shut down its Yahoo Screen on-demand streaming video hub, according to news reports.

The hub's offerings included a National Football League game played in London, licensed clips of shows such as Saturday Night Live, and a number of original series, including Community.

The company had to write off US$42 million in losses stemming from running original series, Yahoo's third-quarter report states.

Video was one of the four areas CEO Marissa Mayer had banked on to turn the company around, the other three being core content, social and gaming. The closure raises more questions about Mayer's leadership and even Yahoo's continued survival as an online company.

"The question [Mayer] has to ask herself is, can Yahoo be saved?" commented Michael Goodman, a research director at Strategy Analytics.

The write-down on original series could have happened to any company, because "professional video is very expensive to produce and getting more expensive as the industry gets crowded," he told the E-Commerce Times. "This made it more difficult for [Mayer] to execute her plans."

The Show Must Go On

Video properties from Yahoo Screen will be placed next to similar content in the company's digital magazines. For example, streamed concerts from the Live Nation channel might be run with content from Yahoo Music.

Ongoing video efforts, such as daily news reports from Katie Couric, whom the company lured to its site, are expected to continue.

In December, Yahoo and NBC Sports Group renewed and expanded their digital sports broadcasting partnership, and it remains to be seen whether and how this will survive the closure of Yahoo Screen. Properties include live sports and Fantasy Football Live.

Meanwhile, Yahoo's increasingly restive investors reportedly are ramping up pressure for the company to hive off its core Internet properties at once rather than launch a tax-free reverse spinoff. Yahoo plans to transfer assets and liabilities other than its Alibaba shares into a newly formed company whose stocks would be distributed pro rata to shareholders, it announced last month.

Why Yahoo's Video Efforts Failed

"On all fronts, [Yahoo Screen] was a half-hearted effort," asserted Mukul Krishna, a senior global research director at Frost & Sullivan.

"Its launch two years ago should have been much more aggressive and sustained because it takes money to make money, and relying on word of mouth or things going viral wasn't going to make things happen, considering the high level of competition," he told the E-Commerce Times.

Screen also suffered from a lack of awareness, Krishna added.

Further, all the properties Yahoo acquired to help its move into video "have always done their own thing, didn't fully integrate into Yahoo, and consumers don't know whether they're Yahoo properties," he said.

What Yahoo Needs to Do Now

Mayer has to "first determine what Yahoo's identity is, what she's going to do tactically in the short term, and work out a long-term strategic vision of where Yahoo's going," Krishna said. "Investors are willing to put in the money if they see the possibility of a tangible return, but one of the reasons they haven't been able to invest heavily in Yahoo is its lack of an identity."

Yahoo "still has several quality assets, particularly its finance page," suggested Charles Sizemore, principal at Sizemore Capital. "That's still the single best portal for finance related news for regular investors."

Mayer also should focus on original content, he told the E-Commerce Times.

There's a crying need for a "very engaging content library," Krishna noted. Netflix's video library doesn't offer much new; Amazon Prime's offerings are limited, with most of the good content being transactional-based; and Hulu hasn't filled the gap.

"If Yahoo steps up, they have a chance," he said. However, it must invest considerable money and effort into promoting the content.

high tech news technology news Yahoo Rolls Up Screen

Yahoo Rolls Up Screen

11:23 AM

Yahoo has shut down its Yahoo Screen on-demand streaming video hub, according to news reports. The hub's offerings included a ...

China Levels Antitrust Allegations Against Microsoft

China's State Administration for Industry and Commerce on Tuesday launched the latest in a series of investigations against Microsoft for possible violations of the country's antimonopoly law.

Back in July 2014, about 100 SAIC officials burst into four Microsoft offices in various parts of China and copied contracts and records, downloaded data from company servers, and questioned executives.

The latest probe seeks answers to major questions arising from the data seized, according to news reports.

"We're serious about complying with China's laws and committed to addressing the SAIC's questions and concerns," a Microsoft spokesperson said in a statement sent to the E-Commerce Times by Chelsea Rauch of WE.

What Seems to Be Happening

SAIC wants Microsoft to submit a complete explanation for problems discovered in the data, according to reports.

In 2014, the company was suspected of not fully disclosing information about the Windows OS and Microsoft Office applications, causing incompatibility problems. Under Chinese law, introducing incompatibilities without advance warning to users could be considered anticompetitive behavior.

The 2014 raids hit Microsoft offices in Beijing, Liaoning, Fujian and Hubei, as well as the Dalian officers of IT consultancy Accenture, which reportedly performs financial work for Microsoft on an outsourced basis.

China had suspected Microsoft of violating its antimonopoly laws since June 2013 regarding compatibility problems, bundling and document authentication for its Windows OS and Microsoft Office applications, the SAIC said in 2014.

"Microsoft has always been a favorite target worldwide for antitrust action, some of it well deserved and some of it not," said Laura DiDio, a research director at Strategy Analytics. "The EU, for instance, has repeatedly gone after them."

Is It Politics, or Just Business?

The 2014 raids followed China's banning government computers from using Windows 8 after whistleblower Edward Snowden's revelations of the U.S. National Security Agency's surveillance activities raised concerns about security.

They also came shortly before Microsoft's Xbox One became the first gaming console to be released in China since Beijing banned console sales in 2000.

China has been cracking the whip on American companies in general, DiDio told the E-Commerce Times. "It's not just Microsoft, it's Google, Qualcomm and others as well."

The actions against Microsoft were sparked by a complaint from Kingsoft, which develops the freeware Microsoft Office-compatible Kingsoft Office suite, according to an undated report from PaRR.

Kingsoft has relationships with IBM, Dell and Intel, and there have been complaints that in some cases its apps aren't compatible with Windows or Microsoft Office.

SAIC received a complaint from an unnamed company in June 2013 alleging Microsoft had failed to fully disclose information related to the Windows OS and the Microsoft Office suite, creating problems with interoperability, tie-in sales and document certification, PaRR reported.

What's at Stake for Microsoft

"The timing of this probe is pretty suspicious because Microsoft recently signed partnership agreements with a number of Chinese companies," DiDio said.

These include state-owned China Electronics Technology Group and Baidu.

Microsoft has staked its future on Windows 10, which it aims to have running on more than 1 billion devices worldwide within two to three years.

That ups the stakes for Microsoft because "it needs the Chinese market, the Japanese market, India," DiDio pointed out. "Microsoft won't get to those numbers with the U.S. and Europe alone."

The company might have to knuckle under eventually because "this goes into gaming and entertainment where China can throw up huge roadblocks," she suggested. "China could hit Xbox sales as well."

China Levels Antitrust Allegations Against Microsoft high tech news technology news

China Levels Antitrust Allegations Against Microsoft

8:10 AM

China's State Administration for Industry and Commerce on Tuesday launched the latest in a series of investigations against Mi...

Before the Internet, messages were spread by television and newspaper ads and highway billboards. Today that is done through social media. Virtually everyone knows about it, and many people use it. Does it make any sense that a U.S. government agency could violate any laws for using social media to carry out its mission?

Doesn't make sense to me. However, last month, the U.S. Government Accountability Office ruled that the Environmental Protection Agency violated federal law and took part in covert propaganda by using social media to solicit support for an Obama administration rule aimed at protecting streams and surface waters.

Having followed the EPA for many years, I have always thought that the point of the agency is to help protect the environment for future generations. Using social media to help protect the nation's streams and surface waters seems to make a lot of sense, particularly since the EPA's website states that its mission is to protect health and the environment.

Free Speech and Social Media

Over the years, many people have filed lawsuits involving libel, slander and even revenge porn related to anonymous social media postings. Since under the U.S. Constitution, the First Amendment gives everyone the right to free speech, the principles should apply to social media.

However, when these types of cases were first filed in the 1990s, they routinely failed, maybe because judges didn't understand or lawyers were not good at explaining their claims, or both. Then around 2000, U.S. courts accepted what was called "cybersmear" as a legitimate legal claim. However, if there was a grain of truth to a statement in question, it was not considered cybersmear.

For example, if a posting stated that an EPA commissioner was incompetent, which is an opinion, that posting would be considered free speech under the First Amendment. However, a posting stating that the commissioner is a convicted felon, if untrue, would be not be protected free speech.

The standard also is different for a public figure than for a private citizen. In 1964, the Supreme Court decided in New York Times v. Sullivan that slander or libel directed at a public figure is entitled to less protection than a nonpublic figure. Based on the Sullivan standard, the EPA is open to criticism, but whether is violating a federal law is altogether different.

EPA Doesn't Back Down

Last month, EPA spokesperson Liz Purchia posted a blog on the EPA website defending the agency's use of the GSA-approved Thunderclap social media platform "to get the word out about our historic Clean Water Rule -- a law to better protect the streams and wetlands that are the foundation of our nation's water resources."

The page on Thunderclap included the EPA logo and byline with this message: "Clean Water is important to me. I support EPA's efforts to protect it for my health, my family, and my community," she said.

The EPA Thunderclap page was "linked to an EPA website with information about the rule. We shared this page with all of our stakeholders -- no matter what sector, geographic location, or perspective -- with the goal of catalyzing our public engagement process, and getting people excited about the importance of clean water," Purchia said.

Apparently the EPA is not backing down.

Senate Inquiry

The GAO is the investigative arm of the Congress, which is currently controlled by the Republican Party. This inquiry began last year when the Senate Environment and Public Works Committee requested that the GAO review the EPA's use of social media, and in particular Thunderclap.

During the inquiry, Sen. James M. Inhofe of Oklahoma, the committee chairman, requested that the GAO expand its inquiry to examine "whether EPA's activities constituted prohibited covert propaganda or publicity." Other senators requested more information.

The "GAO's finding confirms what I have long suspected, that EPA will go to extreme lengths and even violate the law to promote its activist environmental agenda," Inhofe said after the GAO submitted its 26-page report last month.

The Senate committee took note of other highlights of the GAO report about the EPA.

"We conclude that EPA's use of Thunderclap constitutes covert propaganda, in violation of the publicity or propaganda prohibition," the report says.

"We conclude that EPA violated the anti-lobbying provisions contained in appropriations acts for FY 2015 when it obligated and expended funds in connection with establishing the hyperlinks to the webpages of environmental action groups," it maintains.

"Because EPA obligated and expended appropriated funds in violation of specific prohibitions, we also conclude that EPA violated the Antideficiency Act, 31 U.S.C. § 1341(a)(1)(A), as the agency's appropriations were not available for these prohibited purposes," the report says.

Next Steps

Congress seems to have made this more political than legal in nature, which means there likely will be a political resolution rather than a lawsuit between the GAO and the EPA.

Regardless of how the issue is resolved, the legal issues presented are interesting and could result in more scrutiny of other U.S. agencies and their use of social media, giving other agencies free rein over social media use, or something in between.

E-Commerce Times columnist Peter S. Vogel is a partner at Gardere Wynne Sewell, where he is Chair of the Internet, eCommerce & Technology Team. Peter tries lawsuits and negotiates contracts dealing with IT and the Internet. Before practicing law, he was a mainframe programmer and received a master's in computer science. His blog, Internet, IT & eDiscovery, covers a broad range of technology topics. You can connect with him on Google+.

high tech news Social Media and Politics technology news The EPA

The EPA, Social Media and Politics

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Before the Internet, messages were spread by television and newspaper ads and highway billboards. Today that is done through social ...

Monday, January 4, 2016

Will 2016 be a breakaway year for virtual reality technology?

Exhibitors at CES 2016 this week seem to think so. More than three dozen of them will be flogging their VR wares at the show, more than double the number from last year.

"2016 will be the year of VR," said Brian Blau, a research director at Gartner.

"That's pretty clear with all the hardware that's going to be coming on the market and the push by developers and content producers into VR," he told the E-Commerce Times. "It will be a real awakening year for VR."

Still a Niche

Other analysts are being cautious.

"It will remain a niche, but 2016 will set the stage for the future," said Cliff Raskind, a senior director at Strategy Analytics.

"It could be a breakout year, but it will by no means cross the chasm into the mainstream," he told the E-Commerce Times.

The jump to the mainstream is at least three years away, according to a Strategy Analytics report authored by Steven Waltzer and released in October.

"The virtual reality (VR) market is expected to remain niche among hard core gamers and tech enthusiasts for at least the next three years," he wrote, "but as technology allows for a higher quality user experience at a lower price point, it will eventually emerge as an exciting new mainstream content consumption medium."

Sixfold Jump

Whether VR is a niche or not, vendors should see demand for their products climb to heights they haven't seen before.

VR headset shipments will reach 1.2 million units in 2016 -- six times what they were last year, predicts the Consumer Technology Association, which sponsors CES.

IHS Technology pegs headset shipment numbers even higher than that: 7 million.

Those numbers include all forms of headsets, from the most expensive to the cardboard models Google peddles.

"High-end integrated display headsets coming to market in 2016, which include PlayStation VR, Oculus Rift and HTC Vive, will sell well within a relatively narrow audience of enthusiast gamers that are very keen to try out the latest technology at any price point," said Piers Harding-Rolls, a director at IHS.

"I'm not a VR skeptic," he told the E-Commerce Times. "I think the technology has significant potential, but I also think we have to be realistic about how strongly it will be adopted in the short term."

Cool but Clumsy

One barrier to mainstream adoption may be the clumsiness of VR hardware.

"It's a bit of a cumbersome experience," said Glenn Hower, an analyst with Parks Associates.

"It's cool and there's a novelty aspect to it, but right now it's a tough sell for the mainstream markets," he told the E-Commerce Times.

"There's still some work to do with user experience," Hower added. "2016 may see some more significant implementations, but I'm hesitant to say it will make the jump from novelty to mainstream."

More Muscle Needed

Another barrier to VR adoption may be a lack of horsepower in the existing base of personal computers.

Less than 1 percent of the 1.43 billion PCs in the world have the muscle to run VR, according to an Nvidia estimate.

For gamers, who are some of the most enthusiastic fans of VR, that means shelling out US$300 for a new graphics card -- in addition to $350 to $450 for the VR hardware.

"As such, I forecast only a minority of PC gamers will have access to the necessary source hardware to drive a successful VR experience when the headsets are launched in Q1 2016, which reduces the addressable market for PC-based headsets significantly," IHS' Harding-Roll noted.

At the same time Nvidia was appraising the ability of the installed base of PCs to run VR, it also was launching a marketing campaign -- called "VR Ready" -- to inform consumers about which of the company's graphics cards can handle VR.

"I think we're seeing a heavy marketing play here," Gartner's Blau observed.

John Mello is a freelance technology writer and contributor to Chief Security Officer magazine. You can connect with him on Google+.

high tech news PCs May Not Be Ready for VR's Breakout Year technology news

PCs May Not Be Ready for VR's Breakout Year

9:54 AM

Will 2016 be a breakaway year for virtual reality technology? Exhibitors at CES 2016 this week seem to think so. More than three do...

The U.S. Federal Trade Commission is engaged in an internal struggle over how it should assess the effect on consumers when businesses fail to provide proper e-commerce security.

The outcome of the debate will have a significant impact on the FTC's ability to initiate cybersecurity violation cases. Depending on the outcome, in fact, the legal issue could spill over to federal courts or even Congress for resolution.

The internal debate surfaced last month. FTC staff members issued a notice that they were challenging the dismissal of a commission complaint against a company for alleged cybersecurity failures. An FTC administrative law judge who was selected to rule on the complaint dismissed it.

The staff challenge will occur through an appeal of the ALJ's decision to the full commission.

Exposure of Data Triggered Complaint

In the complaint, the FTC contended that cyberprotection deficiencies at LabMD had exposed personal consumer information. However, the ALJ dismissed the complaint in November, ruling that the FTC staff had failed to prove that the exposure and dispersion of the electronically processed records on company networks had caused any injury to consumers.

The ALJ's decision "confirms what our client, LabMD, has said all along, which is that the Federal Trade Commission's case is meritless," said Daniel Epstein, executive director of Cause of Action, which provided legal counsel to LabMD in contesting the FTC's charges.

The FTC "produced no evidence that even a single patient was harmed by LabMD's alleged inadequacies," he said. "Instead, it was the FTC that victimized LabMD and its employees, and more importantly, the doctors that it served."

LabMD's business involved performing diagnostic specimen tests for medical providers and managing related records for medical and insurance purposes.

The evidence in the case involved peer-to peer computer exchanges, expert testimony and physical printouts of data. The proceedings also involved issues regarding assertions of a relatively limited scope of exposure.

Injury Standard Questioned

Broadly speaking, the FTC staff contended that company's clients were injured because the mere exposure of the personal data put them at risk. However, the law judge questioned the applicability of such a broad standard for meeting the federal legal definition for injury or harm.

The FTC is empowered to initiate enforcement actions in the event it suspects a party has engaged in "unfair or deceptive" business practices. By law, the FTC must show that a business practice "causes or is likely to cause substantial injury to consumers," in order to be judged as unfair. The FTC claimed LabMD engaged in unfair business practices by putting clients at risk.

However, the ALJ rejected the staff's position, concluding that evidence of actual harm was lacking. Financial injury, inconvenience and even embarrassment are some of the types of harm considered in such cases. The FTC staff's failure to demonstrate any material, actual harm over a significant period also showed that the potential for future likely injury was virtually nonexistent, the ALJ contended.

"The absence of any evidence that any consumer has suffered harm" as a result of LabMD's "alleged unreasonable data security" after the passage of many years "undermined the persuasiveness" of the FTC staff that such harm likely would occur, FTC Chief Administrative Law Judge D. Michael Chappell said in his dismissal of the case.

In line with his emphasis on the need to provide evidence of actual harm, Chappell questioned the mere recitation of risk statistics related to cyber data exposure or breaches for fulfilling the legal definition of likely harm. He turned around the mathematical risk probabilities the FTC staff cited in noting that, given such statistics, it was curious that the FTC staff could not cite a single actual consumer victim.

Case Could Become a Benchmark

The evidence produced to support the charges may have been unique in that it was hotly contested and involved some convoluted and controversial elements regarding the validity of sources and the role of a third party. Still, the outcome of the case could have a broad impact on similar cases in that the decision raised the issue that the FTC will need to meet a stricter real-time standard for proving harm and injury in cyberprotection cases than it has in the past.

"Importantly, the ALJ opined that historically, liability for unfair conduct has only been found in instances where there is proof of actual consumer harm," said Patricia Wagner, chief privacy officer at Epstein Becker & Green, in a case analysis.

The ALJ held that the standard for what is likely to cause substantial injury "does not mean that something is merely possible. Instead, likely means that it is probable that something will occur," she noted, citing the decision.

"One of the striking things about the ALJ's opinion is his willingness and ability to parse through the evidence, understand what the studies presented demonstrated -- and failed to demonstrate -- and evaluate the circumstances in a well-reasoned manner. Rather than just assume that a breach automatically means that consumers would be harmed, he evaluated the facts and circumstances at issue in this case," Wagner told the E-Commerce Times.

"The recent LabMD decision serves to highlight that the commission's cybersecurity authority under the FTC Act is not without limits, and that the commission must prove that specific cybersecurity incidents actually meet the requirements for an unfair or deceptive practice under the statute," Chris Burris, a partner at King & Spalding, told the E-Commerce Times.

While the issues the LabMD case raised are significant in terms of cyberlaw -- especially related to the FTC's role -- a resolution of the injury issue could take awhile. First, the FTC staff's appeal of the ALJ decision means that the full commission could possibly overturn the ruling.

In its appeal, the FTC staff continued to contend that just the exposure of data creates a risky situation for consumers and that in itself satisfies the legal threshold for harm or injury. The ALJ mistakenly neglected to assess the substantial risk of alleged deficiencies at LabMD involving passwords, firewalls and other protection measures, the staff noted in its appeal.

The law judge "failed to analyze LabMD's multiple, systemic, and serious security failures before issuing [the] ruling," the staff said. "This was a fatal flaw: whether LabMD's security practices caused or were likely to cause substantial consumer injury can be determined only through an analysis of the significant risks created by LabMD's security failures. The decision is wrong as a matter of law and fact."

The commission has set a deadline of Feb. 5 for LabMD to file an answering brief in the internal appeals process. The outcome of the internal FTC appeal could then be brought before a U.S. appeals court.

"We will take this to the U.S. Supreme Court if necessary," LabMD CEO Michael Daugherty told the E-Commerce Times.

LabMD ceased normal operations in 2014 as a result of the FTC action.

John K. Higgins is a career business writer, with broad experience for a major publisher in a wide range of topics including energy, finance, environment and government policy. In his current freelance role, he reports mainly on government information technology issues for ECT News Network.

FTC Debates Cybersecurity Injury Standard high tech news technology news

FTC Debates Cybersecurity Injury Standard

3:21 AM

The U.S. Federal Trade Commission is engaged in an internal struggle over how it should assess the effect on consumers when busines...