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Know Your Subcontractors: Recent FTC Settlement Highlights the Importance of Validating Subcontractor Data Protection Practices

White & Case Technology Newsflash

The Federal Trade Commission ("FTC") voted 4-0 on Friday, January 31, 2014 in favor of a settlement with GMR Transcription Services, Inc. ("GMR") and two of its executives in connection with the leakage of sensitive medical files onto the Internet due to inadequate data security measures used by GMR's subcontractor.[1] The matter highlights the importance of conducting due diligence on subcontractors' data security practices where personal information is involved, and also negotiating data security requirements into subcontractor agreements – two steps that, if taken by GMR, may have mitigated or even avoided the incident altogether.

The Complaint[2]
GMR is a transcription service provider based in California and converts digital audio files into transcripts for a range of clients, including universities, large corporations, government agencies, health care providers and hospitals. According to the FTC, GMR uses independent typists and outsourced service providers to perform typing services in the conversion process. Fedtrans Transcription Services Inc. ("Fedtrans"), an India-based firm specializing in medical transcription services, performed transcription typing services for GMR from 2009 until mid-2012. Fedtrans similarly relied on a network of independent typists to perform the transcription services. Once Fedtrans received an audio file from GMR, Fedtrans notified its independent typists, who would download the file from Fedtrans' network, convert it into a Microsoft Word file, and upload it back to GMR's servers for distribution by GMR to the client. Instead of encrypting the files, which contained a host of sensitive personal information, the complaint alleges that Fedtrans stored and transmitted audio and text files in a readable format using a File Transfer Protocol application. Further, Fedtrans' systems were configured such that the files could be accessed online without any authentication credentials, which resulted in the unauthorized disclosure through public search engines of thousands of medical transcripts containing sensitive personal information, including patients' names, dates of birth, addresses, email addresses, social security numbers, driver's license numbers, tax information, and medical history and examination notes. According to the complaint, GMR failed to make reasonable inquiries into Fedtrans' security practices before engaging its services, which inquiries would have revealed the inadequacies in Fedtrans' data security practices, and furthermore failed to otherwise contractually require Fedtrans to implement "reasonable and appropriate security to protect personal information" such as data encryption, anti-virus protection, and file access credential requirements. According to the FTC, these failures amounted to unfair and deceptive practices in violation of Section 5(a) of the Federal Trade Commission Act[3] as GMR made claims in its privacy policies and otherwise on its website that its medical transcription services were "HIPAA compliant"[4] and ensured "‘data security and absolute privacy for all … medical records and documents'".

The Settlement[5]
Under the settlement approved by the FTC, GMR is required to establish, implement and maintain a written "comprehensive information security program reasonably designed to protect the security, confidentiality, and integrity of personal information," which program shall include "administrative, technical, and physical safeguards," designated employees to be held accountable for the security program, comprehensive risk analyses and assessments, employee training, system monitoring, ongoing evaluation and adjustment, and "the development and use of reasonable steps to select and retain service providers capable of appropriately safeguarding personal information they receive from [GMR], and requiring service providers by contract to implement and maintain appropriate safeguards." Further, the settlement requires GMR to engage an independent third-party service to audit its security program on a biennial basis, and to provide such third party audit reports and other related compliance materials to the FTC during the twenty year term of the settlement. GMR is also prohibited from further "misrepresent[ing] … the extent to which [it] … protect[s] the privacy, confidentiality, security, or integrity of personal information collected from or about consumers.

Practice Notes
The GMR case emphasizes the importance of ensuring that subcontractors handling personal information have adequate security measures in place – a burden the FTC has placed on the primary service provider rather than on subcontractors – and that adequate data protection requirements are expressly set forth in subcontractor agreements to ensure a remedy in the event of a data breach. Businesses that collect, store, transmit or otherwise use personal information are advised to investigate subcontractors' data protection practices, including by way of reviewing third party audit reports and written data security policies where available, and ensuring that subcontractors' practices are in line with the company's own privacy and security policies. Furthermore, companies should require in their written agreements that subcontractors maintain adequate physical and technological security measures. It may be best to draft into agreements a requirement that subcontractors maintain "reasonable and appropriate security to protect personal information" and to also list specific safeguards that track the GMR settlement and other precautions suggested by the FTC, various states and privacy advocacy groups. To provide flexibility for future changes in the law and technology, the listed security measures should form a minimum set of requirements rather than an exclusive list.


[1] - Press Release, F.T.C., Provider of Medical Transcript Services Settles FTC Charges That It Failed to Adequately Protect Consumers’ Personal Information (January 31, 2014), available at
[2] - Complaint In the Matter of GMR Transcription Services, Inc. et al, F.T.C. File No. 122 3095
[3] - 15 U.S.C. § 45
[4] - GMR's website stated, among other things, that as a medical transcription service provider it "cover[ed] all the aspects involved in the HIPAA regulations."
[5] - Agreement Containing Consent Order In the Matter of GMR Transcription Services, Inc. et al, F.T.C. File No. 122 3095


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