Government Support: Task Force Meeting Covers ADR’s Reach into Federal Agencies

By Katerina Karamousalidou

A CPR Government & ADR Task Force meeting last month focused on the U.S. government’s executive branch alternative dispute resolution use. The participants, who included authors of a recent federal government ADR study, described ADR use and emphasized the need for support and assessments of the effectiveness of the processes used to negotiate and settle.

The April 19 meeting started with an introduction from CPR Senior Vice-President Ellen Parker, who explained that the Task Force’s mission is to educate companies, law firms, and government agencies and their attorneys on the laws and the specific requirements for engaging in ADR with target government agencies.

The Task Force comprises leading practitioners, corporate counsel, neutrals, academics, and current and former federal government employees, including ADR specialists and dispute resolution directors. Parker introduced the Committee chair, Pete Swanson, Director of the Office of Conflict Management and Prevention at the Federal Mediation and Conciliation Service, a 75-year-old independent Washington, D.C., agency whose mission is to preserve and promote labor-management peace and cooperation.  

Swanson, together with Jeremy Graboyes, Director of Public and Interagency Programs at the Administrative Conference of the United States, an independent federal agency whose statutory mission is to identify ways to improve the procedures by which federal agencies protect the public interest and determine the rights, privileges, and obligations of private persons.

They dove into ACUS’s history and the work it has been doing in promoting ADR use by federal agencies. Swanson and Graboyes were joined by University of Nebraska College of Law Prof. Kristen M. Blankley, of Lincoln, Neb., and Mediator Judith Starr, who heads ADR consulting firm Starr ADR in Palmetto, Fla. Blankley and Starr are co-authors of a consulting report on ACUS’s work, “Alternative Dispute Resolution in Agency Administrative Programs with the Administrative Conference of the United States” (Dec. 17, 2021) (available at https://bit.ly/38Vaeii).

Jeremy Graboyes set the stage by explaining ACUS’s mission in promoting effective public participation in the regulatory process by reducing unnecessary litigation and improving the use of science and the effectiveness of applicable laws.

He emphasized that ACUS has long been active in examining how agencies use ADR to manage federal administrative programs fairly and efficiently. ACUS also has published a variety of ADR-related reports in source books during its tenure, including a 1995 practitioners’ deskbook developed in partnership with the CPR Institute, the “The ADR Breakthrough for Government Contract Disputes.”

The agency’s efforts led to passage of the Administrative Dispute Resolution Act in 1990 and 1996 (an ACUS wiki explains the acts here), and the Negotiated Rulemaking Act (ACUS wiki here). Both acts designated ACUS as the lead agency responsible for coordinating ADR and negotiated rulemaking.

Jeremy Graboyes also mentioned that ACUS undertook an important project, the use of ombuds in federal agencies, and launched a new project to investigate how agencies might better use different types of ADR to resolve matters related to their core statutory authorities.

ACUS has recently established an ADR Advisory Group to advise the agency on potential new initiatives to improve ADR design and administration across the federal government, working closely with Pete Swanson and FMCS.

Kristen Blankley explained the overview, methodology, and main research areas of the ACUS consulting report. Judith Starr then talked about ADR’s deep historical roots in federal agencies since early 1900s to 1990 ADRA, the subsequent legislative landmarks, and the ACUS’s role in assisting in executive branch ADR implementation.

Blankley analyzed the most preferred selection and implementation of ADR modalities, including mediation, facilitation, ombuds, arbitration, conciliation, and factfinding.  She reviewed recommendations regarding the selection and implementation of ADR processes in relation to the increased visibility of these programs, as well as the need to establish routine outside program evaluation.

Judith Starr said that staffing practices are highly dependent on agency resources. She talked about training programs and opportunities, their variation in length and form, and recommended continuing education, certification opportunities, and specialized training. Blankley emphasized the importance of increasing transparency in ADR proceedings, confidentiality, and harmonized ethics rules. Blankley also highlighted ADR case management strategies and tools, the importance of external audits, software review, and ethics policies for case managers.

Starr concluded her presentation by talking about interagency ADR operations, and Blankley discussed areas for further research, such as wellness, diversity, online dispute resolution, and supporting ADR across the executive branch.

The meeting concluded with a Q-and-A session.

* * *

The author, an LLM student focusing on international commercial arbitration at Pepperdine University School of Law’s Straus Institute for Dispute Resolution in Malibu, Calif., is a Spring 2022 CPR Intern.

[END]

Update: An Influx of Arbitration Legislation

By Tamia Sutherland

The passage and March 3 signing of H.R. 4445, Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 has inspired the introduction of more than 170 bills involving arbitration.

Sen. Lindsey Graham, R., S.C., called H.R. 4445 the most significant workplace reform since the Occupational Safety and Health Act of 1970, and said he is open to further arbitration law changes, on a bipartisan basis. Lindsay Wise and Jess Bravin, Senate Approves Bill Barring Forced Arbitration in Sexual-Assault, Harassment Claims, Wall Street Journal (Feb. 10)(available at https://on.wsj.com/38tmR3Q).

Of the current arbitration-related proposals, there are some duplicates with House and Senate introductions. Still, many facets of arbitration, in and out of government, are covered by the bills.

Activity on some is possible this year.

* * *

In an April 6 Securities Arbitration Alert blog post, George Friedman, Publisher & Editor-in-Chief, discussed Congress and the rise in arbitration legislation:

The recent pace of legislative activity prompted us to look up how many bills have been introduced in the 117th Congress that in some way, shape, or form, refer to arbitration.

search we conducted using the non-partisan www.govtrack.us Website shows that 171 bills have been introduced so far that contain the term “arbitration” or “arbitrate” – 106 in the House and 65 in the Senate.

Not all bills are anti-arbitration, although the majority would amend the Federal Arbitration Act, other federal laws, or both, to curb pre-dispute arbitration agreement use. Democrats introduced all but four bills.

The Securities Arbitration Alert post can be found here.

A few days after the passage of H.R. 4445, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a March 8 hearing on arbitration’s effects on consumers’ financial services contracts. The purpose was to introduce another arbitration bill.

Chairman Sherrod Brown, D., Ohio, presided over the hearing, and in his opening statement said that:

Big companies should not decide on behalf of Americans how they should pursue justice. Consumers–not corporations–should be able to decide whether they want to go through the public court system, through mediation, or through arbitration. . . . That’s why I introduced the Arbitration Fairness for Consumers Act last week with 21 cosponsors in the Senate, many of whom serve on this Committee.”

The Arbitration Fairness for Consumers Act would prohibit arbitration clauses in consumer financial products by amending the Consumer Financial Protection Act of 2010. Chairman Brown explained that the bill “gives consumers the right to decide how they want to pursue justice.” Brown’s website lists this press release and one-pager regarding the bill.

Following the opening statement, Ranking Member Patrick J. Toomey, R., Pa., provided background on Congressional attempts at arbitration restrictions in consumers’ financial services contracts:

In 2017, the CFPB issued a rule that would’ve banned these agreements for consumer financial products. However, Congress overturned this rule under the Congressional Review Act. Since then, Democrats have introduced bills that would undo Congress’ sensible decision.

Then, witnesses representing consumer interest groups Public Justice and Public Citizen, and the business-backed U.S. Chamber of Commerce, provided opposing testimony regarding the regulation of arbitration clauses in consumers’ financial services contracts.

In addition, law professors Todd J. Zywicki and Myriam Gilles from, respectively, Arlington, Va.’s George Mason University Antonin Scalia School of Law and Yeshiva University’s Benjamin N. Cardozo School of Law in New York also provided expert testimony, with Zywicki anti-legislation and Gilles strongly supporting the proposal.

A video of the March 8 hearing and the witness statements are available here. Since its introduction, no further action has occurred on the Arbitration Fairness for Consumers Act.

There’s more. The Forced Arbitration Injustice Repeal (FAIR) Act of 2022, a broad bill that would void all pre-dispute mandatory arbitration agreements in employment, antitrust, consumer, and civil rights passed the House by a 222-209 vote on March 17. That vote’s margin is much narrower than the 335-97 vote the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act received in the House in February.

The FAIR Act passed the House despite strong opposition. Two reports from the Institute for Legal Reform, a U.S. Chamber of Commerce unit that lobbies for tort reform on behalf of businesses and has long opposed arbitration restrictions, concluded that consumers and workers typically do better in arbitration. A November 2020 Institute for Legal Reform report is available here, updated from 2019, and an even more recent November 2021 update is available here.

Consumer organizations, on the other hand, were elated. Following the FAIR Act’s passage Lisa Gilbert, executive vice president of Public Citizen, noted:

“…Today, in an important step forward, the House passed the FAIR Act, a measure that would end the tricks and traps that are endemic in form contracts, including those you enter by clicking ‘I agree’ on the internet.

Hundreds of millions of contracts contain forced arbitration provisions and class-action waivers, denying consumers and workers the ability to file lawsuits in court and preventing them from joining with other similarly situated people to sue together…Today, the House finally stated: No more.”

Gilbert’s full statement is available here.

The FAIR Act was introduced by longtime mandatory arbitration opponent Hank Johnson, D., Ga., who has introduced this legislation in the past. For a discussion of the act’s September 2019 House passage–it later stalled in the Senate–and the controversy over the Institute for Legal Reform’s original 2019 arbitration report, is available at Andrew Garcia, The Fairness Agenda: Arbitration Legislation Advances in the Wake of a Critical Report , 37 Alternatives 157 (November 2019) (available at https://bit.ly/3LSoG93).

The House Committee on the Judiciary published this press release following last month’s passage of the FAIR act.  There has been no action yet on the Senate version, which is before the Judiciary Committee.

* * *

Other arbitration bills have attracted attention, and could gain traction in the wake of H.R. 4445’s passage and signing.  They include:

  • The Justice for Servicemembers Act,
  • Fairness in Nursing Home Arbitration Act, and
  • The Investor Choice Act.

The Justice for Servicemembers Act aims to amend Title 9 of the U.S. Code—the Federal Arbitration Act—to prohibit pre-dispute agreements that require arbitration of certain disputes arising from claims of servicemembers and veterans.  The disputes are claims brought under chapter 43 of U.S.C. Title 38 relating to employment and reemployment rights of members of the uniformed services, and under the Servicemembers Civil Relief Act (50 U.S.C. 3901–4043).

The Fairness in Nursing Home Arbitration Act was introduced to amend titles XVIII and XIX of the Social Security Act “to prohibit skilled nursing facilities and nursing facilities from using pre-dispute arbitration agreements with respect to residents of those facilities under the Medicare and Medicaid programs, and for other purposes.”

The Investor Choice Act attempts to amend the Securities Exchange Act of 1934 to prohibit mandatory pre-dispute arbitration in investment adviser agreements.

Also, H.R. 5974, the Veterans and Consumers Fair Credit Act, was introduced in both the House and Senate to amend the Truth in Lending Act to extend to all consumers the consumer credit protections provided to U.S. Armed Forces members and their dependents under title 10 of the U.S. Code. The bill garnered a joint letter in support signed by 188 civil rights, community, consumer, faith, housing, labor, legal services, senior rights, small business, veterans’ organizations, and academics representing all 50 states and the District of Columbia. Some of the signatories include Main Street Alliance, Minority Veterans of America, the NAACP, National Fair Housing Alliance, and Public Citizen. The joint letter is available at the website of Public Justice, a Washington nonprofit law consumer- and employee-side law firm, here.

Many of these proposals are riding H.R. 4445’s coattails and have the potential to be framed as an extension of the bill ahead of the midterm elections.

For more background information on H.R. 4445, and how it restricts arbitration use for certain employment matters, see Tamia Sutherland & Russ Bleemer, Senate Sends Bill Restricting Arbitration for Workplace Sexual Assault Victims for Biden’s Signature, CPR Speaks (Feb. 10) (available here).

* * *

The author, a second-year law student at the Howard University School of Law, in Washington, D.C., is a CPR 2021-22 intern.

[END]

Supreme Court Reviews the Role of Prejudice to a Party in Determining Arbitration Waiver

By Russ Bleemer

This morning’s U.S. Supreme Court arbitration arguments in Morgan v. Sundance Inc., No. 21-328, reviewed what appeared to be a simple case of whether a plaintiff needs to show prejudice as a pivotal factor in claiming that a defendant has waived its right to arbitration.

But it wasn’t so simple. The arguments ranged over multiple possible standards for including the factor, as well as how to do so if it stays.

The question of whether the Federal Arbitration Act supports prejudice as a factor in waiving the right to arbitration stood next to evaluating the defendant’s actions for waiver in the arguments, with the petitioner soon attacking whether prejudice should be a part of the determination.

The solution likely will be anything but simple. Today expansive arguments lasted nearly an hour and a half–wiith just two attorneys–showed the Court wrestling with the need and content of a prejudice evaluation that has split the circuits.  The Eighth U.S. Circuit Court of Appeals decision on review today had held that “[a] party waives its right to arbitration if it: (1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts.” 

In its summary ahead of the question presented, the Supreme Court noted that eight other federal courts of appeals and most state supreme include the requirement that the waiving party’s inconsistent acts caused prejudice in the waiver analysis, while three federal courts of appeal, and at least four state supreme courts  “do not include prejudice as an essential element of proving waiver of the right to arbitrate.

With nearly everyone in the courtroom stressing the need for a simple evaluation, both sides missed opportunities to offer one.  Karla Gilbride, co-Director of the Access to Justice Project at Washington, D.C., a nonprofit public interest law firm Public Justice, and attorney for petitioner Robyn Morgan, compellingly noted that the prejudice requirement was “atextual” and “all over the place.”

But she didn’t draw a bright line by noting that employees would be prejudiced by expending time or money on cases where employers delayed their arbitration requests until after they took litigation steps.

Former U.S. Solicitor General Paul D. Clement, a partner in the Washington office of Kirkland & Ellis, facing Justice Neil Gorsuch’s option that the Court eschew a Federal Arbitration Act analysis and send the case back to the lower court for a pure Iowa state law analysis, said that if that path is taken, the Court instead of offering a ruling, should dismiss Morgan entirely as improvidently granted.

And the Court wasn’t helping the advocates by invoking layers of state contract law doctrines, federal statutes, and case interpretations in order to establish a standard for evaluating waiver and whether to include prejudice.

Every member of the Court had pointed questions for the advocates in today’s arguments.  Justice Clarence Thomas didn’t participate, however; the Court announced Sunday that he had been hospitalized with an infection, but it noted this morning that he would participate in the case based on the filings and the arguments’ transcript.

Petitioner attorney Gilbride opened, with an argument that centered around the case issue of whether the the Eighth Circuit ruling favored arbitration, in violation of AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011), and FAA Sec. 2, which says that arbitration contracts are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

She maintained that the prejudice requirement has become specific to arbitration. She said there was a lot of discussion in the briefs about waiver and default, but the Eighth Circuit should have applied generally applicable Iowa law.  Then, she explained, if it found waiver, the court would still have to assess if the actions of employer Sundance, which owns Taco Bell franchises, were in default of proceeding.

“So whether Sundance’s actions constituted default is a secondary question,” said Gilbride, “not a replacement for the first-order waiver inquiry.”

Gilbride was moving from her FAA Sec. 2 analysis to FAA Sec. 3, and urging the Court to adopt a two-step analysis for evaluating waiving a right to arbitration. She was countering an argument made by Paul Clement in his Court briefs, who maintained that FAA Sec. 3 could be dispositive.

FAA Sec. 3 deals with motions to stay proceedings in favor of arbitration:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

“Prejudice,” declared Gilbride, “has no part to play in either of these inquiries.”

Under initial questioning from Chief Justice John G. Roberts Jr. and Justice Elena Kagan, Gilbride offered that the Court could remand for analysis of Iowa’s generally applicable waiver doctrines, but instead the Eighth Circuit looked at federal law and erroneously required prejudice. See Morgan v. Sundance Inc., 992 F.3d 711 (8th Cir. 2021) (available at https://bit.ly/3nqL7sJ). She conceded that prejudice could be a part of the state contract law, and that each case needed individual determination at the trial court level. 

At the same time, she noted that there could be a statutory default under federal law in FAA Sec. 3.

Justice Samuel A. Alito Jr. pressed Gilbride on how state law would affect the analysis if it in some way provided something different for arbitration cases than for other contract cases. She warned that arbitration-specific standards wouldn’t likely survive in analyzing three hypothetical Alito treatments of state law.

Justice Sonia Sotomayor told Gilbride her analysis was confusing, with the FAA Sec. 3 default meshing with FAA Sec. 4 on federal court jurisdiction over parties who refuse to honor arbitration agreements for purposes of compelling the process. Sotomayor appeared uncomfortable with the need to find a federal law default standard under Sec. 3 after finding the state law waiver standard needed for Sec. 2 in Gilbride’s sequential analysis proposal.

Sotomayor summarized, noting, “Some of my colleagues are troubled by the fact that states differ in how they define waiver.  I am troubled by the fact that the circuits define prejudice in different ways.”

At that point, Gilbride offered a bright-line standard. She noted that the requirement is “atextual” and not applied uniformly. “A presumption that a party should raise their defense of arbitration . . . by the time they file their first responsive pleading, by the time of their answer . . . before their answer if they file a motion,” she said, “that would be presumptively enough to get someone not to be in default in proceeding.”

The analysis Gilbride proposed, countered Chief Justice Roberts, will “increase the complexity and delay in arbitration proceedings.  . . . [It is] creating a whole new battleground before you even get to arbitration about whether or not there’s been . . waiver under state law. It seems quite contrary to the policy behind the FAA.”

Gilbride quickly countered that the prejudice requirement “actually increases delay and increases the sort of skirmishing in court . . . before anyone resorts to the arbitral forum that the FAA was designed eliminate.

In response to a comment by Justice Stephen G. Breyer that delay cases are fact intensive, Public Justice’s Karla Gilbride insisted that the analysis isn’t “any more complicated than questions about . . . who is bound by the contract or whether a particular dispute fall within the terms of the contract.  . . . State courts and federal courts applying state law answer those questions . . . within the parameters of the FAA all the time . . . without anything seeming to have ground to a halt.”

* * *

Sundance’s Paul Clement said that his client wasn’t in default under FAA Sec. 3, because there was no violation of a contract or a law. “[U]under all relevant state law doctrines, one has to show prejudice before a contractual right is lost because you litigated or waited too long to assert it,” he said at the outset, adding, “The most straightforward way to affirm the decision below is to apply Section 3 and its stay absent default direction.”

Client Sundance, Clement explained, moved under FAA Sec. 3 to stay the litigation, and “it is not in violation of any contractual deadline, any court rule, or any other legal obligation.”

He said the problem wasn’t a waiver by the respondent of its right to arbitrate.  “[W]hat is at issue is simply not asserting a right soon enough,” he said.

Chief Justice Roberts was skeptical, asking, “Waiver plays no role in regard–evaluating that situation at all?”

Clement said that in the absence of filing deadlines, courts will assess a variety of factors–including prejudice to the other side.  

Justice Neil Gorsuch pressed him on assessing a waiver in the absence of an intentional act, and Clement said that the lower court really meant a forefeiture. 

At that point, Gorsuch suggested it would make sense to send the case back for that state law analysis stating that the Eighth Circuit made a mistake using a federal law analysis.  That’s when Clement said that the Court should dismiss the case instead.

“The Eighth Circuit wasn’t saying this is absolutely waiver and ‘that’s why we’re applying this three-factor test,’” explained Clement.

The circuit court, he continued, “applied the three-factor test presumably as–if you go back in their case law . . .– as a gloss on the [FAA Sec. 3] statutory phrase ‘in default.’ And [the appeals panel] said, as a general matter, ‘This is when it’s too late to invoke your right to arbitrate, and we have a three-factor test, and the plaintiff in this case fails under the third factor.’ Importantly, [the Eighth Circuit] didn’t even definitively resolve the second factor [acting inconsistently with the right to arbitration], which is the only thing that actually even goes to an inconsistency that possibly could get to an implied waiver. And there’s not a hint in the decision that they thought they were talking about the explicit waiver that your question alludes to.”

Clement emphasized under tough questioning from Justices Breyer and Kagan that there was no dispute about the arbitration agreement’s existence, and attempts to resolve state law issues preliminarily under such circumstances belong with arbitrators, at one point invoking to Breyer the opinion the justice wrote on arbitrator versus court determinations in Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002) (available at https://bit.ly/2yiejeh).

“The arbitration agreement is valid,” said Clement. “Nobody questions that.”

Justice Brett Kavanaugh asked whether the failure to raise the arbitration defense to a court action in the first responsive pleading could be a review standard for waiver, but Clement rejected it. He said it wasn’t fair to his client. “[If you want to write an opinion in my client’s favor and suggest to the rules committee that they amend the rules to give clear notice to parties, then I could live with that.”

Clement followed up when Kavanaugh pressed further to note that the line drawn by courts generally isn’t the first responsive pleading, but when there already has been extensive discovery.

Kagan returned to Clement’s point that missing a deadline would satisfy FAA Sec. 3’s requirement that a stay wouldn’t be issued if the party asking for the stay was in default. “Where does this federal common law rule come from as to what counts as default?” she asked.

“It’s a gloss on the statutory phrase ‘in default,’” responded the former solicitor general, “and I think everybody agrees ‘default’ means you violated a legal obligation.”

Justice Sotomayor recounted Sundance’s moves in the matter, and maintained that the company intentionally waived arbitration to see how it would do in litigation, and then reversed course.  Clement resisted, but noted also countered that the strategy was sound and adhered to its arbitration contract.  

He responded:

I think what the parties bargained for here was not just arbitration but bilateral arbitration. And when the other side decides not just to violate the arbitration agreement but to seek a nationwide collective action, I think my client is perfectly within its rights, and it’s what I would advise my client to do under the circumstances[–]don’t make a motion to compel arbitration because you might get a motion to compel nationwide collective arbitration, and pretty much every defendant on the planet agrees that’s the worst of both worlds. So you wait.

Sotomayor said that Sundance should have raised that objection in its motion to compel.

“I suppose we could have,” responded Kirkland’s Paul Clement, “and with the benefit of that additional advice, maybe that’s what I’d tell my clients to do. But I’d still say, OK, at worst, we failed to make a motion. At worst, we’re in the realm of forfeiture, and we still have the ability to make this motion under [FAA] Sec. 3.”

The case is expected to be decided before the Court’s current term ends in June.  The audio of Supreme Court oral arguments, as well as transcripts, can be found here. For more background on Morgan, see Russ Bleemer, “The Supreme Court’s Six-Pack Is Set to Refine Arbitration Practice,” 40 Alternatives 17 (February 2022) (available here), and Mark Kantor, “U.S. Supreme Court Adds an Arbitration Issue: Is Proof of Prejudice Needed to Defeat a Motion to Compel?” CPR Speaks (Nov. 15, 2021) (available here).

* * *

The author edits Alternatives to the High Cost of Litigation for CPR at altnewsletter.com.

[END]

Increased Mobile Health Triggers Increased FTC Enforcement, and Points to a Need for Dispute Prevention Efforts

By Janice L. Sperow

The pandemic changed how we work, how we shop, how we communicate, and how we “meet.” It changed our world’s “normal.”

Most significantly, it changed the healthcare industry, but not only with new vaccines and protocols. It revolutionized the way we maintain our health and wellness, as healthcare app development now shapes the future of medicine.

That, in turn, provides an opportunity for a new application for alternative dispute resolution—specifically, a recent Federal Trade Commission statement puts health-care industry managers on notice that they should institute dispute prevention steps and protocols to avoid potentially costly civil penalties as their products face closer federal scrutiny.

Spurred by rapid significant advances in mobile technology, artificial intelligence, and the internet of things, medical apps have accelerated at an unprecedented rate. Even before the pandemic’s uptick in the use of healthcare mobility tools, the Physicians Practice medical publication conducted a mobile health survey in 2018 and found that more than 75% of respondents used some form of mobile health solutions on a weekly basis.

Since the pandemic, the use of mobile applications in healthcare, MedTech (see www.medtech.org), and eHealth has skyrocketed. A $21.3 billion market in 2017, the global mobile health market is anticipated to reach $151 billion by 2025. See, e.g., Grand View Research, mHealth Apps Market Size, Share & Trends Analysis Report By Type (Fitness, Medical), By Region (North America, APAC, Europe, MEA, Latin America), And Segment Forecasts, 2021–2028 (February 2021) (available at https://bit.ly/2Zqo5bR).

The U.S Food and Drug Administration defines a health app as mobile software that diagnoses, tracks, or treats disease. A wellness app uses mobile software to enhance or track overall user health. They can and do address every facet of life impacting wellness from mental, physical, social, environmental, nutritional, behavioral, to even spiritual factors.

In response to the market’s growth, the Federal Trade Commission issued its “Statement of the Commission on Breaches by Health Apps and Other Connected Devices” (Sept. 15) (available at https://bit.ly/3bgLv63).  The statement stresses the FTC’s commitment to protecting private medical and health information inputted into these apps and devices, and explains the FTC’s Health Breach Notification Rule in more detail. (The Rule is available at https://bit.ly/3nFzkpk.) The Statement unequivocally declares the Rule’s scope and the FTC’s intention to enforce the rule.

The FTC’s Health Breach Notification Rule has been in effect since 2009, when the American Recovery and Reinvestment Act of 2009 (text at https://bit.ly/3pGHtMy) became effective. The Rule addresses the security of personal health records, or PHR, defined to include an electronic record of identifiable health information on an individual that can be drawn from multiple sources and that is managed, shared, and controlled by or primarily for the individual. See 16 C.F.R. § 318.2(d).

“PHR identifiable health information” includes “individually identifiable health information,” as defined in section 1171(6) of the Social Security Act. See 42 U.S.C. 1320d-6. It also includes individual information provided by or on behalf of the individual that actually identifies or reasonably can be used to identify the individual. See 16 C.F.R. § 318.2(e) (“reasonable basis to believe that the information can be used to identify the individual”).

The Rule applies to (1) vendors of personal health records; (2) PHR-related entities that interact with vendors of PHRs or HIPAA-covered entities by offering products or services through their sites; (3) PHR-related entities that access information from or send information to a PHR; (4) PHR-related entities that process unsecured PHR identifiable health information as part of providing their services; and (5) third-party service providers for PHRs vendors.

The Rule does not apply to HIPAA-covered entities or any other entity to the extent that it engages in activities as a business associate of a HIPAA-covered entity.

Under the Rule, vendors of PHRs and PHR related entities must report a “breach of security” involving PHRs to the FTC, the consumers, and in some cases to the media. Service providers that process information for PHR vendors and PHR related entities also have a duty to notify their business customers of a security breach.

Typically, these service providers handle data storage or billing as a third-party provider. The Rule defines a “breach of security” as the acquisition of unsecured, PHR identifiable health information without the individual’s authorization.

Upon discovering a security breach, the entity must notify the required recipients within 60 days; but it must alert the FTC within 10 business days if the breach involves more than 500 individuals. Noncomplying entities face civil penalties of $43,792 per violation per day.

Rule Clarification

The FTC’s new Statement clarifies the Rule’s scope and application. It explains that the Rule covers PHRs vendors that contain individually identifiable health information created or received by health care providers. The Statement then specifies that health app and connected-device developers qualify as “health care providers” under the Rule because they “furnish health care services or supplies.”

Consequently, the Rule’s protections encompass any personally identifiable information developers create or receive that relates to the past, present, or future physical or mental condition of an individual; the provision of healthcare to an individual; or the past, present, or future payment for healthcare to an individual.

The Statement also emphasized that an electronic health record must draw information from multiple sources and be managed, shared, or controlled by or primarily for the individual before the FTC will consider it to be a PHR under the Rule.

The Statement, however, interprets multiple sources liberally to include other non-health related information. An electronic health record can draw information “from multiple sources” in the context of a health app, for example, through a combination of consumer inputs and application programming interfaces.

Hence, the Rule would apply to an app if it collects information directly from consumers and can technically draw information through an application programming interface that enables syncing with a consumer’s fitness tracker or phone, even if only one source provided the health information. For example, the Rule would cover a blood sugar monitoring app that collects health information only from the user’s blood sugar levels if it then uses non-health information from the user’s phone, such as date, time, or percentage figures.

The Statement also warns entities that the Rule does not limit a “breach of security” to cybersecurity intrusions, illegal behavior, or ill-intentioned activities. Rather, any unauthorized access will trigger the Rule’s notification duties, much like under HIPAA. Thus, a health app developer faces a reportable breach of security if it accidentally discloses private health information to a third party without the individual’s consent.

Rule Enforcement Change

In addition to clarifying the Rule’s scope, the FTC’s new Statement also signaled an enforcement sea change. Even though the Rule was enacted more than a decade ago, the FTC has not enforced it once since 2009.

The FTC admitted that it has not used the Rule. The Statement cautioned, however, that the FTC considers the Rule’s notification duties critical now in light of the surge in health apps and connected devices. The Statement explicitly declares the FTC’s intent to notify entities of their continuing obligation to publicize breaches under the Rule.

The Statement’s message is unequivocal: the FTC will enforce the Rule and its notice requirements from now on.

A Dispute Prevention Opportunity

Instead of being in a “more bad news” category, healthcare managers should file the FTC’s Statement as a new opportunity to prevent future disputes. The FTC Statement serves as a warning, affording the healthcare industry some time to implement strategies to protect itself from class actions, mass claims arbitration, and other costly disputes. By taking the warning seriously, the industry can assess and then minimize its risk.

The bottom line: Healthcare and wellness app developers should assess the Rule’s application to their services and the adequacy of their current security measures in order to prevent triggering the Rule’s notification provisions or even the possibility of a noncompliance finding.

And then they can breathe a sigh of relief if the current measures adequately protect the business, or implement new measures now to upgrade them until they do. Either way, the FTC handed the healthcare industry an opportunity to prevent costly future risk.

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The author is a full-time neutral, arbitrator, mediator, dispute prevention facilitator, and Hearing Officer specializing in mass claims, healthcare, technology, employment, and all commercial matters. She works on domestic and international matters, and is based in La Mesa, Calif.

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