The Federal Trade Commission announced a settlement with VTech Electronics Limited and its U.S. subsidiary in the FTC’s first case involving Internet-connected toys.

VTech had been charged with violating the FTC Act and the Children’s Online Privacy Protection Act (COPPA) by collecting personal information from children without providing direct notice and obtaining their parent’s consent, as well as failing to properly secure the data it collected.  The settlement includes a payment of $650,000 in civil penalties, injunctive relief, and the establishment of a comprehensive security program.

Background

VTech, a Hong Kong corporation, and VTech Electronics North America, advertise, market and distribute electronic learning products (ELPs).  The companies offer online games available through the ELPs and operate the Learning Lodge Navigator online service, a platform similar to an app store that allows customers to download child-directed apps, games, e-books and other online content.  As of November 2015, approximately 2.25 million parents had created accounts with Learning Lodge for nearly 3 million children, according to the FTC.

Another app, Kid Connect, allows children to communicate with other children who have the app, or with adults who download the adult version of it available through Apple’s App Store and Google’s Google Play.  VTech also offered a web-based platform called Planet VTech, which permitted children to play online games and chat with other friends.  Parents created accounts by submitting personal information including name, address, password, secret question and answer, child first name, login name, password, and child’s date of birth.  VTech is also the parent company of LeapFrog, a popular brand of educational toys and games for children.

In November 2015, VTech learned, from a journalist, that a hacker had accessed their computer network and exfiltrated the personal information of consumers, including personal information about the children who use Kid Connect.  The hacker remotely accessed the company’s test environment and then were able to traverse to the live environment where VTech stored in clear text, among other things, parents’ full names, mailing addresses, e-mail addresses, secret questions and children’s usernames.  Although the stored passwords, children’s photos and audio files were in an encrypted format, the hacker accessed the decryption keys.

FTC Complaint

The complaint alleges that VTech and its subsidiaries violated COPPA by not prominently and clearly labeling required links.  For example,   a link to the Privacy Policy was not included in each area of the Kid Connect app where personal information was collected from children.  The complaint notes that the Privacy Policy was in small blue font in the bottom right hand corner of the Kid Connect registration pages.  In addition, the Privacy Policy did not include information that the COPPA Rule requires operators of child-directed websites to disclose the company’s address and email address, a full description of the information collected from children, and information about the parents’ right to review or delete a child’s personal information.

The complaint also alleges that VTech engaged in a number of practices that failed to provide reasonable and appropriate data security to protect the personal information collected from consumers, including children through Kid Connect. This includes failing to implement the proper safeguards to keep hackers from gaining remote unauthorized access to the network by exploiting commonly known and reasonably foreseeable vulnerabilities.

Among other things, the complaint alleges that VTech failed to:

• Develop, implement, or maintain a comprehensive information security program.

• Implement adequate safeguards and security measures to segment and protect its live website enforcement from its test environment.

• Implement an intrusion or prevention or detection system or similar safeguards to alert the company of potentially unauthorized access to their computer network.

• Implement a tool to monitor for unauthorized attempts to exfiltrate consumers’ personal information across the company’s network boundaries.

• Complete its vulnerability and penetration testing of environments that could be exploited to gain unauthorized access to consumers’ personal data to well-know and reasonably foreseeable vulnerabilities.

• Implement reasonable guidance or training for employees regarding data security and safeguarding consumers’ personal information.

The complaint also alleges that the defendants violated Section 5 representing in their privacy policy that VTech protects privacy by using HTTPS encryption technology, which was false.

Settlement and Key Takeaways

The settlement permanently prohibits VTech from violating COPPA in the future.The settlement also prohibits VTech from misrepresenting the extent to which they maintain and protect the privacy, confidentiality, security, or integrity of registration information and personal information collected from a child.  VTech must also establish a comprehensive data security program, which will be subject to independent audits for 20 years.

This settlement highlights the importance of good data security practices generally and brings much due attention to the interconnectivity of toys, a rapidly growing market within the Internet of Things stratosphere.