[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
REAUTHORIZATION OF THE FEDERAL TRADE COMMISSION: POSITIONING THE
COMMISSION FOR THE TWENTY-FIRST CENTURY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 11, 2003
__________
Serial No. 108-30
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
88-423PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
BARBARA CUBIN, Wyoming Ranking Member
JOHN SHIMKUS, Illinois HILDA L. SOLIS, California
JOHN B. SHADEGG, Arizona EDWARD J. MARKEY, Massachusetts
Vice Chairman EDOLPHUS TOWNS, New York
GEORGE RADANOVICH, California SHERROD BROWN, Ohio
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
JOSEPH R. PITTS, Pennsylvania PETER DEUTSCH, Florida
MARY BONO, California BART STUPAK, Michigan
LEE TERRY, Nebraska GENE GREEN, Texas
ERNIE FLETCHER, Kentucky KAREN McCARTHY, Missouri
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
DARRELL E. ISSA, California DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho JOHN D. DINGELL, Michigan,
W.J. ``BILLY'' TAUZIN, Louisiana (Ex Officio)
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Leary, Hon. Thomas B., Commissioner, Federal Trade Commission 35
Muris, Hon. Timothy J., Chairman, Federal Trade Commission... 10
Swindle, Hon. Orson, Commissioner, Federal Trade Commission.. 33
Thompson, Hon. Mozelle W., Commissioner, Federal Trade
Commission................................................. 30
Additional material submitted for the record:
Federal Trade Commission, letter dated July 2, 2003,
enclosing response for the record.......................... 58
(iii)
REAUTHORIZATION OF THE FEDERAL TRADE COMMISSION: POSITIONING THE
COMMISSION FOR THE TWENTY-FIRST CENTURY
----------
WEDNESDAY, JUNE 11, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade and
Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Shimkus, Shadegg,
Bass, Ferguson, Otter, Tauzin (ex officio), Schakowsky, Markey,
Stupak, Green, McCarthy, and Strickland.
Staff present: Kelly Zerzan, majority counsel; Ramsen
Betfarhad, majority counsel and policy coordinator; Jill
Latham, legislative clerk; Jon Tripp, deputy communications
director; and Jonathan Cordone, minority counsel.
Mr. Stearns. Good morning. I would like to welcome all of
you to the Reauthorization of the Federal Trade Commission:
Positioning the Commission for the 21st Century hearing at the
Subcommittee on Commerce, Trade, and Consumer Protection. I
would like to welcome and thank the Chairman of the Federal
Trade Commission, Mr. Muris, and three of the FTC
Commissioners, Mr. Leary, Thompson, Swindle, for appearing
before the committee on the matter of this reauthorization.
In working with the Commission we had specifically
scheduled the hearing today as the schedule of all five
Commissioners permitted them to be here. Unfortunately, due to
urgent family matters, Commissioner Sheila Anthony is not
available to testify this morning.
As I have suggested in the past, I think the Congress must
undertake its basic household duties, and this is one of them,
more diligently. One such duty is reauthorizing the various
agencies of the Federal Government. That is what we are trying
to accomplish starting this morning with this hearing.
Now, my colleagues, the last time we reauthorized the
Commission was in 1996, some 7 years ago, when we authorized it
through fiscal year 1998. The reauthorization process accords
us with the opportunity to carefully examine the mission of the
agency, its effectiveness in advancing the mission. In that
light I am pleased that the Commission is presenting a number
of legislative proposals to the committee this morning that it
deems necessary for its better fulfillment of its mission, in
particular its consumer protection mission.
I commend the Commission for being proactive on these
matters. I do want to perhaps express a little concern I had
that the committee was not informed in a timely manner of the
Commission's intent to present its legislative proposal with
respect to spam at today's hearing.
That said, this hearing is a good opportunity for us to
hear the Commission's argument in support of its three major
legislative proposals. The first FTC legislative proposal calls
for the elimination of the FTC Act's common carrier exemption.
The statutory exemption precludes the Federal Trade Commission
from investigating and prosecuting common carriers for both
anticompetitive behavior and deceptive, unfair and fraudulent
activities. The Commission seeks a revisit of that exemption,
in particular with respect to its ability to pursue deceptive,
unfair, fraudulent non-common carrier activities of a
telecommunications common carrier.
As the subtitle of this hearing is ``Positioning the
Commission for the 21st Century,'' I will obviously listen very
carefully to the Commission's arguments that the exception--
exemption rather--was written into the statutes some 70 years
ago. So this is sort of a landmark discussion that we are
having here, and so I think everybody in the industry and here
in government will follow this discussion very carefully
because of its huge implications.
Now, my colleagues, the second Federal Trade Commission
legislative proposal addresses spam, the modern scourge of e-
mail users everywhere. The legislative proposal as opposed to
the procedural one especially calls for investing the Federal
Trade Commission with broad rulemaking authority addressing
deceptive and abusive practices with respect to unsolicited
commercial e-mail along the lines of similar authority granted
to it with respect to telemarketing by Congress in the
Telemarketing Consumer Fraud and Abuse Prevention Act of 1991.
What I find curious about the proposal, an issue that I
would like to further explore with the Commissioners, is the
qualifying language that surrounds the proposal making the
proposal seem tentative. Specifically the Commission's
testimony prefaces the proposal by stating that, ``section 5 of
the FTC Act provides a firm footing for spam prosecution.
Additional law enforcement tools could make more explicit the
boundaries of legal and illegal conduct.'' More significantly,
the statement concludes by stating that, ``admittedly the
Commission recognized that these legal systems will not solve
the growing spam problem, nor is it clear what impact these
systems will have on some of the other problems associated with
spam; for example, volume and security.''
Mr. Tauzin, the chairman of this committee, the full
committee, drafted a bill, H.R. 2214. I am an original
cosponsor of that bill, Reduction and Distribution of Spam Act
2003. So we could be interested in working closely with the
Commission so that we can advance from this committee and the
Congress an effective spam legislation in light of some of your
comments.
Another issue, the Commission's sweeping cross-border fraud
legislative proposal is one that I think is quite worthy of
careful consideration by members. I believe if we derive the
right formulation of that language it could indeed empower the
FTC to be more effective in tackling this challenge in this
century. It is important that the proposal be rigorously
debated, making sure that civil liberties are not compromised.
Still, as the Commission is well aware, we need to respond
more effectively to fraud that finds its genesis overseas. For
example, one reason that spam has problems--as a problem defies
easy solution is the fact that even if we combat it effectively
within the United States, within our borders, spam will
continue to be a serious nuisance and a costly problem because
it is dispatched from overseas. Thus it is imperative that we
explore ways to better protect our consumers from unfair,
deceptive and fraudulent activities that increasingly have
international dimensions to them.
I will work closely with the Commission in further
developing its cross-border fraud proposals in ways that do not
abridge our civil liberties with the objective of enacting
legislation, if possible, this year.
In conclusion, I would like to raise a number of issues for
the Commission's consideration. First, I think it is imperative
that the Commission focus more resources on its efforts
fighting ID theft and assisting the victims of this crime. I
ask that the Commission consider any and all ideas that would
help consumers find speedy redress. Time permitting, I will
raise with you a few thoughts that I have during the question
and answer session.
Second, I think it is time for the Commission to seriously
consider promulgating a rule separate and distinct from the
franchise rule addressing business opportunities.
Third, I have followed the Commission's activities with
respect to information security, specifically the Eli Lilly and
Microsoft consent agreements. I again commend the Commission
for being proactive on an issue of very substantial importance.
Still, I am concerned that consent decrees concluded at the
agency level may now effectively become the corpus of legal
guidance on information security obligations with respect to
their customer's personal data. I seek to explore this issue
this morning and in the near future with the Commission.
I thank all of them for coming and their participation this
morning, and I look forward to their testimony. And with that,
the ranking member is welcome for an opening statement.
Ms. Schakowsky. I thank you, Mr. Chairman, and I thank the
chairman of the full committee for holding this important
hearing today as well. I want to thank the Commissioners from
the Federal Trade Commission for being here today. I am sorry
that Commissioner Sheila Anthony was not able to be here and
hope the other Commissioners will extend to her my gratitude
for all her work on behalf of the consumers.
It is my understanding that later this session the
subcommittee will consider legislation that will reauthorize
the Federal Trade Commission for the next several years. The
FTC is here today to share its views on what should be included
in this legislation, and I look forward to hearing from all of
you.
That being said, I hope that in the near future the
subcommittee will have an opportunity to hear from consumers
and law enforcement officials and other experts on FTC
reauthorization. I hope that the chairman will agree to hold
more hearings to ensure that we have a record that includes a
diverse range of views before we consider legislation that
would reauthorize the FTC.
The FTC is responsible for protecting consumers and
businesses from unfair deceptive trade practices. The FTC is
responsible for policing the marketplace and holding bad actors
accountable. This is an extremely important mission because our
constituents are far too vulnerable to unscrupulous companies
that put their own bottom line above all else, including
obeying the law. And whether it is at the gas pump, while at
the pharmacy, while purchasing a home, families need to be
protected from unfair and deceptive business practices and
other types of fraud.
It is very important that our laws and regulations are
vigorously enforced by the FTC. Perpetrators of fraud need to
know that they will be held accountable for their actions. The
public needs to be assured that their rights are being
protected. It is the FTC's job to put the interest of consumers
first and foremost at all times without exceptions. It is the
subcommittee's responsibility to ensure that the FTC enforces
the law and vigorously protects the public from unfair and
deceptive trade practices.
The FTC works to prevent fraud and deception from occurring
in the first place. This is an increasingly difficult job
because identity thieves and other scam artists are always
working to be one step ahead of the law. The Internet and other
technological advances have made it increasingly difficult to
find perpetrators and protect consumers. No crime provides a
better example of this challenge than the problem of identity
theft.
And according to the Federal Trade Commission, in 2002
identity theft was the No. 1 consumer complaint for the third
year in a row. The number of identity thefts doubled in 2002.
In 2002, there were at least 7,400 victims in Illinois and over
2,700 in Chicago. This is--and I represent a district on the
North Side of Chicago. This is probably just the tip of the
iceberg. Leading consumer groups estimate that there were
800,000 victims last year.
Victims are frequently unaware that their identity has been
stolen in the first place. Thieves can use stolen personal
information to create fake IDs, cash checks, apply for credit
cards, loans and mortgages. Consumers have spent years and
thousands of dollars attempting to clear their credit reports.
Many have lost their ability to borrow, buy a new home or
refinance a mortgage through no fault of their own. I have
heard from constituents who have had their identities stolen,
and it is a difficult ordeal.
The FTC has worked hard to educate consumers on how they
can protect their identity. The FTC has also worked to create a
master complaint form that is used by the public and private
institutions, and I commend the FTC for these efforts.
Nevertheless, the fact remains that victims have a very, very
difficult time restoring their credit record. I hope the FTC
will take additional steps to help consumers.
I want to work with my colleagues to assist in your efforts
to turn the tide on these serious problems. We also need to
look at ways in which we can help the FTC work closer with
foreign governments while at the same time ensuring that the
constitutional privacy rights of our constituents are not
infringed upon. I want to hear the FTC's views on this issue.
Today the Commission will testify on a proposal to remove
the FTC's exemption from regulating the advertisements of long
distance telephone companies. Some telecommunication companies
have evoked the common carriage exemption to prevent the FTC
from taking enforcement actions. I question if the common
carriage exemption serves the public interest. The FTC has
expertise in fighting unfair and deceptive trade practices. I
also look forward to hearing about the Commission's efforts to
implement the National Do Not Call List, fight predatory
lending and combat spam.
Thank you.
Mr. Stearns. I thank the gentlelady. And the gentleman from
Illinois, Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. Let me welcome the
Commissioners back to this hearing to talk about the
reauthorization. The FTC has an important role because it is
one that the public really understands for the most part. I
mean, they understand the issue of the Do Not Call List. They
understand the crisis of identity theft. They understand the
problems with spam. They may not have a full understanding nor
do many legislators on the common carrier exemption, which will
be addressed and discussed and debated. But that is why we are
having this hearing today, to get in a position to move on a
reauthorization bill and tweak the legislative language that we
need to do to face a new era with new technology and new
challenges.
So we are really pleased to have you here. I want to
apologize up front. I have another competing hearing at 11, so
I am going to stay to hear most of your statements. I don't
know if I will be around to ask some questions, but I look
forward to hearing your testimony. And with that, Mr. Chairman,
I yield back my time.
Mr. Stearns. I thank the gentleman. The gentleman from
Michigan, Mr. Stupak.
Mr. Stupak. Thank you, Mr. Chairman, and thank you for
holding this hearing, and I welcome our distinguished panel
here today. First, I would like to commend the Commissioners
and the FTC for their aggressive pursuit of the Federal Do Not
Call Registry. I have had countless constituents express
frustration to me about the frequent telemarketing calls that
they receive. I have been pleased to report to them that both
Congress and the FTC have sought to address this problem and
that help is on the way in the form of the FTC Do Not Call
List.
Along these lines is my concern about another abusive
practice, spam. I believe that Congress must take action on
this subject, and I would support providing the FTC with
greater authority to address the rise of spam. These
unsolicited e-mails range from commercial e-mail that clog up
Internet service providers and frustrate customers to offensive
pornographic e-mails that can be opened by unsuspecting
children. I support cracking down on spam so we can protect
business, consumers and our children, and pledge to work with
the FTC on the necessary measures that are needed.
Last, but certainly not least, I am very interested in the
hearings the FTC is conducting on health care issues and
competition, particularly as they relate to insurance
companies, and I look forward to reviewing the results of the
FTC report.
The FTC is involved in issues that are of the utmost
importance to consumers: telemarketers, spam, health care as
well as the ongoing antitrust enforcement in the oil and gas
industries and identity theft. While I do not believe the FTC
enforcement should take the place of the rights of individual
consumers or the State Attorney Generals who seek remedies, I
believe that by providing all of these parties with sufficient
remedies we can make real progress in the area of consumer
fraud and abuse.
Like Mr. Shimkus, I will have to leave shortly for another
hearing in the Telecommunications and Internet Subcommittee,
but I hope to hear some of the testimony today and look forward
to proceeding with the reauthorization of the FTC.
And with that, Mr. Chairman, I would yield back the balance
of my time.
Mr. Stearns. Thank the gentleman. And the vice chairman of
the subcommittee, the gentleman from Arizona, Mr. Shadegg.
Mr. Shadegg. Thank you, Mr. Chairman. And first let me
thank you for holding this important hearing. And let me also
thank Chairman Muris and Commissioners Thompson, Swindle and
Leary for their testimony today.
I am particularly interested to hear about the Commission's
efforts to educate consumers and help them deal with and combat
identity theft. My personal interest in identity theft began
about 5 years ago when two of my constituents, Bob and JoAnn
Hartle of Phoenix, Arizona, were the victims of an identity
theft. My constituents were instrumental in securing passage of
the first State law in the Nation to criminalize identity theft
as a crime in and of itself.
Mr. And Mrs. Hartle suffered the devastation of identity
theft when a convicted felon took Mr. Hartle's identity and
made purchases totaling more than $100,000. This individual
also used Mr. Hartle's identity to obtain a pass to the secure
areas of Phoenix Sky Harbor International Airport, an offense
which today following 9/11 would be considered extremely grave.
On top of that he obtained handguns using Mr. Hartle's clean
record to get around the Brady gun law. As a result of their
victimization, Mr. and Mrs. Hartle were forced to spend more
than 4 years of their lives and more than $15,000 of their own
money to restore their credit because there were no Federal
penalties for identity theft.
Their case led me to introduce a bill in the House that was
eventually signed into law. The Identity Theft and Assumption
Deterrence of 1998 gave Federal law enforcement agencies the
authority to investigate and prosecute identity theft as a
Federal crime for the first time. Mr. and Mrs. Hartle also
turned their unfortunate circumstance into something positive
by establishing a nonprofit organization to assist other
victims of identity theft. Their website, www.idfraud.net, is
available to provide guidance to identity theft victims
nationwide.
Identity theft ranges from single individuals, like the
criminal who victimized the Hartles, involving small or large
amounts of money, to large organized professional crime rings.
TriWest Healthcare Alliance, a company located in my district,
may have been the victim of a professional crime ring. On
December 14, 2002, computer hard drives containing their
clients' sensitive, personally identifiable information were
stolen from TriWest's Phoenix office. The stolen data included
personally identifiable information such as Social Security
numbers, birth dates and addresses for military personnel, one
quarter of whom were on active duty at the time, retirees and
family members who were served by TriWest under a contract with
the Department of Defense.
The nature of identity theft has changed over time and
today it is more likely than ever to involve breaches of
security data. According to an identity fraud manager at the
Federal Trade Commission, there is a shift by identity thefts
from going after single individuals to going after mass amounts
of information. Law enforcement experts now estimate that half
of all cases involve thefts of business data banks as more and
more information is stored in computer data bases that are
vulnerable to hackers.
The identity theft legislation that I introduced was signed
into law in 1998 and was an important first step to crack down
on identity fraud and identity theft. However, more legislation
is needed in this area to protect consumers from identity theft
and to ensure the soundness and secureness of our economy. I am
currently in the process of developing a legislative response.
I will look forward to hearing your testimony on this and other
issues and appreciate your presence here today.
Yield back the balance of my time.
Mr. Stearns. Thank the gentleman. The gentleman from Texas,
Mr. Green.
Mr. Green. Thank you, Chairman Stearns and Ranking Member
Schakowsky, for holding this important hearing on the
reauthorization of the Federal Trade Commission. As the agency
dedicated to protecting the interests of American consumers,
the FTC has the important and admirable mission of ensuring
both competition and consumer protection in the marketplace.
Like my colleagues, I would like to thank the FTC for its
swift implementation of the Do Not Call Registry. While I
initially urged that Congress approve stronger language, I am
glad that beginning this summer consumers will have the power
to reduce the number of annoying telemarketing calls that too
often interrupt precious and yet increasingly limited time that
the American families have to spend together. The
implementation of this registry is truly a victory for our
consumers.
Additionally, I would like to offer my personal thanks to
the FTC for its role in protecting Spanish speaking consumers
in my hometown of Houston and across America who have been
victimized by deceptive and unfair debt collecting practices.
As a result of the Commission's actions against Houston based
United Recovery Systems, our Spanish speaking consumers can be
assured that they are afforded the same consumer protections as
English speaking consumers.
I understand our witnesses will be offering several
specific legislative proposals to enhance the FTC's ability to
protect consumer interests, and I agree with the Commission
that the common carrier exemption is outdated and the FTC's
ability to protect consumers from anticompetitive and deceptive
practices should also apply to the telecommunications industry.
Times have changed and the telecommunications industry is no
longer a government regulated monopoly. Telecommunications is a
deregulated, competitive industry and its customers should be
afforded the same consumer protections that they receive when
dealing with our competitive industry.
Additionally, I am pleased that the Commission wishes to
broaden its authority to address the problematic issue of spam.
Last year Congresswoman Heather Wilson and I introduced spam
legislation. We are putting together the final touches on
similar but updated legislation for this Congress. Our
legislation will provide for broad strong enforcement and seeks
to eliminate loopholes, to provide consumers a true and
effective opt out option from unwanted e-mail, much of what is
pornographic.
One spam bill, H.R. 2214, imposes a knowledge standard that
the Commission must prove to successfully bring a civil action
for violations of three provisions of the bill. I am concerned
with how this unusual proposal compares with traditional
enforcement authority, and I would hope that would be addressed
by our witnesses. It seems safe to say that the FTC would less
likely bring an action in situations where it would be required
to prove a knowledge standard.
Again, I look forward to working with you to crackdown on
spammers, and I will listen with interest to the legislative
proposals and further that goal. And again thank you, Mr.
Chairman and ranking member, and for our witnesses being here
today.
Mr. Stearns. I thank the gentleman. Gentleman from Idaho.
Mr. Otter. I will pass.
Mr. Stearns. Okay. The gentleman from Idaho passes. Mr.
Ferguson.
Mr. Ferguson. Thank you, Mr. Chairman. I appreciate your
holding this hearing. I thank Chairman Muris and the
Commissioners for participating.
Mr. Chairman, the FTC provides a substantial service to the
consumers of our country and to our economy as a whole. In many
instances the FTC is the watchdog that stands up for consumers
against bad actors in the marketplace who engage in deceptive
marketing or other fraudulent activities. Whether combating
telemarketing fraud, Internet scams or price fixing schemes,
the FTC's primary mission is to protect consumers.
Today I look forward to hearing from the panel regarding
their recommendations as the FTC looks forward in their role to
protecting consumers in the future. We must, however, recognize
that when reassessing the role of the FTC, that we do not
duplicate authority or create further jurisdictional ambiguity.
We all know that today's budgets are tight. It simply doesn't
make sense to give one agency new authority to enforce laws and
regulations already enforced by another agency. Our Nation's
telecommunications sector has seen some tough times recently
and it seems foolish to me to add one more layer of government
red tape to stifle innovation and hamper growth.
I look forward to hearing the testimony of our panel today
and also to hearing specifics on why the FTC needs perhaps a
new and broader mandate. Thank you again, Mr. Chairman. I thank
the members of the panel for coming here today, and I yield
back.
Mr. Stearns. Thank the gentleman. Gentlelady from Missouri,
Ms. McCarthy.
Ms. McCarthy. Thank you, Mr. Chairman. I am going to submit
my remarks for the record. They touch on many of the issues my
colleagues on the committee have already raised. I am very
grateful to you for this hearing and the Chairman and
Commissioners for sharing their thoughts with us today. I yield
back.
Mr. Stearns. All right. I thank the gentlelady.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman, for holding this hearing. I commend your
continued leadership of this Subcommittee, as we explore another timely
and important matter in the reauthorization of the Federal Trade
Commission.
I would also like to thank the distinguished panelists for coming
before the subcommittee. It is appropriate for the Chairman and
Commissioners to come before the subcommittee today and share with us
the proposals for ensuring that the core mission of the FTC can
continue to be effectively accomplished.
The Federal Trade Commission (FTC) has grown to play an invaluable
role in the marketplace. In the presence of ever-changing economies
both nationally and internationally, we must thoroughly examine the
FTC's operating parameters and determine their relevance, effectiveness
and flexibility when expansion might be necessary.
The FTC has already implemented a number of initiatives addressing
recently raised consumer concerns. The ``Do-Not-Call'' registry is an
excellent example. In reauthorizing the FTC, we must ensure its ability
to examine, assess and enforce regulations in the marketplace remains
intact and vibrant without exceeding its charter.
I look forward to reviewing the proposals before us today and
continuing the dialogue throughout the reauthorization process.
I thank the Chairman again and yield back the remainder of my time.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you, Mr. Chairman, for holding this important hearing. We
have nearly all of the Federal Trade Commissioners here today, and I
thank them for coming.
The authorization for the Federal Trade Commission lapsed in fiscal
year 1998, so it is time for this Committee to examine what the FTC
does, how it does it, and where the Commission plans to move in the
future.
The Federal Trade Commission has been remarkably active in the past
two years. Its mission, which is to prevent unfair competition and
unfair or deceptive acts or practices in the marketplace, has guided
the Commission in vigorously pursuing bad actors, scam artists and
hucksters.
We have seen a crack down on a range of deceptive marketing
practices including identity theft and Internet fraud, enforcement of
privacy policies, and the creation of a national do-not-call list.
Today we will hear about a number of new proposals the FTC would like
to tackle, including cross-border fraud, common carrier regulation, and
spam.
I was surprised to find the FTC has a legislative proposal for spam
included in its reauthorization package, although I'll note that many
of the issues raised by the FTC are included in Mr. Burr's anti-spam
bill, H.R. 2214. That bill provides the FTC with more streamlined APA
rulemaking authority to give the Commission more flexibility to respond
to changes in the marketplace. In addition, H.R. 2214 gives the FTC and
the Department of Justice all of the enforcement powers they currently
enjoy under the FTC Act--the same powers the Commission is requesting
here today. Since H.R. 2214 does not supercede the FTC's authority to
enforce against spam under its unfair and deceptive trade practices
authority, it should be a nice supplement to the Commission's existing
authority. In fact, H.R. 2214 may go even further than the FTC proposal
as it allows consumers the opportunity to opt out of ALL commercial
email, not just unsolicited commercial email.
I look forward to working with the FTC to refine and improve H.R.
2214, the Reduction in Distribution of SPAM Act. I encourage you,
Chairman Muris, to continue to communicate your ideas and concerns
regarding H.R. 2214 to this Committee.
Another aspect of the Commission's proposal is the removal of the
jurisdictional exemption over telecommunications common carriers.
Currently, common carriers are subject to rigorous regulation by the
Federal Communications Commission as well as by the states. Moreover,
to the extent that common carriers are engaged in non-common carrier
activities, courts have found that the FTC has the jurisdiction
necessary to enforce its regulations. If there is a need to codify this
judicial interpretation, that is a course of action we can discuss.
I do not, however, believe that a wholesale removal of the
exemption is necessary. If there are instances where common carrier
activities are so intertwined with non-common carrier activities, I
encourage the FTC and the FCC to work together and coordinate a joint
enforcement response. However, dual regulation is not the answer.
Thank you again, Mr. Chairman for calling this hearing, and I look
forward to hearing from our distinguished panel of witnesses.
Mr. Stearns. And with that, we will have our witnesses, and
I welcome the Honorable Timothy Muris, Chairman; the Honorable
Mr. Thompson, Commissioner, Federal Trade Commission; Honorable
Mr. Swindle, Commissioner; and the Honorable Mr. Leary. I think
you have heard both sides of our opening statements, so you
have created a little interest in the Federal Trade Commission
with your proactive proposals. So we are anxious to hear, Mr.
Chairman, your opening statement.
STATEMENTS OF HON. TIMOTHY J. MURIS, CHAIRMAN, FEDERAL TRADE
COMMISSION; HON. MOZELLE W. THOMPSON, COMMISSIONER, FEDERAL
TRADE COMMISSION; HON. THOMAS B. LEARY, COMMISSIONER, FEDERAL
TRADE COMMISSION; AND HON. ORSON SWINDLE, COMMISSIONER, FEDERAL
TRADE COMMISSION
Mr. Muris. Thank you very much, Mr. Chairman. We certainly
appreciate the opportunity to testify today to support the
FTC's reauthorization request. On behalf of the Commission, let
me first start by expressing our sincere thanks to you, Mr.
Chairman, and all the members of the subcommittee for your
continued support of the FTC. Our dedicated staff has continued
to take innovative and aggressive actions to protect consumers
and promote competition.
Today I would like to briefly outline our missions and some
of our recent accomplishments. My colleagues will then each
discuss specific legislative proposals that you mentioned that
we are recommending. The FTC consumer protection mission
focuses on attacking fraud and deception, consumer privacy,
deceptive lending practices, and cross-border consumer
protection. This program provides Americans with impressive
results.
Since April 1, 2002, the FTC has organized 12 joint law
enforcement efforts or sweeps with more than 165 partners.
These sweeps resulted in more than 400 cases targeting Internet
scams and telemarketing fraud, including deceptive work-at-home
opportunities, deceptive health claims, advanced fee credit
related fraud, fundraising fraud, and Internet auction fraud.
Overall, since April 2002 we have obtained more than 65 final
judgments, ordering more than $865 million in consumer redress.
In addition to attacking fraud, the Commission devotes
significant resources to protecting privacy. This year, the
Commission, with assistance from Congress, is set to launch its
National Do-Not-Call Registry. Implementation of this registry
will begin soon. Once it is in place, consumers who have
registered will begin to review fewer and fewer unwanted
telemarketing calls.
I want to thank you, Mr. Chairman, and this committee for
your support of this important initiative. In addition to
unwanted telemarketing calls, unsolicited commercial e-mail or
spam is a growing concern. We are addressing consumer concerns
about spam through law enforcement, consumer and business
education and research. In addition, the Commission has several
legislative ideas that Commissioner Swindle will discuss.
We have been equally as active protecting consumers from
anticompetitive conduct that can raise prices, particularly in
the health care, energy and high tech sectors. In health care,
a number of our activities will likely provide consumers with
more affordable drugs. For example, we published a study
examining the frequency of anticompetitive abuses to block
market entry of lower cost generic drugs, provided comments to
the FDA on the potential for misusing the Hatch-Waxman Act
procedures governing generic entry, and brought law enforcement
actions against branded drug companies alleging improper
efforts to delay generic entry. We recently announced a
settlement with Bristol-Myers Squibb concerning alleged abuses
of the Hatch-Waxman process to obstruct the entry of generic
competition for two anti-cancer drugs and one anti-anxiety
agent.
The FTC has also been active in protecting consumers from
anticompetitive conduct that may raise the price of oil and
gas. This year, we filed a complaint alleging that Unocal
improperly manipulated the process through which California set
regulations for the formulation of low emissions gasoline. We
have also begun a project that monitors wholesale and retail
prices of gasoline in approximately 360 cities across the
United States in an effort to identify possible anticompetitive
activity.
This year we are making, as the chairman noted, several
recommendations for legislative changes. We would be happy to
work with the committee staff on these recommendations. First,
Commissioner Thompson will provide an overview of the
Commission's recommendations to improve cross-border fraud
enforcement. These proposals are also critical to the FTC fight
against deceptive spam, as spammers often send their messages
from anywhere in the world to anyone in the world.
Second, Commissioner Swindle will discuss the agency's
recommendations to enhance the FTC's effectiveness in fighting
fraudulent spam. These proposals will improve our ability to
investigate and sue possible spam targets.
Finally, Commissioner Leary will discuss our recommendation
to eliminate the FTC Act's exemption for communications common
carriers.
Thank you very much for your attention, and I will turn it
over, if I may, to Commissioner Thompson.
[The prepared statement of Hon. Timothy J. Muris follows:]
Prepared Statement of The Federal Trade Commission
Mr. Chairman, the Federal Trade Commission (``Commission'' or
``FTC'') is pleased to appear before the Subcommittee today to support
the FTC's reauthorization request for Fiscal Years 2004 to
2006.1 Since the last reauthorization hearing, the FTC has
continued to take innovative and aggressive actions to protect
consumers and promote competition. The Commission would like to thank
the Chairman and members of the Subcommittee for their continued
support of the agency's missions.
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\1\ This written statement represents the views of the Federal
Trade Commission. My oral presentation and responses to questions are
my own and do not necessarily reflect the views of the Commission or
any other Commissioner.
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i. introduction
The FTC acts to ensure that markets operate efficiently to benefit
consumers. The FTC's twin missions of competition and consumer
protection serve a common aim: to enhance consumer welfare. The FTC's
competition mission promotes free and open markets, bringing consumers
lower prices, innovation, and choice among products and services. The
FTC's consumer protection mission fosters the exchange of accurate,
non-deceptive information, allowing consumers to make informed choices
in making purchasing decisions. Because accurate information in the
marketplace facilitates fair and robust competition, the FTC's twin
missions complement each other and maximize benefits for consumers.
Five principles guide the FTC's agenda for consumers. In exercising
its competition and consumer protection authority, the FTC:
Promotes competition and the unfettered exchange of accurate,
non-deceptive information through strong enforcement and
focused advocacy;
Stops conduct that poses the greatest threat to consumer
welfare, such as anticompetitive agreements among rivals and
fraudulent and deceptive practices;
Employs a systematic approach for identifying and addressing
serious misconduct, with special attention to harmful behavior
in key economic sectors;
Uses the agency's distinctive institutional capabilities by
applying its full range of tools--prosecuting cases, conducting
studies, holding hearings and workshops, engaging in advocacy
before other government bodies, and educating businesses and
consumers--to address competition and consumer protection
issues; and
Improves the institutions and processes by which competition
and consumer protection policies are formulated and applied.
During the past year, the FTC has applied its unique complement of
law enforcement and policy instruments to address critical consumer
concerns. Highlights include:
Privacy: ``Do-Not-Call.'' The Commission promulgated far-
reaching amendments to its Telemarketing Sales Rule (``TSR'').
Among the most important changes, the agency is poised to
launch its National Do-Not-Call registry, one of the most
significant consumer protection initiatives in recent years.
The registry will be a central database of telephone numbers of
consumers who choose not to receive telemarketing calls. Once
the registry is in place this summer, telemarketers will pay a
fee to gain access to the registry and then must scrub their
telemarketing lists against the telephone numbers in the
database. This fall, consumers who have placed their telephone
numbers on the registry will begin to receive fewer and fewer
unwanted telemarketing calls.
Health Care: Prescription Drugs. Medical therapy increasingly
relies on new pharmaceuticals as alternatives to more invasive
treatments, such as surgery. A number of FTC activities will
likely, directly or indirectly, help consumers to afford drugs
to meet their needs. The FTC published a study examining the
frequency of anticompetitive abuses to block market entry of
lower-cost generic drugs; provided comments to the Food and
Drug Administration (``FDA'') on the potential for misusing the
Hatch-Waxman Act procedures governing generic entry; and
brought law enforcement actions against branded drug companies
alleging improper efforts to delay generic entry. Among other
significant matters, the Commission reached a settlement with
Bristol-Myers Squibb (``BMS'') resolving charges that BMS
abused the Hatch-Waxman process to obstruct the entry of
generic competition for two anti-cancer drugs and an anti-
anxiety agent.
Financial Practices: Fraudulent Lending. In May 2003, the
court finalized a settlement to resolve FTC charges that The
Associates (now owned by Citigroup, Inc.) had engaged in
widespread deceptive and abusive practices involving subprime
home mortgage lending. The settlement is expected to provide
$215 million in redress through cash refunds and reduced loan
balances to approximately 2.2 million consumers in the U.S.,
Puerto Rico, and the Virgin Islands. A related class action
settlement is expected to yield an additional $25 million, for
total relief to consumers of $240 million.
E-Commerce: A Unified Approach to Maintaining Efficient
Markets. The development of the Internet has created a host of
consumer issues, requiring the FTC to draw on all its consumer
protection and competition capabilities. Among other
activities, the FTC has formed an Internet Task Force to
analyze state regulations that may restrict the entry of new
Internet competitors; hosted public workshops on both spam and
potential anticompetitive barriers to e-commerce; and brought
significant law enforcement actions that continue its
historical role of leading efforts to keep e-commerce free from
fraud, deception, and unfair or anticompetitive practices.
Energy: Gasoline. In an administrative complaint issued in
March 2003, the FTC alleged that Unocal improperly manipulated
the process through which the California Air Resources Board
set regulations for the formulation of low-emissions gasoline.
The FTC contended that Unocal's anticompetitive conduct
potentially could cost California consumers hundreds of
millions of dollars per year in higher gasoline prices.
Innovation: Intellectual Property and Competition. With the
growth of the knowledge-based economy, the relationship between
competition and patent policy as spurs to innovation has become
increasingly important. The FTC, together with the Antitrust
Division of the Department of Justice, held hearings over 24
days, with more than 300 participants, to explore this topic. A
report will issue later this year.
In the next two years, the FTC will continue to address significant
law enforcement and policy issues and to devote its resources to those
areas in which it can have a major impact on behalf of consumers. With
respect to the consumer protection mission, the focus will be on broad
efforts to fight fraud and deception, as well as on consumer privacy
and security initiatives, including efforts to address spam and ID
theft. With respect to the competition mission, the FTC will continue
merger and nonmerger policy development and law enforcement, with
particular emphasis on health care, energy, high technology, and
international issues.
This testimony addresses areas of FTC focus with discussions of
specific activities and accomplishments on behalf of consumers. To
further improve the FTC's ability to implement its mission and serve
consumers, this testimony concludes with legislative recommendations to
(1) eliminate the FTC Act's exemption for communications common
carriers, (2) enact measures to improve the FTC's ability to combat
cross-border fraud, (3) enact measures to improve the FTC's ability to
combat spam, and (4) make technical changes to allow the agency to
accept reimbursements and certain gifts and services that can enhance
our mission performance.
ii. consumer protection
A. Fraud and Deception
The FTC targets the most pervasive types of fraud and deception in
the marketplace, drawing substantially on data from Consumer Sentinel,
the agency's award-winning consumer complaint database, 2
and from Internet ``surfs'' that focus on specific types of claims or
solicitations that are likely to violate the law. Since April 1, 2002,
the FTC has organized 12 joint law enforcement efforts (``sweeps'')
with more than 165 law enforcement partners.3 These sweeps
resulted in more than 400 law enforcement actions targeting Internet
scams and telemarketing fraud, including deceptive work-at-home
opportunities, deceptive health claims, advance-fee credit-related
fraud, fundraising fraud, and Internet auction fraud. The FTC filed 70
of these law enforcement cases.
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\2\ In 2003, Consumer Sentinel was named one of the top 25 E-
Government programs by the Industry Advisory Council and the Federal
Chief Information Officer Council.
\3\ The FTC works with various federal and state law enforcement
agencies, as well as Canadian, Mexican, and other international
authorities. See, e.g., FTC Press Release, State, Federal Law Enforcers
Launch Sting on Business Opportunity, Work-at-Home Scams (June 20,
2002), available at . See
also FTC Press Release, FTC, States Give ``No Credit'' to Finance
Related Scams in Latest Joint Law Enforcement Sweep (Sept. 5, 2002),
available at .
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Overall, since April 2002, the FTC has filed more than 145 cases
involving fraud or deception and has enjoyed significant success in
obtaining redress orders to provide relief for defrauded consumers,
with more than 65 final judgments to date ordering more than $865
million in consumer redress.4 The agency continues to ensure
compliance with district court orders by bringing civil contempt
proceedings when appropriate, and by assisting in criminal prosecution
of FTC defendants who flagrantly violate court orders.
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\4\ This figure represents the amount of redress that has been
ordered by the courts in more than 65 orders from April 2002 to May
2003. The figure does not represent the actual amount of money that has
been or will be collected pursuant to those orders.
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The FTC's actions against fraud and deception directly affect
consumers. For example, in November 2002, the FTC finalized a consent
order against Access Resource Services, Inc. and Psychic Readers
Network, the promoters of ``Miss Cleo'' psychic services, who allegedly
engaged in deceptive advertising, billing, and collection practices.
The defendants stipulated to a court order requiring them to stop all
collection efforts on accounts against consumers who purchased or
purportedly purchased defendants' pay-per-call or audiotext services,
to pay $5 million in equitable relief, and to forgive an estimated $500
million in outstanding consumer charges.5
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\5\ FTC v. Access Resource Services, Inc., Civ. Action No. 02-
60226-CIV Gold/Simonton (S.D. Fla. Nov. 4, 2002).
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In January 2003, the FTC obtained a permanent injunction against
SkyBiz.com, Inc., an alleged massive international pyramid scheme. The
final settlement includes $20 million in consumer redress to be
distributed to both domestic and foreign victims. The settlement also
bans the principal individual defendants from multi-level marketing for
a period of years.6
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\6\ FTC v. SkyBiz.com, Inc., Civ. Action No. 01-CV-396-EA (M) (N.D.
Okla. Jan. 28, 2003).
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In March 2003, the FTC announced settlements with five individual
defendants who allegedly engaged in deceptive charitable telemarketing
by misrepresenting both the charities that donations would benefit and
the percentage of donations that the charities would
receive.7 Between 1995 and early 1999, the defendants raised
more than $27 million. Among other terms of the settlements, defendant
Mitchell Gold is subject to a $10 million judgment. Following an FTC
criminal referral, Gold was indicted for mail and wire fraud in
connection with the fundraising business and another fraudulent
telemarketing scheme. Gold pled guilty and was sentenced to 96 months
in prison.
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\7\ FTC v. Mitchell Gold, Civ. Action No. SAcv 98-968 DOC (Rzx)
(C.D. Cal. Mar. 7, 2003).
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B. Consumer Privacy
The FTC will continue to devote significant resources to protecting
consumer privacy. Consumers are deeply concerned about the security of
their personal information, both online and offline. Although these
concerns have been heightened by the rapid development of the Internet,
they are by no means limited to the cyberworld. Consumers can be harmed
as much by the thief who steals credit card information from a mailbox
or from a discarded billing statement in the trash as by one who steals
that information over the Internet. Of course, the nature of Internet
technology raises its own special set of issues.
1. Do-Not-Call. As highlighted above, the FTC has initiated a
national Do-Not-Call registry, a centralized database of telephone
numbers of consumers who have asked to be placed on the list. The Do-
Not-Call registry--part of the FTC's 2002 amendments to the TSR--will
help consumers reduce the number of unwanted telemarketing phone calls.
2. Identity Theft. The FTC's toll-free number 1-877-ID-THEFT is the
nation's central clearinghouse for identity theft complaints. Calls
regarding identity theft have increased from more than 36,000 calls in
FY 2000 to more than 185,000 calls in FY 2002. These complaints are
available to the FTC's law enforcement partners through an online
database, and now more than 620 law enforcement agencies can access
this data. In addition, FTC investigators, working with the Secret
Service, develop preliminary investigative reports that are referred to
regional Financial Crimes Task Forces for possible prosecution.
Continuing a program begun in March 2002, the FTC, the Secret
Service, and the Department of Justice (``DOJ'') conduct training
seminars to provide hundreds of local and state law enforcement
officers with practical tools to combat identity theft. To date, the
FTC and its partners have conducted six regional training sessions for
620 law enforcement officers.
The FTC also engages in extensive education of both businesses and
consumers about preventing and responding to identity theft. One of the
agency's most popular publications is ``Identity Theft: When Bad Things
Happen to Your Good Name.'' 8
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\8\ Since the FTC first published the booklet in February 2002, the
FTC has distributed more than 1.2--million paper copies and logged more
than 1 million ``hits'' accessing the booklet on the FTC web site. The
publication is available at .
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3. Safeguarding Consumer Information. In May 2002, the FTC
finalized an order settling charges that Eli Lilly & Company
unintentionally disclosed e-mail addresses of users of its Prozac.com
and Lilly.com sites as a result of failures to take reasonable steps to
protect the confidentiality and security of that information. The
settlement requires Lilly to establish a security program to protect
consumers' personal information against reasonably anticipated threats
or risks to its security, confidentiality, or integrity.9
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\9\ Eli Lilly & Co., Dkt. No. C-4047 (May 10, 2002).
---------------------------------------------------------------------------
In December 2002, the FTC settled charges against Microsoft
Corporation that, among other things, the company misrepresented the
measures it used to maintain and protect the privacy and
confidentiality of consumers' personal information collected through
its Passport web services.10 Microsoft has agreed to
implement a comprehensive information security program for Passport and
similar services. The FTC will continue to bring actions involving
claims deceptively touting the privacy and security features of
products and services, as well as failures to maintain adequate
security for personal information.
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\10\ Microsoft Corp., Dkt. No. C-4069 (Dec. 24, 2002).
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In May 2002, the Commission finalized its Safeguards Rule to
implement the security provisions of the Gramm-Leach-Bliley Act
(``GLB'').11 The Rule establishes standards for financial
institutions to maintain the security of customers' financial
information, and became effective in May 2003. To help businesses
comply with the Rule, the agency issued a new business education
publication, and will conduct other initiatives to inform businesses of
the Rule and provide compliance guidance.12
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\11\ Standards for Safeguarding Customer Information; Final Rule,
67 Fed. Reg. 36,484 (May 23, 2002) (to be codified at 16 C.F.R. Part
314).
\12\ FTC Facts for Businesses, Financial Institutions and Customer
Data: Complying with the Safeguards Rule, available at .
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Commissioner Orson Swindle, in particular, has focused on issues
involving information security. During the past year, he has served as
head of the U.S. delegation to the Organization for Economic
Cooperation and Development (``OECD'') Experts Group for Review of the
1992 OECD Guidelines for the Security of Information Systems. The group
released revised guidelines in August 2002 that consist of nine
principles promoting a ``culture of security.''
The FTC has promoted the dissemination of these principles among
industry and consumer groups. The FTC's consumer security web site,
, contains practical tips for staying secure
online and features ``Dewie the Turtle,'' a colorful cartoon mascot to
promote effective online security. In addition, the FTC has worked with
the White House Office of Cyberspace Security and the Department of
Homeland Security to develop consumer awareness aspects of the National
Strategy to Secure Cyberspace.
4. Children's Online Privacy Protection Act
(``COPPA'').13 COPPA requires commercial web sites to give
notice of their information practices and to obtain parental consent
before collecting, using, or disclosing personal information about
children under the age of 13. Since April 2001, the FTC has brought
eight COPPA cases and obtained agreements requiring payment of civil
penalties totaling more than $350,000.14 The two most recent
cases involved settlements with Hershey Foods and Mrs.
Fields.15 Both companies agreed to settle charges that their
web sites allegedly collected personal data from children without
complying with COPPA requirements.
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\13\ 15 U.S.C. Sec. Sec. 6501-6506.
\14\ United States v. Hershey Foods Corp., Civ. Action No. 4:03-cv-
00350-JEJ (M.D. Pa. Feb. 26, 2003); United States v. Mrs. Fields Famous
Brands, Civ. Action No. 2:03cv00205 (D. Utah Feb. 25, 2003); United
States v. The Ohio Art Co., Civ. Action No. 3:02CV7203 (N.D. Ohio Apr.
30, 2002); United States v. American Pop Corn Co., Civ. Action No. C02-
4008DEO (N.D. Iowa Feb. 28, 2002); United States v. Lisa Frank, Inc.,
Civ. Action No. 01-1516-A (E.D. Va. Oct. 3, 2001); United States v.
Looksmart, Ltd., Civ. Action No. 01-606-A (E.D. Va. Apr. 23, 2001);
United States v. Bigmailbox.com, Inc., Civ. Action No. 01-605-A (E.D.
Va. Apr. 23, 2001); United States v. Monarch Servs., Inc., Civ. Action
No. AMD 01 CV 1165 (D. Md. Apr. 20, 2001).
\15\ United States v. Hershey Foods Corp., Civ. Action No. 4:03-cv-
00350-JEJ (M.D. Pa. Feb. 26, 2003); United States v. Mrs. Fields Famous
Brands, Civ. Action No. 2:03cv00205 (D. Utah Feb. 25, 2003).
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5. Spam. The problems caused by unsolicited commercial e-mail
(``spam'') 16 go well beyond the annoyance spam causes to
the public. These problems include the fraudulent and deceptive content
of most spam messages, the sheer volume of spam being sent across the
Internet, and the security issues raised because spam can be used to
disrupt service or as a vehicle for sending viruses.
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\16\ Unsolicited commercial e-mail (``UCE'' or ``spam'') is any
commercial e-mail message that is sent--typically in bulk--to consumers
without the consumers' prior request or consent.
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In particular, deceptive spam is an ever-growing problem that the
FTC is addressing through law enforcement efforts, consumer and
business education, and research. An important tool the FTC uses to
target law violations, identify trends, and conduct research for
education is its spam database. Consumers forward spam they receive to
the FTC database at [email protected]. The database receives, on average,
more than 110,000 e-mail messages each day, and currently contains a
total of approximately 42 million pieces of spam.
In April 2003, the FTC released a report analyzing false claims
made in spam. To prepare the report, the FTC staff reviewed a sample of
approximately 1,000 pieces of spam, taken from a pool of more than 11
million e-mails in the FTC's database. Of the 1,000 pieces, 66 percent
contained facial elements of deception in the ``from'' line, the
``subject'' line, or the text of the message.17
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\17\ FTC Staff Report, False Claims in Spam (Apr. 2003), available
at . The
remaining spam messages were not necessarily truthful, but they did not
contain any obvious indicia of falsity.
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The FTC shares the database information with other federal and
state law enforcement agencies to broaden the fight against deceptive
spam. In November 2002, the FTC and 12 law enforcement partners brought
30 enforcement actions as part of an ongoing initiative to fight
deceptive spam and Internet scams.18 The FTC also announced,
with ten participating agencies, a ``Spam Harvest,'' a study designed
to identify online actions that may put consumers at the greatest risk
for receiving spam.19
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\18\ FTC Press Release, Federal, State, and Local Law Enforcers
Tackle Deceptive Spam and Internet Scams (Nov. 13, 2002), available at
.
\19\ See FTC Consumer Alert, E-mail Address Harvesting: How
Spammers Reap What You Sow (Nov. 13, 2002), available at .
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The FTC recently settled an action against a company that allegedly
profited from a particularly insidious spam scam. According to the
complaint, the subject line of the e-mail said ``Yahoo sweepstakes
winner,'' and the message congratulated the recipient for being chosen
as a winner of a prize in a recent Yahoo sweepstakes contest. Most
often, the message mentioned that the prize was a Sony Playstation 2,
making it particularly attractive to adolescents. But the message was
not from Yahoo, and the recipients had not won anything. Instead, after
clicking through five web pages, consumers were connected to a
pornographic web site at a cost of up to $3.00 a minute. The settlement
enjoins the defendants from making misleading representations of
material facts in e-mail and other marketing, including deceptive e-
mail header information. The settlement also requires the defendants to
prevent third parties that promote their videotext services, through e-
mail or other means, from making deceptive statements.20
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\20\ FTC v. BTV Indus., Civ. Action No. CV-S-02-0437-LRH-PAL (D.
Nev. Jan. 6, 2003).
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In April, the FTC filed an action against an allegedly illegal spam
operation for using false return addresses, empty ``reply-to'' links,
and deceptive subject lines to expose unsuspecting consumers, including
children, to sexually explicit material.21 The FTC alleged
that the defendant used the spam in an attempt to drive business to an
adult web site, ``Married But Lonely.'' The FTC obtained a stipulated
preliminary injunction to halt false or misleading spam.
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\21\ FTC v. Brian D. Westby, Civ. Action No. 03-C-2540 (N.D. Ill.
filed Apr. 15, 2003).
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The FTC recently hosted a three-day public forum to analyze the
impact spam has on consumers' use of e-mail, e-mail marketing, and the
Internet industry and to explore solutions in addition to law
enforcement.22 A major concern expressed at the forum was
the dramatic rate at which spam is proliferating. For example, one ISP
reported that in 2002, it experienced a 150 percent increase in spam
traffic. America Online reported that it recently blocked 2.37 billion
pieces of spam in a single day. Indeed, spam appears to be the
marketing vehicle of choice for many fraudulent and deceptive
marketers. In addition, and of particular concern, panelists noted that
spam is increasingly used to disseminate malicious code such as viruses
and ``Trojan horses.''
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\22\ Draft transcripts of the forum are available at .
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Solutions to the problems posed by spam will not be quick or easy;
nor is one single approach likely to provide a cure. Instead, a
balanced blend of technological fixes, business and consumer education,
legislation, and enforcement will be required. Technology that empowers
consumers in an easy-to-use manner is essential to getting immediate
results for a number of frustrated end-users. Any solution to the
problems caused by spam should contain the following elements:
1. Enhanced enforcement tools to combat fraud and deception;
2. Support for the development and deployment of technological tools to
fight spam;
3. Enhanced business and consumer education; and
4. The study of business methods to reduce the volume of spam.
The Commission's legislative recommendations, outlined in Part IV,
would enhance the agency's enforcement tools for fighting spam. In
addition, the FTC will continue vigorous law enforcement and reach out
to key law enforcement partners through the creation of a Federal/State
Spam Task Force to strengthen cooperation with criminal authorities.
The Task Force can help to overcome some of the obstacles that spam
prosecutions present to law enforcement authorities. For example, in
some instances, state agencies spent considerable front-end
investigative resources to find a spammer, only to discover at the back
end that the spammer was located outside the state's jurisdiction.
State and federal agencies recognize the need to share the information
obtained in investigations, so that the agency best placed to pursue
the spammer can do so more efficiently and quickly. The Task Force
should facilitate this process. Further, it can serve as a forum to
apprise participating agencies of the latest spamming technology,
spammer ploys, and investigational techniques.
Through the Task Force, the FTC will reach out not only to its
civil law enforcement counterparts on the state level, but also to
federal and state criminal authorities. Although few criminal
prosecutions involving spam have occurred to date,23
criminal prosecution may well be appropriate for the most egregious
conduct. The FTC and its partners in criminal law enforcement agencies
continue to work to assess existing barriers to successful criminal
prosecutions. The FTC will explore whether increased coordination and
cooperation with criminal authorities would be helpful in stopping the
worst actors.
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\23\ See, e.g., United States v. Barrero, Crim. No. 03-30102-01 DRH
(S.D. Ill. 2003) (guilty plea entered May 12, 2003). Like the related
case, FTC v. Stuffingforcash.com Corp., Civ. Action No. 02 C 5022 (N.D.
Ill. Jan. 30, 2003), the allegations in this criminal prosecution were
based on fraud in the seller's underlying business transaction.
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Improved technological tools will be an essential part of any
solution as well. A great deal of spam is virtually untraceable, and an
increasing amount crosses international boundaries. Panelists estimated
that from 50 percent to 90 percent of e-mail is untraceable, either
because it contains falsified routing information or because it comes
through open relays or open proxies.24 Because so much spam
is untraceable, technological development will be an important element
in solving spam problems. To this end, the FTC will continue to
encourage industry to meet this challenge.
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\24\ An open relay is an e-mail server that is configured to accept
and transfer e-mail on behalf of any user anywhere, including unrelated
third parties, which allows spammers to route their e-mail through
servers of other organizations, disguising the origin of the e-mail. An
open proxy is a mis-configured proxy server through which an
unauthorized user can connect to the Internet. Spammers use open
proxies to send spam from the computer network's ISP or to find an open
relay.
Brightmail recently estimated that 90% of the e-mail that it
analyzed was untraceable. Two panelists at the forum estimated that 40%
to 50% of the e-mail it analyzed came through open relays or open
proxies, making it virtually impossible to trace. Even when spam cannot
be traced technologically, however, enforcement is possible. In some
cases, the FTC has followed the money trail to pursue sellers who use
spam. The process is resource intensive, frequently requiring a series
of ten or more CIDs to identify and locate the seller in the real
world. Frequently the seller and the spammer are different entities. In
numerous instances, FTC staff cannot initially identify or locate the
spammer and can only identify and locate the seller. In many of those
cases, in the course of prosecuting the seller, staff has, through
discovery, sought information about the spammer who actually sent the
messages. This, too, involves resource-intensive discovery efforts.
While the FTC actions have focused more on deception in the content of
the spam message, recent actions have begun to attack deception in the
sending of spam. As discussed above, the FTC has brought law
enforcement actions targeting false subject lines and false ``from''
lines.
---------------------------------------------------------------------------
Action by consumers and businesses who may receive spam will be a
crucial part of any solution to the problems caused by spam. A key
component of the FTC's efforts against spam is educating consumers and
businesses about the steps they can take to decrease the amount of spam
they receive. The FTC's educational materials provide guidance on how
to decrease the chances of having an e-mail address harvested and used
for spam, and suggest several other steps to decrease the amount of
spam an address may receive. The FTC's educational materials on spam
are available on the FTC website.25
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\25\ See .
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Finally, several initiatives for reducing the overwhelming volume
of spam were discussed at the FTC's Spam Forum. At this point,
questions remain about the feasibility and likely effectiveness of
these initiatives. The FTC intends to continue its active role as
catalyst and monitor of technological innovation and business
approaches to addressing spam.
6. Pretexting. Through its Section 5 authority as well as its
jurisdiction under the GLB Act, the FTC is also combating
``pretexting,'' the use of false pretenses to obtain customer financial
information. The agency has obtained stipulated court orders to halt
these practices 26 and has sent warning letters to nearly
200 others about apparent violations of the GLB pretexting
prohibitions.
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\26\ FTC v. Information Search, Inc., Civ. Action No. AMD 01 1121
(D. Md. Mar. 15, 2002); FTC v. Guzzetta, Civ. Action No. CV-01-2335
(E.D.N.Y. Feb. 25, 2002); FTC v. Garrett, Civ. Action No. H 01-1255
(S.D. Tex. Mar. 25, 2003).
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C. Deceptive Lending Practices
As highlighted above, the FTC has been aggressive in its fight
against deceptive lending practices. Unscrupulous lenders can deceive
consumers about loan terms, rates, and fees, and the resulting injury
can be severe--including the loss of a home. Over the last year, the
FTC has obtained settlements for nearly $300 million in consumer
redress for deceptive lending practices and other related law
violations. The FTC has settled cases against Associates First Capital
Corporation (now owned by Citigroup) 27 for alleged
deceptive sales of credit insurance and alleged violations of the Equal
Credit Opportunity Act 28 and the Fair Credit Reporting Act;
29 against First Alliance Mortgage 30 for alleged
deceptive loan terms and origination fees; and against Mercantile
Mortgage 31 for alleged deception of consumers about loan
terms and alleged violations of the Truth in Lending Act.32
In addition to monetary relief, the Mercantile settlement gives
hundreds of consumers the opportunity to refinance loans at low or no
cost.33
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\27\ FTC v. Associates First Capital Corp., Civ. Action No. 1:01-
CV-00606 JTC (N.D. Ga. Feb. 26, 2002).
\28\ 15 U.S.C. Sec. Sec. 1691-1691f, as amended.
\29\ Id. Sec. Sec. 1681-1681(u), as amended.
\30\ FTC v. First Alliance Mortgage Co., Civ. Action No. SACV 00-
964 DOC (MLGx) (C.D. Calif. Nov. 26, 2002).
\31\ U.S. v. Mercantile Mortgage Co., Civ. Action No. 02C 5079
(N.D. Ill. Aug. 15, 2002).
\32\ 15 U.S.C. Sec. Sec. 1601-1667f, as amended.
\33\ The FTC continues its litigation against Chicago-area mortgage
broker Mark Diamond and against D.C.-area mortgage lender Capital City
Mortgage Corporation. FTC v. Mark Diamond, Civ. Action No. 02C-5078
(N.D.Ill. filed Nov. 1, 2002); FTC v. Capital City Mortgage Corp., Civ.
Action No. 1: 98-CV-00237 (D.D.C. Jan. 29, 1998). The Diamond case
represents the FTC's first litigated case against a mortgage broker. In
Capital City, the FTC alleges that Capital City deceived consumers into
taking out high-rate, high-fee loans and then foreclosed on consumers'
homes when they could not afford to pay.
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D. Health Fraud and Deception
Truthful and substantiated advertising can serve as an important
source of useful information for consumers about health care.
Inaccurate information, on the other hand, can cause serious financial
as well as physical harm. For that reason, combating deceptive health
claims, both online and off, continues to be a priority for the FTC.
1. Dietary Supplements. Challenging misleading or unsubstantiated
claims in the advertisement of dietary supplements is a significant
part of the FTC's consumer protection agenda. During the past decade,
the FTC has filed more than 80 law enforcement actions challenging
false or unsubstantiated claims about the efficacy or safety of a wide
variety of supplements.34 The agency focuses its enforcement
priorities on claims for products with unproven benefits or that
present significant safety concerns to consumers, and on deceptive or
unsubstantiated claims that products treat or cure serious diseases.
The FTC has taken action against all parties responsible for the
deceptive marketing, including manufacturers, advertising agencies,
infomercial producers, distributors, retailers, and endorsers.
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\34\ See, e.g., FTC v. Dr. Clark Research Ass'n, Civ. Action No. 1-
03-00054-TRA (N.D. Ohio Jan. 8, 2003); FTC v. Vital Dynamics, Civ.
Action No. 02-CV-9816 (C.D. Calif. Jan 17, 2003) (consent decree); FTC
v. Rexall Sundown, Inc., Civ. Action No. 00-CV-7016 (S.D. Fla. Mar. 11,
2003) (proposed consent decree subject to court approval).
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2. Weight Loss Advertising. Since the 1990s, the FTC has filed
nearly 100 cases challenging false or misleading claims for all types
of weight loss products, including over-the-counter drugs, dietary
supplements, commercial weight loss centers, weight loss devices, and
exercise equipment.35 In September 2002, the FTC issued a
``Report on Weight-Loss Advertising: An Analysis of Current Trends,''
36 which concludes that false or misleading claims for
weight loss products are widespread and, despite an unprecedented level
of FTC enforcement activity, appear to have increased over the last
decade.
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\35\ See, e.g., Enforma Natural Prods., Inc., Civ. Action No.
2:00cv04376JSL (CWx) (C.D. Cal. Dec. 9, 2002) (consent decree); Weider
Nutrition Int'l, Dkt. No. C-3983, 2001 WL 1717579 (Nov. 15, 2000); FTC
v. SlimAmerica, Inc., 77 F. Supp. 2d 1263 (S.D. Fla.1999); Jenny Craig,
Inc., 125 F.T.C. 333 (1998) (consent order); Weight Watchers Int'l,
Inc., 124 F.T.C. 610 (1997) (consent order); NordicTrack, Inc., 121
F.T.C. 907 (1996) (consent order).
\36\ FTC Staff Report, Weight Loss Advertising: An Analysis of
Current Trends (Sept. 2002), available at .
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The FTC continues to explore ways to reduce the number of deceptive
weight loss claims. On November 19, 2002, the FTC held a public
workshop on the Advertising of Weight Loss Products.37
Workshop participants included government officials, scientists, public
health groups, marketers of weight loss products, advertising
professionals, and representatives of the media. Participants explored
both the impact of deceptive weight loss product ads on the public
health and new approaches to fighting the proliferation of misleading
claims, including a more active role for the media in screening out
patently false weight loss advertising. Also, in an opinion piece in
Advertising Age, Commissioner Sheila Anthony noted that the FTC cannot
solve this problem alone and challenged the industry and the media to
play their part.38
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\37\ See Public Workshop: Advertising of Weight Loss Products, 67
Fed. Reg. 59,289 (Sept. 20, 2002).
\38\ Commissioner Sheila Anthony, Let's clean up the diet-ad mess,
Advertising Age, Feb. 3, 2003, at 18.
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E. Cross-Border Consumer Protection
The Internet and electronic commerce know no boundaries, and cross-
border fraud is a growing problem for consumers and businesses in the
U.S. and abroad. During 2002, approximately 14% of the complaints
collected in the Consumer Sentinel complaint database involved a cross-
border element. The number of FTC cases involving offshore defendants,
offshore evidence, or offshore assets also has increased. In 2002, the
FTC brought approximately 22 law enforcement actions involving cross-
border fraud.
Those who defraud consumers take advantage of the special problems
faced by law enforcers in acting against foreign companies, including
difficulties in sharing information with foreign law enforcement
agencies, exercising jurisdiction, and enforcing judgments abroad.
Thus, law enforcers worldwide, now more than ever, need to cooperate
and expand their consumer protection efforts.
To address the growing problem of cross-border fraud, in October
2002, Chairman Muris announced a Five-Point Plan to Combat Cross-Border
Fraud. Since then, the FTC has been implementing this plan by:
Developing OECD guidelines on cross-border fraud. Commissioner
Mozelle Thompson of the FTC chairs the OECD Committee on
Consumer Policy and leads the U.S. delegation to the Committee,
which is developing guidelines for international cooperation
concerning cross-border fraud. The FTC is working with its
foreign counterparts, and soon expects to finalize these
guidelines.
Strengthening bilateral and multilateral relationships. The
FTC already has bilateral consumer protection cooperation
agreements with agencies in Australia, Canada, and the U.K.,
and is working to strengthen these relationships and develop
new ones. The FTC also participates in a network of consumer
protection enforcement officials from more than 30 countries.
Finally, the FTC has joined other agencies in various cross-
border task forces, such as the Toronto Strategic Partnership,
Project Emptor with British Columbia authorities, and MUCH--the
Mexico-U.S.-Canada Health fraud task force. In the past year,
the FTC has announced numerous joint law enforcement actions
taken with the assistance of these task forces, including
actions involving credit card loss protection,39
advance fee credit cards, 40 and bogus cancer
clinics.41
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\39\ FTC v. STF Group, Civ. Action No. 03-C-0977 (N.D. Ill. filed
Feb. 10, 2003).
\40\ FTC v. Pacific First Benefit, LLC, Civ. Action No. 02-C-8678
(N.D. Ill. filed Dec. 2, 2003).
\41\ FTC v. CSCT, Inc., Civ. Action No. 03-C-00880 (N.D. Ill. filed
Feb. 6, 2003).
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Continuing public-private partnerships. The FTC continues to
ask responsible industry to help fight cross-border fraud,
which hurts businesses as well as consumers. The FTC held a
workshop on this issue in February 2003 and continues to work
with the private sector to follow up on some ideas discussed at
the workshop, including better sharing of information between
the private sector and the FTC.
Providing technical assistance. The FTC wants to ensure that
no developing country becomes a haven for fraud. Therefore, it
is conducting U.S. AID-funded technical assistance on consumer
protection issues in various developing countries. Last year,
the FTC conducted technical assistance missions for consumer
protection authorities from 13 Eastern European countries,
including Hungary and Slovenia. This year, the FTC is planning
to conduct missions in Romania, Russia, and Peru.
Recommending proposals for legislative amendments. Many of the
challenges the FTC faces in combating cross-border fraud might
best be addressed through legislative changes. The FTC's
proposals for legislative changes are described in Section IV
of this testimony.
F. Initiatives Designed to Reach Specific Consumer Groups
The FTC has implemented a variety of initiatives that assist
particular consumer groups, including children, Spanish-speaking
consumers, and military personnel and their families.
1. Protecting Children. The agency maintains an active program to
monitor, report on, and provide educational materials about marketing
activities affecting children. The FTC continues to monitor the
marketing of violent entertainment products to children. Since
September 2000, the agency has issued a series of reports on this
issue.42 The FTC intends to issue a fourth follow-up report
on the industries' practices. The staff also is working with retailer
trade groups to devise a consumer education message for parents, and is
preparing to hold a public workshop on these issues later this year.
---------------------------------------------------------------------------
\42\ FTC, Marketing Violent Entertainment to Children: A Review of
SelfRegulation and Industry Practices in the Motion Picture, Music
Recording & Electronic Game Industries (Sept. 2000), available at
; FTC, Marketing
Violent Entertainment to Children: A SixMonth FollowUp Review of
Industry Practices in the Motion Picture, Music Recording & Electronic
Game Industries (Apr. 2001), available at ; FTC, Marketing Violent Entertainment to
Children: A OneYear FollowUp Review of Industry Practices in the Motion
Picture, Music Recording & Electronic Game Industries (Dec. 2001),
available at ; FTC,
Marketing Violent Entertainment to Children: A Twenty-One Month
FollowUp Review of Industry Practices in the Motion Picture, Music
Recording & Electronic Game Industries (June 2002), available at
.
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The FTC also conducted an informal survey of online gambling sites
and published a consumer alert warning parents and their children that
online gambling can pose huge risks, including money loss, impaired
credit ratings, and addiction to gambling.43
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\43\ FTC Consumer Alert, Online Gambling and Kids: A Bad Bet (June
26, 2002), available at .
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Finally, the FTC monitors alcohol advertising to ensure that ads
for these products do not involve potentially unfair or deceptive
practices, including the targeting of alcohol advertisements to minors.
In response to a Congressional request, the agency will prepare reports
on two subjects related to alcohol advertising and youth: (1) the
impact on underage consumers of the significant expansion of ads for
new alcoholic beverages, and (2) the industry's response to
recommendations for improved self-regulation contained in the FTC's
1999 report to Congress.44
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\44\ Conference Report on the Omnibus Appropriations Bill for FY
2003, H. Rep. No. 108-10 (Feb. 13, 2003)
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2. Spanish-Speaking Consumers. In FY 2002, the FTC instituted a
Hispanic Outreach Program, which resulted in hiring a Hispanic Outreach
Coordinator. This effort includes the creation of a dedicated page on
the FTC site, Protection Para el Consumidor (``Consumer Protection''),
which mirrors the English version of the consumer protection page and
provides Spanish translations of several popular consumer education
publications. The FTC also has created an online Spanish-language
consumer complaint form and has undertaken outreach efforts to Hispanic
media.
In addition, the FTC has taken action against alleged law
violations affecting Spanish-speaking consumers. The agency settled a
civil penalty action against a Houston-based debt collection company
for alleged violations of the rights of Spanish- and English-speaking
consumers under the Fair Debt Collection Practices Act.45
The settlement requires, among other things, that the company make
disclosures in Spanish where applicable.
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\45\ United States v. United Recovery Systems, Inc., Civ. Action
No. H-02-1410 (sl) (S.D. Tex. Apr. 22, 2002).
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3. Military Sentinel. In September 2002, the FTC and the Department
of Defense (``DOD'') launched Military Sentinel, the first online
consumer complaint database tailored to the unique needs of the
military community. The system offers members of the military and their
families a way to file complaints and gain immediate access to the
FTC's full range of educational materials and information.46
It also gives DOD and law enforcement officers secure access to the
complaints entered into the database.
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\46\ FTC Facts for Consumers, Military Sentinel: Fact Sheet,
available at .
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iii. maintaining competition
The FTC's competition mission, as its name suggests, promotes
competition in the marketplace to give consumers the best products at
the lowest prices. The FTC employs a variety of tools to promote and
protect competition: in addition to enforcing the antitrust laws, the
agency holds workshops, conducts studies, writes reports, and monitors
the marketplace. The agency will continue to focus both its law
enforcement activity and other initiatives in key sectors of the
economy, such as health care, energy, and high-tech industries. The
global economy also requires the FTC's competition mission, like its
consumer protection mission, to be increasingly concerned with
international issues.
A. Health Care
The health care sector remains enormously important to both
consumers and the national economy. Health-related products and
services account for more than 15 percent of the U.S. gross domestic
product (``GDP''), and that share has grown by about 25 percent since
1990. Without effective antitrust enforcement, health costs would be
greater and the share of GDP would be even higher.
1. Prescription Drugs. As previously mentioned, the FTC recently
reached a major settlement with Bristol-Myers Squibb (``BMS'') to
resolve charges that BMS engaged in a series of anticompetitive acts
over the past decade to obstruct entry of low-price generic competition
for three of BMS's widely-used pharmaceutical products: two anti-cancer
drugs, Taxol and Platinol, and the anti-anxiety agent
BuSpar.47 Among other things, the FTC's complaint alleged
that BMS abused FDA regulations to obstruct generic competitors; misled
the FDA about the scope, validity, and enforceability of patents to
secure listing in the FDA's ``Orange Book'' list of approved drugs and
their related patents; breached its duty of good faith and candor with
the U.S. Patent and Trademark Office (``PTO''), while pursuing new
patents claiming these drugs; filed baseless patent infringement suits
against generic drug firms that sought FDA approval to market lower-
priced drugs; and paid a would-be generic rival $72.5 million to
abandon its legal challenge to the validity of a BMS patent and to stay
out of the market until the patent expired. Because of BMS's alleged
pattern of anticompetitive conduct and the extensive resulting consumer
harm, the Commission's proposed order necessarily contains strong--and
in some respects unprecedented--relief.48
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\47\ Bristol-Myers Squibb Co., Dkt. No. C-4076 (Apr. 14, 2003).
\48\ The proposed order includes a provision prohibiting BMS from
triggering a 30-month stay for any BMS product based on any patent BMS
lists in the Orange Book after the filing of an application to market a
generic drug.
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The settlement with BMS represents the latest FTC milestone in
settlements regarding allegedly anticompetitive conduct by branded or
generic drug manufacturers designed to delay generic entry. Other
recent FTC successes in this area include:
Biovail. An October 2002 consent order settling charges that
Biovail Corporation illegally acquired a license to a patent
and improperly listed the patent in the FDA's Orange Book as
claiming Biovail's high blood pressure drug Tiazac (under
current law, the listing of the patent and the subsequent
lawsuit brought by Biovail against a potential generic entrant
triggered an automatic 30-month stay of FDA approval of the
generic competitor); 49 and
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\49\ Biovail Corp., Dkt. No. C-4060 (Oct. 2, 2002).
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Biovail/Elan. An August 2002 settlement with Biovail and Elan
Corporation, plc resolving charges that the companies entered
into an agreement that provided substantial incentives for the
two companies not to compete in the markets for 30 milligram
and 60 milligram dosage strengths of the generic drug Adalat CC
(an anti-hypertension drug).50
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\50\ Biovail Corp. and Elan Corp., Dkt. No. C-4057 (Aug. 15, 2002).
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2. Health Care Providers. For decades, the FTC has worked to
facilitate innovative and efficient arrangements for the delivery and
financing of health care services by challenging artificial barriers to
competition among health care providers. These efforts continue. In the
last year, the FTC settled with seven groups of physicians for
allegedly colluding to raise consumers' costs.51 These
settlements involved significant numbers of doctors--more than 1,200 in
a case in the Dallas-Fort Worth area and more than three-quarters of
all doctors in the Carlsbad, New Mexico area. The Commission's orders
put a stop to allegedly collusive conduct that harms employers,
individual patients, and health plans by depriving them of the benefits
of competition in the purchase of physician services.
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\51\ Grossmont Anesthesia Servs. Med. Group, Inc., File No. 021-
0006 (May 30, 2003) (agreement accepted for public comment); Anesthesia
Serv. Med. Group, Inc., File No. 021-0006 (May 30, 2003) (agreement
accepted for public comment); Carlsbad Physicians, File No. 031-0002
(May 2, 2003) (agreement accepted for public comment); System Health
Providers, Dkt. No. C-4064 (Oct. 24, 2002); R.T. Welter & Assoc., Inc.
(Professionals in Women's Care), Dkt. No. C-4063 (Oct. 8, 2002);
Physician Integrated Servs. of Denver, Inc., Dkt. No. C-4054 (July 16,
2002); Aurora Associated Primary Care Physicians, L.L.C., Dkt. No. C-
4055 (July 16, 2002).
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3. Health Care Mergers. The FTC has taken action regarding a number
of proposed mergers in the health care sector to ensure that consumers
continue to receive the benefits of competitive markets. In April, the
Commission reached a settlement with Pfizer Inc., the largest
pharmaceutical company in the United States, and Pharmacia Corporation
to resolve concerns that their $60 billion merger would harm
competition in nine separate and wide-ranging product markets,
including drugs to treat overactive bladder, symptoms of menopause,
skin conditions, coughs, motion sickness, erectile dysfunction, and
three different veterinary conditions.52 Annual sales in the
nine product markets currently total more than $3 billion. The
settlement will require divestitures to protect consumers' interests in
those markets while allowing the remainder of the transaction to go
forward.
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\52\ Pfizer Inc., Dkt. No. C-4075 (Apr. 14, 2003) (proposed consent
agreement accepted for public comment).
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Other recent health care mergers investigated by the FTC include:
Cytyc/Digene. In June 2002, the Commission authorized the
staff to seek a preliminary injunction blocking Cytyc
Corporation's proposed acquisition of Digene
Corporation,53 involving the merger of two
manufacturers of complementary cervical cancer screening tests.
The complaint alleged that the combined firm would have an
incentive to use its market power in one product to stifle
increased competition in the complementary product's market.
Thus, if the merger had been consummated, rivals would have
been substantially impeded from competing. Following the
Commission's decision, the parties abandoned the transaction.
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\53\ FTC Press Release, FTC Seeks to Block Cytyc Corp.'s
Acquisition of Digene Corp. (June 24, 2002), available at .
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Baxter/Wyeth. The FTC alleged that Baxter International's $316
million acquisition of Wyeth Corporation raised competitive
concerns in markets for a variety of drugs. Of particular
concern were the $400 million market for propofol, a general
anesthetic commonly used for the induction and maintenance of
anesthesia during surgery, and the $225 million market for new
injectable iron replacement therapies used to treat iron
deficiency in patients undergoing hemodialysis.54 To
settle this matter, the parties agreed to divestitures that are
expected to maintain competition in those markets.
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\54\ Baxter International Inc. and Wyeth, Dkt. No. C-4068 (Feb. 3,
2003).
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Amgen/Immunex. The FTC obtained an agreement settling
allegations that Amgen Inc.'s $16 billion acquisition of
Immunex Corporation would reduce competition for three
important biopharmaceutical products: (1) neutrophil
regeneration factors used to treat a dangerously low white
blood cell count that often results from chemotherapy; (2)
tumor necrosis factors used to treat rheumatoid arthritis,
Crohn's disease, and psoriatic arthritis; and (3) interleukin-1
inhibitors used in the treatment of rheumatoid
arthritis.55 The settlement required that the
companies divest certain assets and license certain
intellectual property rights in these markets.
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\55\ Amgen Inc. and Immunex Corp., Dkt. No. C-4056 (Sept. 3, 2002).
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4. Promoting Competition in Prescription Drugs. The FTC also has
sought to promote competition in the pharmaceutical industry through
published reports and speeches. Commissioner Leary has a special
interest in pharmaceutical competition and has addressed this topic in
speeches to solicit input from affected parties and to promote dialogue
regarding practical solutions.56
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\56\ See Thomas B. Leary, Antitrust Issues in Settlement of
Pharmaceutical Patent Disputes (Nov. 3, 2000), available at ; Thomas B. Leary, Antitrust
Issues in the Settlement of Pharmaceutical Patent Disputes, Part II
(May 17, 2001), available at .
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In July 2002, the FTC issued a report entitled ``Generic Drug Entry
Prior to Patent Expiration: An FTC Study,'' 57 which
evaluated whether the Hatch-Waxman Amendments to the Federal Food,
Drug, and Cosmetic Act are susceptible to strategies to delay or deter
consumer access to generic alternatives to brand-name drug products.
The report recommended changes in the law to ensure that generic entry
is not delayed unreasonably, including through anticompetitive
activity. In October 2002, President Bush directed the FDA to implement
one of the key findings identified in the FTC study.58
Specifically, the FDA has proposed a new rule to curb one of the abuses
uncovered by the FTC study--pharmaceutical firms' alleged misuse of the
Hatch-Waxman patent listing provisions--to speed consumer access to
lower-cost generic drugs.59
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\57\ Generic Drug Entry Prior to Patent Expiration: An FTC Study
(July 2002), available at .
\58\ President Takes Action to Lower Prescription Drug Prices by
Improving Access to Generic Drugs (Oct. 21, 2002), available at .
\59\ Applications for FDA Approval to Market a New Drug: Patent
Listing Requirements and Application of 30-Month Stays on Approval of
Abbreviated New Drug Applications Certifying That a Patent Claiming a
Drug Is Invalid or Will Not Be Infringed; Proposed Rule, 67 Fed. Reg.
65448 (Oct. 24, 2002).
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5. Hearings on Health Care and Competition Law and Policy. To keep
abreast of developments in the dynamic health care market, the FTC,
working with DOJ's Antitrust Division, commenced a series of hearings
on ``Health Care and Competition Law and Policy'' on February 26,
2003.60 Over a seven-month period, the FTC and DOJ will
spend almost 30 days of hearings in a comprehensive examination of a
wide range of health care issues, involving hospitals, physicians,
insurers, pharmaceuticals, long-term care, Medicare, and consumer
information, among others. To date, the hearings have focused on the
specific challenges and complications involved in applying competition
law and policy to health care; issues involved in hospital merger cases
and other joint arrangements, including geographic and product market
definition; horizontal hospital networks and vertical arrangements with
other health care providers; the competitive effects of mergers of
health insurance providers; and consumer information and quality of
care issues. A public report that incorporates the results of the
hearings will be prepared after the hearings.
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\60\ The FTC web site for the hearings is http://www.ftc.gov/ogc/
healthcarehearings/index.htm. To date, the FTC has released a detailed
agenda for the hearings' sessions in February through June. All of the
documents relating to the hearings appear on the web site.
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B. Energy
Antitrust law enforcement is critical in the oil and gas industry.
Fuel price increases directly and significantly affect businesses of
all sizes throughout the U.S. economy and can strain consumer budgets.
1. Oil Merger Investigations. In recent years, the FTC has
investigated numerous oil mergers. When necessary, the agency has
insisted on divestitures to cure potential harm to competition. In the
most recent case, Conoco/Phillips, the Commission required the merged
company to divest two refineries and related marketing assets, terminal
facilities for light petroleum and propane products, and certain
natural gas gathering assets.61
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\61\ Conoco Inc. and Phillips Petroleum Company, Dkt. No. C-4058
(Feb. 7, 2003) (consent order).
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2. Natural Gas Merger Investigations. The FTC also has investigated
mergers in the natural gas industry and taken necessary action to
preserve competition. Just two weeks ago, the Commission accepted for
public comment a consent order designed to preserve competition in the
market for the delivery of natural gas to the Kansas City
area.62 The proposed order conditionally would allow
Southern Union Company's $1.8 billion purchase of the Panhandle
pipeline from CMS Energy Corporation, while requiring Southern Union to
terminate an agreement under which one of its subsidiaries managed the
Central pipeline, which competes with Panhandle in the market for
delivery of natural gas to the Kansas City area. Absent the settlement
agreement, the transaction would have placed the two pipelines under
common ownership or common management and control, eliminating direct
competition between them, and likely resulting in consumers' paying
higher prices for natural gas in the Kansas City area.
---------------------------------------------------------------------------
\62\ Southern Union Co., File No. 031-0068 (May 29, 2003)
(agreement accepted for public comment).
---------------------------------------------------------------------------
3. Gasoline Monopolization Case. As highlighted above, the
Commission recently issued an administrative complaint in an important
nonmerger case involving the Union Oil Company of California
(``Unocal'').63 The complaint alleges that Unocal violated
Section 5 of the FTC Act by subverting the California Air Resources
Board's (``CARB'') regulatory standard-setting procedures of the late
1980s relating to low-emissions reformulated gasoline (``RFG'').
According to the complaint, Unocal misrepresented to industry
participants that some of its emissions research was non-proprietary
and in the public domain, while at the same time pursuing a patent that
would permit Unocal to charge royalties if CARB used such emissions
information. The complaint alleged that Unocal did not disclose its
pending patent claims and that it intentionally perpetuated the false
and misleading impression that it would not enforce any proprietary
interests in its emissions research results. The complaint states that
Unocal's conduct has allowed it to acquire monopoly power for the
technology to produce and supply California ``summer-time'' RFG, a low-
emissions fuel mandated for sale in California from March through
October, and could cost California consumers five cents per gallon in
higher gasoline prices. This case is pending before an Administrative
Law Judge.
---------------------------------------------------------------------------
\63\ Union Oil Co. of California, Dkt. No. 9305 (complaint issued
Mar. 4, 2003).
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4. Study of Refined Petroleum Product Prices. Building on its
enforcement experience in the petroleum industry, the FTC is studying
the causes of volatility in refined petroleum products prices. In two
public conferences, held in August 2001 and May 2002, 64
participants discussed key factors that affect product prices,
including increased dependency on foreign crude sources, changes in
industry business practices, and new governmental regulations. The
information gathered through these public conferences will form the
basis for a report to be issued later this year.
---------------------------------------------------------------------------
\64\ FTC Press Release, FTC to Hold Public Conference/Opportunity
for Comment on U.S. Gasoline Industry in Early August (July 12, 2001),
available at ; FTC Press
Release, FTC Chairman Opens Public Conference Citing New Model To
Identify and Track Gasoline Price Spikes, Upcoming Reports (May 8,
2002), available at .
---------------------------------------------------------------------------
5. Gasoline Price Monitoring. In May 2002, the FTC announced a
project to monitor wholesale and retail prices of gasoline in an effort
to identify possible anticompetitive activities to determine if a law
enforcement investigation would be warranted. This project tracks
retail gasoline prices in approximately 360 cities nationwide and
wholesale (terminal rack) prices in 20 major urban areas. The FTC
Bureau of Economics staff receives daily data purchased from the Oil
Price Information Service (``OPIS''), a private data collection
company. The economics staff uses an econometric (statistical) model to
determine whether current retail and wholesale prices each week are
anomalous in comparison with historical data. This model relies on
current and historical price relationships across cities, as well as
other variables.
As a complement to the analysis based on OPIS data, the FTC staff
also regularly reviews reports from the Department of Energy's Consumer
Gasoline Price Hotline, searching for prices significantly above the
levels indicated by the FTC's econometric model or other indications of
potential problems. Throughout most of the past two years, gasoline
prices in U.S. markets have been within their predicted normal bounds.
Of course, the major factor affecting U.S. gasoline prices is the
substantial fluctuation in crude oil prices. Prices outside the normal
bounds trigger further staff inquiry to determine what factors might be
causing price anomalies in a given area. These factors could include
supply disruptions such as refinery or pipeline outages, changes in
taxes or fuel specifications, unusual changes in demand due to weather
conditions and the like, and possible anticompetitive activity.
To enhance the Gasoline Price Monitoring Project, the FTC has
recently asked each state Attorney General to forward to the FTC's
attention consumer complaints they receive about gasoline prices. The
staff will incorporate these complaints into its ongoing analysis of
gasoline prices around the country, using the complaints to help locate
price anomalies outside of the 360 cities for which the staff already
receives daily pricing data.
The goal of the Monitoring Project is to alert the FTC to unusual
changes in gasoline prices so that further inquiry can be undertaken
expeditiously. When price increases do not appear to have market-driven
causes, the FTC staff will consult with the Energy Information Agency
of the Department of Energy. The FTC staff also will contact the
offices of the appropriate state Attorneys General to discuss the
anomaly and the appropriate course for any further inquiry, including
the possible opening of a law enforcement investigation.
C. High Technology
With its history of keeping pace with marketplace developments, the
FTC is well-positioned to take a leading role in assessing the impact
of technology on domestic and world markets. In addition to bringing
enforcement actions in high tech areas, the FTC is studying the impact
of the Internet and intellectual property on competition law and
policy.
1. Standard-Setting Cases. As technology advances, efforts will
increase to establish industry standards for the development and
manufacture of new products. Standard setting is often procompetitive,
but anticompetitive abuses can take place during the standard-setting
process. When the standard-setting process appears to have been
subverted, the FTC will take action. In addition to Unocal, discussed
previously, the agency is currently conducting an administrative
adjudication regarding Rambus, Inc. A June 2002 complaint alleges that
Rambus, a participant in an electronics standard-setting organization,
failed to disclose--in violation of the organization's rules--that it
had a patent and several pending patent applications on technologies
that eventually were adopted as part of the industry
standard.65 The standard at issue involved a common form of
computer memory used in a wide variety of popular consumer electronic
products, such as personal computers, fax machines, video games, and
personal digital assistants. The Commission's complaint alleges that,
once the standard was adopted, Rambus was in a position to reap
millions in royalty fees each year, and potentially more than a billion
dollars over the life of the patents.66 Because standard-
setting abuses can harm robust and efficiency-enhancing competition in
high tech markets, the FTC will continue to pursue investigations in
this area.67
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\65\ Rambus, Inc., Dkt. No. 9302 (complaint issued June 18, 2002).
\66\ Id.
\67\ In 1996, the FTC settled a similar complaint against Dell
Computer, alleging that Dell had failed to disclose an existing patent
on a personal computer component that was adopted as the standard for a
video electronics game. Dell Computer Co., 121 F.T.C. 616 (1996).
---------------------------------------------------------------------------
2. Intellectual Property Hearings. In 2002, the FTC and DOJ
commenced a series of ground-breaking hearings on ``Competition and
Intellectual Property Law and Policy in the Knowledge-Based Economy.''
68 These hearings, which took place throughout 2002 and were
held in Washington and Silicon Valley, heard testimony from academics,
industry leaders, technologists and others about the increasing need to
manage the issues at the intersection of competition and intellectual
property law and policy. The FTC anticipates releasing a report on its
findings later this year.
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\68\ FTC Press Release, Muris Announces Plans for Intellectual
Property Hearings (Nov. 15, 2001), available at .
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3. Internet Task Force. In 2001, the FTC's Internet Task Force
began to evaluate potentially anticompetitive regulations and business
practices that could impede e-commerce. The Task Force has discovered
that some state regulations may have the effect of protecting existing
bricks-and-mortar businesses from new Internet competitors. The Task
Force also is considering whether private companies may be hindering e-
commerce through the use of potentially anticompetitive tactics. In
October 2002, the Task Force held a public workshop to: (1) enhance the
FTC's understanding of these issues; (2) educate policymakers about the
potential anticompetitive effects of state regulations; and (3) educate
private entities about the types of business practices that may be
viewed as problematic.69
---------------------------------------------------------------------------
\69\ FTC Press Release, FTC to Host Public Workshop to Explore
Possible Anticompetitive Efforts to Restrict Competition on the
Internet (July 17, 2002), available at .
---------------------------------------------------------------------------
D. International Competition
Because competition increasingly takes place in a worldwide market,
cooperation with competition agencies in the world's major economies is
a key component of the FTC's enforcement program. Given differences in
laws, cultures, and priorities, it is unlikely that there will be
complete convergence of antitrust policy in the foreseeable future.
Areas of agreement far exceed those of divergence, however, and
instances in which differences will result in conflicting results are
likely to remain rare. The agency has increased its cooperation with
agencies around the world, both on individual cases and on policy
issues, and is committed to addressing and minimizing policy
divergences.
1. ICN and ICPAC. In the fall of 2001, the FTC, DOJ, and 12 other
antitrust agencies from around the world launched the International
Competition Network (``ICN''), an outgrowth of a recommendation of the
International Competition Policy Advisory Committee (``ICPAC''). ICPAC
suggested that competition officials from developed and developing
countries convene a forum in which to work together on competition
issues raised by economic globalization and the proliferation of
antitrust regimes. The ICN provides a venue for antitrust officials
worldwide to work toward consensus on proposals for procedural and
substantive convergence on best practices in antitrust enforcement and
policy. Sixty-seven jurisdictions already have joined the ICN, and the
FTC staff is working on initial projects relating to mergers and
competition advocacy.
2. OECD. The FTC continues to participate in the work of the OECD
on, among other things, merger process convergence, implementation of
the OECD recommendation on hard-core cartels (e.g., price-fixing
agreements), and regulatory reform.
E. Other Enforcement
1. General Merger Enforcement. The FTC reviews and challenges
mergers in any economic sectors that have significant potential to harm
competition and consumers. For example, last summer the Commission
settled allegations that Bayer AG's $6.2 billion purchase of Aventis
S.A.'s crop science business raised antitrust concerns in the markets
for a number of crop science products, including markets for (1) new
generation chemical insecticide products and active ingredients; (2)
post-emergent grass herbicides for spring wheat; and (3) cool weather
cotton defoliants. These new generation products are at the forefront
of pesticide, insecticide, and herbicide products, and maintaining
competition in these markets is significant because they appear to
offer greater effectiveness, with less environmental impact than
current generation products. In settling this matter, the Commission
required Bayer to divest businesses and assets used in the manufacture
of these products to parties capable of maintaining competitive
conditions in these markets.70
---------------------------------------------------------------------------
\70\ Bayer AG and Aventis S.A., Dkt. No. C-4049 (July 24, 2002)
(consent order).
---------------------------------------------------------------------------
Also, in October 2002, the Commission authorized the staff to seek
a preliminary injunction in federal court blocking the proposed
acquisition of the Claussen Pickle Company by the owner of the Vlasic
Pickle Company.71 If allowed to proceed, the combined firm
would have had a monopoly share of the refrigerated pickle market in
the United States. Following the FTC's decision, the parties abandoned
the proposed acquisition.
---------------------------------------------------------------------------
\71\ FTC v. Hicks, Muse, Tate & Furst Equity Fund V, LP, Civ.
Action No. 1:02-cv-02070-RWR (D.D.C. filed Oct. 23, 2002). A notice of
voluntary dismissal was filed on October 31, 2002.
---------------------------------------------------------------------------
2. Mergers Not Reportable Under HSR. The FTC will continue to
devote resources to monitoring merger activities that are not subject
to premerger reporting requirements under HSR, but that could be
anticompetitive. In 2000, Congress raised the HSR size-of-transaction
filing threshold to eliminate the reporting requirement for smaller
mergers, but of course it did not eliminate the substantive prohibition
under Section 7 of the Clayton Act 72 against smaller
mergers that may substantially lessen competition. Consequently, the
FTC must identify--through means such as the trade press and other news
articles, consumer and competitor complaints, hearings, and economic
studies--and remedy those unreported, usually consummated mergers that
could harm consumers.
---------------------------------------------------------------------------
\72\ 15 U.S.C. Sec. 18.
---------------------------------------------------------------------------
One notable example is the case against MSC.Software
Corporation.73 In this case, the company ultimately agreed
to settle FTC allegations that MSC's 1999 acquisitions of Universal
Analytics, Inc. and Computerized Structural Analysis & Research
Corporation violated federal antitrust laws by eliminating competition
in, and monopolizing the market for, advanced versions of Nastran, an
engineering simulation software program used throughout the aerospace
and automotive industries. Under the terms of the settlement agreement,
MSC must divest at least one clone copy of its current advanced Nastran
software, including the source code. The divestiture will be through
royalty-free, perpetual, non-exclusive licenses to one or two acquirers
who must be approved by the FTC.
---------------------------------------------------------------------------
\73\ MSC.Software Corp., Dkt. No. 9299 (Oct. 29, 2002).
---------------------------------------------------------------------------
3. Enforcement of FTC Merger Orders. The FTC also will litigate,
when necessary, to ensure compliance with Commission orders protecting
competition. In March, a federal judge fined Boston Scientific
Corporation (``BSC'') for violating a licensing requirement in a merger
settlement involving medical technology used to diagnose and treat
heart disease.74 To preserve competition in the market for
intravascular ultrasound catheters following its acquisition of two
competitors, BSC had agreed to license its catheter technology to
Hewlett-Packard Company. Finding that BSC ``acted in bad faith'' and
took an ``obstreperous approach'' to its obligation, the court assessed
a civil penalty of more than $7 million. This represents the largest
civil penalty ever imposed for violation of an FTC order.
---------------------------------------------------------------------------
\74\ United States v. Boston Scientific Corp., Civ. Action No. 00-
12247-PBS, Memorandum and Order (D. Mass. Mar. 28, 2003).
---------------------------------------------------------------------------
iv. legislative recommendations
To improve the agency's ability to implement its mission and to
serve consumers, the FTC makes the following recommendations for
legislative changes. The FTC staff will be happy to work with
Subcommittee staff on these recommendations.
A. Elimination of the FTC Act's Exemption for Communications Common
Carriers
The FTC Act exempts common carriers subject to the Communications
Act from its prohibitions on unfair or deceptive acts or practices and
unfair methods of competition. This exemption dates from a period when
telecommunications services were provided by government-authorized,
highly regulated monopolies. The exemption is now outdated. In the
current world, firms are expected to compete in providing
telecommunications services. Congress and the Federal Communications
Commission (``FCC'') have replaced much of the economic regulatory
apparatus formerly applicable to the industry with competition.
Moreover, technological advances have blurred traditional boundaries
between telecommunications, entertainment, and high technology.
Telecommunications firms have expanded into numerous non-common-carrier
activities. For these reasons, FTC jurisdiction over telecommunications
firms' activities has become increasingly important.
The FTC Act exemption has proven to be a barrier to effective
consumer protection, both in common carriage and in other
telecommunications businesses. The exemption also has prevented the FTC
from applying its legal, economic, and industry expertise regarding
competition to mergers and other possible anticompetitive practices,
not only involving common carriage but also in other high-tech fields
involving telecommunications. The FTC believes that Congress should
eliminate the special exemption to reflect the fact that competition
and deregulation have replaced comprehensive economic regulation.
The common carrier exemption sometimes has stymied FTC efforts to
halt fraudulent or deceptive practices by telecommunications firms.
While common carriage has been outside the FTC's authority, the agency
believes that the FTC Act applies to non-common-carrier activities of
telecommunications firms, even if the firms also provide common carrier
services. Continuing disputes over the breadth of the FTC Act's common
carrier exemption hamper the FTC's oversight of the non-common-carrier
activities. These disputes have arisen even when the FCC may not have
jurisdiction over the non-common-carrier activity. These disputes may
increase the costs of pursuing an enforcement action or may cause the
agency to narrow an enforcement action--for example, by excluding some
participants in a scheme--to avoid protracted jurisdictional battles
and undue delay in providing consumer redress. It may have additional
serious consequences to new areas of industry convergence, e.g., high
technology and entertainment, where the FTC's inability to protect
consumers can undermine consumer confidence.
The FTC has the necessary expertise to address these issues. The
FTC has broad consumer protection and competition experience covering
nearly all fields of commerce. The FTC has extensive expertise with
advertising, marketing, billing, and collection, areas in which
significant problems have emerged in the telecommunications industry.
In addition, the FTC has powerful procedural and remedial tools that
could be used effectively to address developing problems in the
telecommunications industry if the FTC were authorized to reach them.
The common carrier exemption also significantly restricts the FTC's
ability to engage in effective antitrust enforcement in broad sectors
of the economy. The mix of common carrier and non-common-carrier
activities within particular telecommunications companies frequently
precludes FTC antitrust enforcement for much of the telecommunications
industry. Further, because of the expansion of telecommunications firms
into other high-tech industries and the growing convergence of
telecommunications and other technologies, the common carrier exemption
increasingly limits FTC involvement in a number of industries outside
telecommunications.
B. Legislation to Improve the FTC's Ability to Combat Cross-Border
Fraud
As stated earlier, consumer fraud is now more global than ever
before. To better protect consumers, the FTC requests that Congress
enact legislation that would better address the changing nature of the
consumer marketplace and improve the agency's ability to cooperate and
share information in cases and investigations relating to cross-border
fraud. The agency's recommendations focus primarily on improving its
ability to combat fraud involving foreign parties, evidence, or assets.
At the same time, some of the recommendations may also benefit the
pursuit of purely domestic investigations and cases. Indeed, it is
often not immediately evident whether a matter has a cross-border
component.
These proposals also would help the FTC fight deceptive spam. As
the agency has learned from investigations and discussions at the
recent FTC spam forum, spammers easily can hide their identity, forge
the electronic path of their e-mail messages, or send their messages
from anywhere in the world to anyone in the world. Also, a large
percentage of spam comes from outside our borders. For these reasons,
the spam forum participants emphasized that successful efforts to
combat deceptive spam will require international enforcement
cooperation. These legislative proposals can improve the FTC's ability
to cooperate with international partners on this issue.
The FTC staff has discussed these legislative proposals with other
affected agencies, and these agencies generally support the goals of
the proposals. The FTC staff is continuing to work with these agencies
on the details of a few of the proposals. The FTC's cross-border
proposal includes four main components. First, the FTC is seeking to
strengthen, in a number of ways, its ability to cooperate with foreign
counterparts, who are often investigating the same targets. Under
current law, for example, the FTC is prohibited from sharing with
foreign counterparts certain information that the FTC has obtained in
its investigations. Legislation is necessary to allow the agency to
share such information and provide other investigative assistance in
appropriate cases.75
---------------------------------------------------------------------------
\75\ The Securities Exchange Commission, the Commodity Futures
Trading Commission, and the federal financial regulators already have
the authority to share information and cooperate with their foreign
counterparts. See 15 U.S.C. Sec. 78x(c); 15 U.S.C. Sec. 78u(a)(2); 7
U.S.C. Sec. 12(e); 7 U.S.C. Sec. 16(f); 12 U.S.C. Sec. 3109(a)-(b); and
12 U.S.C. Sec. 1818(v)(2). The FTC's proposal is modeled after these
statutes.
---------------------------------------------------------------------------
Second, the FTC is seeking enhancements to its information-
gathering capabilities to enable it to obtain more easily information
from federal financial regulators about those who may be defrauding
consumers. The FTC is also seeking enhancement of its ability to obtain
information from third parties without the request triggering advance
notice to investigative targets and thus prompting the targets to move
their assets overseas.
Third, the FTC is seeking improvements to its ability to obtain
consumer redress in cross-border litigation, by clarifying the agency's
authority to take action in cross-border cases and expanding its
ability to use foreign counsel to pursue offshore assets.
Finally, the FTC is seeking to strengthen international cooperative
relationships by obtaining authority to facilitate staff exchanges and
to provide financial support for certain joint projects.
C. Legislation to Enhance the FTC's Effectiveness To Fight Fraudulent
Spam
As discussed earlier, a recent study by the Commission found that
66 percent of spam contained obvious indicia of falsity. Moreover, a
significant portion of spam is likely to be routed through foreign
servers. For these reasons, it would be useful to have additional
legislative authority, addressing both procedural and substantive
issues, that would enhance the agency's effectiveness in fighting fraud
and deception. The procedural legislative proposals would improve the
FTC's ability to investigate possible spam targets, and the substantive
legislative proposals would improve the agency's ability to sue these
targets successfully.
1. Procedural Proposals. The FTC's law enforcement experience shows
that the path from a fraudulent spammer to a consumer's in-box
frequently crosses at least one international border and often several.
Thus, fraudulent spam exemplifies the growing problem of cross-border
fraud. Two of the provisions in the proposed cross-border fraud
legislation discussed above also would be particularly helpful to
enable the FTC to investigate deceptive spammers more effectively and
work better with international law enforcement partners.
First, we request that the FTC Act be amended to allow FTC
attorneys to seek a court order requiring a recipient of a Civil
Investigative Demand (``CID'') to maintain the confidentiality of the
CID for a limited period of time. Several third parties have told us
that they will provide notice to the target before they will share
information with us, sometimes because they believe notice may be
required and sometimes even if such notice clearly is not required by
law.
Second, we are requesting that the FTC Act be amended to provide
that FTC attorneys may apply for a court order temporarily delaying
notice to an investigative target of a CID issued to a third party in
specified circumstances, when the Right to Financial Privacy Act
(``RFPA'') or the Electronic Communications Privacy Act (``ECPA'')
would require such notice.
The FTC's experience is that when fraud targets are given notice of
FTC investigations they often destroy documents or secrete assets.
Currently RFPA and ECPA provide a mechanism for delaying notice, but
the FTC's ability to investigate would be improved by tailoring the
bases for a court-ordered delay more specifically to the types of
difficulties the FTC encounters, such as transfers of assets offshore.
In addition, it is unclear whether FTC attorneys can file such
applications, or whether the Commission must seek the assistance of the
Department of Justice. Explicit authority for the FTC, by its own
attorneys, to file such applications would streamline the agency's
investigations of purveyors of fraud on the Internet, ensuring that the
agency can rapidly pursue investigative leads.
Other legislative proposals would enhance the FTC's ability to
track deceptive spammers. First, we request that the ECPA be clarified
to allow the FTC to obtain complaints received by an ISP regarding a
subscriber. Frequently, spam recipients complain first to their ISPs,
and access to the information in those complaints would help the agency
to determine the nature and scope of the spammer's potential law
violations, as well as lead the agency to potential witnesses.
Second, we request that the scope of the ECPA be clarified so that
a hacker or a spammer who has hijacked a bona fide customer's email
account is deemed a mere unauthorized user of the account, not a
``customer'' entitled to the protections afforded by the statute.
Because of the lack of a statutory definition for the term
``customer,'' the current statutory language may cover hackers or
spammers. Such a reading of the ECPA would permit the FTC to obtain
only limited information about a hacker or spammer targeted in an
investigation. Clarification to eliminate such a reading would be very
helpful.
Third, we request that the ECPA be amended to include the term
``discovery subpoena'' in the language of 18 U.S.C. Sec. 2703. This
change is particularly important because a district court has ruled
that the FTC staff cannot obtain information under the ECPA from ISPs
during the discovery phase of a case, which limits the agency's ability
to investigate spammers.76
---------------------------------------------------------------------------
\76\ See FTC v. Netscape Comm. Corp., 196 F.R.D. 559 (N.D. Cal.
2000).
---------------------------------------------------------------------------
2. Substantive Proposals. Substantive legislative changes also
could aid in the FTC's law enforcement efforts against spam. Although
Section 5 of the FTC Act provides a firm footing for spam prosecutions,
additional law enforcement tools could make more explicit the
boundaries of legal and illegal conduct, and they could enhance the
sanctions that the agency can impose on violators. The Telemarketing
and Consumer Fraud and Abuse Prevention Act (``TCFAPA''), 15 U.S.C.
Sec. Sec. 6101-6108, provides a model for addressing unsolicited
commercial e-mail. Amendments to the TCFAPA would authorize the FTC to
adopt rules addressing deceptive and abusive 77 practices
with respect to the sending of unsolicited commercial e-mail.
Approaching spam through this statutory model would provide the market
with direction, but would do so within a framework that could change as
the problems evolve. It also would provide several more specific,
important benefits.
---------------------------------------------------------------------------
\77\ The FTC has determined, in the Statement of Basis and Purpose
for the Amended TSR, that the undefined term ``abusive'' used in the
legislation authorizing that Rule will be interpreted to encompass
``unfairness.'' 68 Fed. Reg. 4580, 4614 (2003).
---------------------------------------------------------------------------
First, amendment of the statute would give the FTC general
discretionary authority via rulemaking to address deceptive practices
relating to spam. The rule would set out bright lines between
acceptable and unacceptable practices for the business community. The
list of deceptive practices could include: the use of false header or
routing information; the use of false representations in the
``subject'' line; the use of false claims that an unsolicited
commercial e-mail message was solicited; and the use of false
representations that an opt-out request will be honored. As with
telemarketing, a rule also could prohibit assisting and facilitating
any of the above, i.e., providing substantial assistance to another
party engaged in any rule violation knowing or consciously avoiding
knowing that such party is engaged in such violation.
Second, amendment of the statute would give discretionary authority
via rulemaking to address abusive practices relating to spam. Specific
abusive practices might include: sending any recipient an unsolicited
commercial e-mail message after such recipient has requested not to
receive such commercial e-mail messages; failing to provide a
reasonable means to ``opt out'' of receiving future e-mail messages;
and sending unsolicited commercial e-mail to an address obtained
through harvesting or a dictionary attack.
Third, amendment of the TCFAPA would ensure that the Rule embodies
the same standard of liability that is embodied in Section--5 of the
FTC Act, without a general requirement to show intent or scienter.
Imposition of intent or scienter requirements would unnecessarily
complicate enforcement, and also would actually constrict the scope of
the FTC's existing authority under Section 5 to attack spam.
Fourth, the amended statute would provide that the Rule would be
enforceable, like all FTC Rules, through FTC actions in federal
district court, and it further would provide that violators would be
subject to preliminary and permanent injunctions and could be ordered
to pay redress to consumers. In addition, in an action brought by DOJ
on behalf of the FTC, violators would be liable to pay civil penalties
of up to $11,000 per violation (the amount of civil penalties is
governed by statutory factors, such as ability to pay, previous history
of such conduct, egregiousness of the conduct, etc.).
Like the existing statute, the amended TCFAPA would authorize
states to enforce the FTC Rule in federal court to obtain injunctions
and redress for their citizens, but not civil penalties.
The TCFAPA authorizes a private right of action for any person
adversely affected by a violation of the FTC's Telemarketing Sales Rule
if the amount in controversy exceeds $50,000 in actual damages for each
person adversely affected by such action. The FTC, however, will need
to assess whether the inclusion of an analogous provision in an amended
TCFAPA that addresses spam would be appropriate, effective, and
feasible.
Finally, the rulemaking authority granted through this amendment
could be adapted to new changes in technology without hindering
technological innovation.
An amended TCFAPA should seek to assure consistency between state
and federal laws. The scope of the Internet and of e-mail communication
is global, transcending national boundaries. Congress should seek to
minimize artificial barriers that would break up this market.
In addition to the TCFAPA amendments, the possible criminalization
of false header and routing information should be explored. There is
some debate over whether the wire fraud statute covers fraud in the
sending of e-mail communications. The FTC staff is discussing this
issue with criminal authorities to determine whether a specific statute
that criminalized this conduct would clear up any statutory confusion
or encourage spam prosecutions. At this time, the FTC has no
recommendations on whether changes in the criminal code are necessary
or appropriate.78 Admittedly, we recognize that these legal
steps will not solve the growing spam problem. Nor is it clear what
impact these steps will have on some of the other problems associated
with spam (e.g., volume and security). These issues may need to be
addressed separately. Nevertheless, the FTC believes that the proposed
legislation would provide more effective investigative and enforcement
tools and would enhance the FTC's continuing law enforcement efforts.
---------------------------------------------------------------------------
\78\ Any legislation that criminalizes certain types of spam
activities should not negatively impact the FTC's existing Section 5
authority or change the present standards of proof, scienter, or
evidence for cases of civil fraud, deception, or unfairness.
---------------------------------------------------------------------------
D. Technical Changes
Finally, the FTC requests two new grants of authority: (1) the
ability to accept reimbursement for expenses incurred by the FTC in
assisting foreign or domestic law enforcement authorities, and (2) the
ability to accept volunteer services, in-kind benefits, or other gifts
or donations. Both new authorities would be useful as the FTC tries to
stretch its resources to meet its statutory responsibilities.
The authority to accept reimbursement for expenses incurred would
be especially useful in connection with the FTC's close coordination
with domestic and foreign law enforcement authorities to address
possible law violations. Partnering with these law enforcement
authorities has resulted in enhanced law enforcement efforts and
greater sharing of significant information. In some of these
situations, the FTC's foreign or domestic partner is interested in
reimbursing the FTC for the services it has provided or in sharing some
of the costs of investigating or prosecuting the matter. Without
specific statutory reimbursement authority, however, the FTC cannot
accept and keep such reimbursements because of constraints under
appropriations law.
In addition, the FTC requests authority to accept donations and
gifts, such as volunteer services and in-kind benefits. Congress has
conferred this authority by statute on various agencies, including the
Office of Government Ethics, the FCC, and the Consumer Product Safety
Commission. Without this authority, the FTC cannot accept services or
keep items because of appropriations law constraints. This broad
restriction on acceptance of gifts sometimes limits the FTC's ability
to fulfill its mission in the most cost-effective manner. For example,
the FTC cannot accept volunteer services from individuals wishing to
provide such services to the agency. In addition, agency officials must
sometimes refuse donated items that could otherwise be useful in
carrying out the agency's mission, such as books and similar mission-
related items.
v. conclusion
Mr. Chairman, the FTC appreciates the strong support for its agenda
demonstrated by you and the Subcommittee. I would be happy to answer
any questions that you and other Senators may have about the FTC's
reauthorization request.
Mr. Stearns. Welcome. Thank you, Mr. Chairman. Mr.
Thompson.
STATEMENT OF HON. MOZELLE W. THOMPSON
Mr. Thompson. Good morning. Thank you, Mr. Chairman and
members of the committee, for the opportunity to appear before
you today and offer testimony in support of the FTC's
reauthorization. In recent years the FTC has been doing
significant work in the area of international consumer
protection. Improvements in communication and technology have
created a global marketplace in which American consumers and
American businesses play an important and active role. But
these same improvements have left American consumers open to
new types of harm in numbers that are growing at an exponential
rate.
Today, I would like to talk about one of the most
significant consumer protection problems in the last several
years; the globalization of fraud and deception and the FTC's
response, because not only has the marketplace for consumers
been global, so have the purveyors of fraud and deception.
Now, as you can see from the first exhibit, right behind
me, the same technological tools that have expanded markets
across international boundaries have allowed fraudsters to act
more effectively and quickly to extend their reach from
domestic markets. The FTC needs new tools to effectively combat
cross-border fraud and deception and we ask you for them today.
Now, this first exhibit shows you just where some of our
complaints come from, from U.S. consumers to businesses, and
you can just see this from our data right now, all around the
world. Now, there was a time not very long ago when the biggest
challenge to American consumers was whether they wanted to do
business with a mail order company on the other side of the
United States. Most of our consumer protection laws are based
on what we knew then, and they have served us well. Today,
however, America represents the largest and richest consumer
marketplace in the world. Improvements in technologies have
opened world markets to American consumers and vice versa.
So it is not surprising that American consumers are
bombarded with new opportunities to spend their money. These
opportunities arrive from around the world via mail, telephone,
television and even spam. While many of these opportunities may
be legitimate, a rapidly growing number are fraudulent and
deceptive.
Now, as you can see from the second chart, from some of our
data, just what is in red are American consumer complaints
against Canadian companies. And the other, the blue part,
represents American consumer complaints against other companies
from around the world. It is amazing what percentage of those
complaints come from outside of our borders.
Now, in response to this dramatic increase, the FTC has
taken a leadership role in reaching a mutual understanding with
our international colleagues that we must plus bring down
barriers to prosecuting fraudsters who prey on victims across
borders. Consumer protection law enforcers around the world now
agree that this problem is serious and that international
cooperation is a key to any effort to combat cross-border fraud
and deception. We work in a variety of international fora to
address these problems. Our efforts have resulted in bilateral
memorandum of understanding and include our participation in
the International Consumer Protection Enforcement Network, a
group of consumer protection law enforcement agencies from
around the world.
The issue of cross-border fraud and deception is also at
the forefront of our discussions at the Organization for
Economic Cooperation and Development, the OECD, and their
Committee on Consumer Policy. That committee, which I chair,
has worked to develop guidelines that provide the 30 OECD
governments with a blueprint for cooperation in combatting
cross-border fraud. We hope those guidelines will be finalized
and approved later this month.
But participation in international fora is not enough.
Criminal law enforcers saw the need for international
cooperation a long time ago and they found ways to permit
governments to share investigatory information and to engage in
cooperative law enforcement. Later, the Federal Government
recognized the negative market impacts of such activities as
securities and commodities fraud. Consequently, agencies like
the SEC and the CFTC were given certain powers that enable them
to better prosecute such fraud across national borders.
But unlike our sister agencies, the FTC's tools to combat
fraud and deception have not quite caught up with the times. In
many instances the statutes under which we operate do not
address the increasingly cross-border nature of fraud and
sometimes even hinder our ability to engage in strong law
enforcement activity. The growth of cross-border fraud
demonstrates the pressing need for new tools.
As you can see from the third exhibit, our statistics show
a sharp increase in the number of cross-border complaints from
American consumers about foreign companies, from 7,609 in
calendar year 1998 to 24,213 in calendar year 2002. In fact,
from 2001 to 2002 the number of complaints almost doubled. And
as the chairman recognized in his remarks, participants in our
spam forum have even noted how much fraudulent and deceptive e-
mail comes from outside of the United States. So for this
reason alone, cross-border fraud legislation is a necessary
element to make spam legislation effective.
So the legislative proposal that we have presented to you
is intended to address some of the problems that I have
outlined and improve the FTC's ability to protect consumers in
cross-border cases. Quite simply, we are asking for the tools
to make us more effective in meeting the challenges posed by
cross-border fraud.
I would be happy to provide you with more details and
answer any questions you may have on this or any other subject
of the FTC's activities. Thank you.
[The prepared statement of Hon. Mozelle W. Thompson
follows:]
Prepared Statement of Hon. Mozelle W. Thompson, Commissioner, Federal
Trade Commission
Good morning Mr. Chairman and members of the Committee, and thank
you for the opportunity to appear before you and to offer testimony in
support of the FTC's reauthorization. In recent years, the FTC has been
doing significant work in the area of international consumer
protection. Improvements in communication and technology have created a
global marketplace in which American consumers and American businesses
play an important and active role. But these same improvements have
left American consumers open to new types of harm in numbers that are
growing at an exponential rate.
Today, I would like to talk about one of the most significant
consumer protection problems in the last several years--the
globalization of fraud and deception--and the FTC's response. Because
not only has the consumer marketplace become global, so have the
purveyors of fraud and deception. The same technological tools that
have expanded markets across international boundaries have also allowed
fraudsters to act more quickly and efficiently--and to extend their
reach beyond their domestic markets. The FTC needs new tools to
effectively combat cross border fraud and deception, and we ask you for
them today.
There was a time when the biggest challenge to American consumers
was whether they wanted to do business with a mail order company on the
other side of the country. Most of our consumer protection laws are
based on what we knew then, and they have served us well. Today,
however, America represents the largest and richest consumer
marketplace in the world. Improved technologies have opened world
markets to American consumers and vice versa. So, it is not surprising
that American consumers are bombarded with new opportunities to spend
their money. These opportunities arrive from around the world via mail,
telephone, television, and even spam. While many of these opportunities
may be legitimate, a rapidly growing number are fraudulent or
deceptive.
In response to this dramatic increase, the FTC has taken a
leadership role in reaching a mutual understanding with our
international colleagues that we have to bring down barriers to
prosecuting fraudsters who prey on victims across borders. Consumer
protection law enforcers around the world now agree that this problem
is serious and that international cooperation is the key to any effort
to combat cross border fraud and deception.
We work in a variety of international fora to address the problems
posed by cross border fraud.
Our efforts have resulted in bilateral memoranda of understanding,
and include our participation in the International Consumer Protection
and Enforcement Network (ICPEN), a group of consumer protection law
enforcement agencies from around the world.
The issue of cross-border fraud and deception is also at the
forefront of our discussions at the Organization for Economic
Cooperation and Development (OECD) Committee on Consumer Policy (CCP).
The CCP has worked to develop guidelines that provide the thirty OECD
governments with a blueprint for cooperation in combating cross-border
fraud. We hope that the guidelines will be finalized and approved later
this month.
But participation in international fora is not enough.
Criminal law enforcers saw the need for international cooperation
many years ago. They found ways to permit government authorities to
share investigatory information and to engage in cooperative law
enforcement. Later, the Federal government recognized the negative
market impact of such activities as securities and commodities fraud.
Consequently, agencies such as the SEC and CFTC were given certain
powers enabling them to better prosecute such fraud across national
borders.
Unlike our sister agencies, the FTC's tools to combat fraud and
deception have not kept up with the times. In many instances the
statutes under which we operate do not address the increasingly cross-
border nature of fraud and deception and sometimes even hinder our
ability to engage in strong enforcement activity against those who use
international borders to the detriment of consumers.
The growth of cross-border consumer fraud demonstrates the pressing
need for new tools to protect consumers. Our statistics show a sharp
increase in the number of cross-border complaints from American
consumers about foreign companies, from 7,609 in calendar year 1998 to
24,213 in calendar year 2002. In fact, from 2001 to 2002, the number of
complaints almost doubled. Even at our recent Spam Forum, participants
noted that unsolicited e-mail increasingly crosses borders to subject
consumers to fraudulent and deceptive offers.
The legislative proposal that we have presented to you is intended
to address some of these problems and improve the FTC's ability to
protect consumers in such cases. Quite simply, we are asking for the
tools to make us more effective in meeting the challenges posed by
cross-border fraud.
I would be happy to answer any questions that you have on this
subject or any other part of the FTC's activities.
Mr. Stearns. Thank you, Commissioner. Commissioner Swindle.
STATEMENT OF HON. ORSON SWINDLE
Mr. Swindle. Thank you, Mr. Chairman--pardon me--and
members of the committee, for this opportunity to appear before
you and Chairman Muris and----
Mr. Stearns. You might just pull the mike up a little bit.
Mr. Swindle. If I turn it on, it would help immensely.
Modern technology. I will start again with the clearing of the
throat.
Thank you, Mr. Chairman and members of the committee, for
this opportunity to appear before you and with Chairman Muris
and my fellow Commissioners. Today I would like to briefly
address a growing problem for all of us, the unsolicited
commercial e-mail, unwanted e-mail or spam. Consumers must have
trust and confidence in technology and its uses, particularly
when it comes to the privacy and security of their personal and
sensitive information. Spam undermines consumer trust and
confidence and is rapidly growing threat to Web-based services.
The Commission's testimony provides the committee with an
overview of our efforts to combat spam and also legislative
recommendations to address spam. The legislative
recommendations are modeled on the Telemarketing Act. However,
many of the Commission's recommendations are already contained
in the Burr spam bill. For example, like the Telemarketing Act,
the Burr bill provides for State law enforcement action in
Federal court, allows for the collection of civil penalties and
grants the Commission narrow rulemaking authority to implement
key provisions of the bill.
Spam raises a number of concerns. The volume of spam is
increasing at astonishing rates. In addition, recent Commission
studies indicate that spam has become the weapon of choice for
those engaged in fraud and deception. Spam also can transmit
viruses, Trojan horses and other damaging code capable of
inflicting major damage on the Internet and our critical
infrastructure. These concerns represent enormous cost to
businesses, consumers and the economy.
There is no easy solution to the spam problem, certainly,
no single approach that will solve the problem. Nevertheless,
spam raises problems that demand attention by policymakers and
industry leaders. First, there is a complex combination of
technology, market forces and public policy that will be
evolving for years to come. In addition, the spam problem is
heavily influenced by the emotions of millions of computer
users who are literally fed up with spam.
Spam is about to kill the ``Killer Ap'' of the Internet,
specifically consumer use of e-mail and e-commerce. If
consumers lose trust and confidence in Web-based services and
stop using them as tools for communications and on-line
commerce, tremendous harm will be done to the economic
potential of information technology. Solving these problems
requires innovation, resources and time. However, dealing with
the emotional reaction of spam by millions of users requires
our immediate attention before it gets out of hand.
Internet service providers, software manufacturers and
those engaged in designing operating systems must empower
consumers with better control over their incoming e-mail.
Easing the spam burden on consumers will help to shore up trust
and confidence.
Surely this is possible right now. Why has industry not
done so? Frankly, I am not convinced that industry really wants
to empower consumers by giving them easy to use tools to
control their incoming e-mail. Spam is a crisis today. We need
great minds to quickly find solutions. Empowering consumers
would be a good first step. Industry must do this and do it
now.
The Commission will continue its multifaceted efforts to
address spam. For example, the Commission will continue its
aggressive law enforcement programs against deceptive spam.
However, it is both resource intensive and technically
challenging to find the guilty parties. Consumer education and
awareness are also essential. Our Web site, ftc.gov/
infosecurity, our consumer outreach and partnerships with
industry on fighting spam and promoting safe computing are
expanding our reach.
The Commission also conducts research on various aspects of
spam. Three recent Commission studies helped us to better
understand the magnitude of deceptive spam and how consumers
are victimized. The Commission's spam forum in May was intended
to better inform the dialog and to explore possible solutions
for spam. The forum was remarkable in its discussions and
participants. Over 80 panelists and over 400 people attended
the conference over its 3-day span. I would like to share some
of the forum's revelations about the realities of spam.
First and foremost, the private sector must lead the way to
finding solutions to spam. We likely will not find the perfect
solution. The target will be constantly moving as technology
evolves. More laws are not necessarily the right answer. Laws
bestowing a competitive advantage to larger firms over smaller
firms are questionable. Unenforceable laws will have little
real effect. Overreaching laws will have unintended adverse
consequences. Passing legislation to mandate best practices for
good actors will not help us track down the bad actors engaged
in fraud and deception. Industry and government, consumers and
other user's and civil society organizations must be a part of
a continuing dialog to find solutions.
In addition, consumer awareness and developing safe
computing practices by all participants are essential.
Developing a culture of security where all participants work to
enhance consumer security and minimize the vulnerabilities to
the Internet and our critical infrastructure is an imperative,
not an option. The effort to solve the spam problem and secure
our information systems and networks is a journey. It is not a
destination, and we have miles to go before we sleep.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the Commissioner. Commissioner Leary.
STATEMENT OF THE HON. THOMAS B. LEARY
Mr. Leary. Yes. Thank you, Mr. Chairman and members of the
subcommittee. My role here is to discuss our unanimous
recommendation that the Federal Trade Commission Act be amended
to eliminate the special exemption for telecommunications
common carriers. When the common carrier exemption was included
in the FTC Act many years ago the exemption made sense. It was
logical to exempt monopoly providers of common carrier services
who were not disciplined by competition, but rather by detailed
rate and service regulation. Since that time, the
telecommunications industry has changed dramatically and,
perhaps even more important, the regulatory role of the Federal
Government has also changed dramatically. Let me summarize some
of the changes that are particularly significant.
One, the common carrier activities of telecom companies are
less regulated by government fiat today and more by
competition. At the same time, telecom companies have been
allowed to expand into non-common carrier activities like
Internet services. They provide these services in competition
with companies that are unqualifiably subject to our
jurisdiction. These telecom companies no longer occupy a
special niche in our economy.
Two, over the last century you have passed myriad laws and
regulations and created entirely new agencies to monitor and
regulate specific activities of business enterprises whether
they are common carriers or not. Sector specific regulation of
the kind that the FCC or the FDA provides has been supplemented
everywhere by specific substantive law enforcement of agencies
like the SEC, OSHA or the EPA--agencies like the FTC that have
a broad jurisdiction over a large number of sectors, but
monitor a limited range of activities in any one sector. We no
longer look to a single government agency to address all
problems that may appear in a single sector.
Three, we in the FTC have a long experience cooperating
with other agencies to avoid duplication or inconsistency in
these situations. Specifically, we want to cooperate with the
FCC, and we have no ability or desire to intrude in their core
mission as gatekeeper into the limited communications spectrum.
We do not make the same kinds of public interest determinations
that they do. We are not concerned with the qualifications of
companies that compete or the nature of services that they
provide.
The core mission that you have assigned to us is to see
that any company, whatever it does, conducts its business with
fairness and with honesty. In carrying out that mission, we
have acquired an in-house expertise and a body of precedent
that I really believe is unmatched anywhere in this country or
indeed the world.
Now, some may ask why we are asking for a change after all
these years, and that is a fair question. The short answer is
that technologies are continually converging and we have become
increasingly frustrated by our inability to obtain complete
relief in situations where (A) there are multiple parties, some
of whom are common carriers and some who are not; (B) a common
carrier engages in deceptive practices involving a mix of
common carrier and non-common carrier activities; or (C) the
jurisdiction lines are unclear and resources are wasted dealing
with an issue that has nothing to do with the merits.
Finally, an admitted common carrier may engage in deceptive
practices that are similar to those we see all the time, that
do the same consumer harm and for which we have special
remedies, but we are paralyzed by the jurisdictional barrier.
Potential agency overlaps may require discussion and
cooperation. We have had and continue to have an ongoing
exchange with the FCC on this subject. We are trying to address
the situation where companies that engage in the same conduct
in competition with one another are subject to different
regulatory regimes. We will not have duplicate regulation, but
we want to avoid inconsistent regulation.
In conclusion, let me assure you that we do not want to
intrude into other agencies' business and we do not seek to
impose remedial relief absent a need for it. But you decided
long ago that the issues we are talking about here are our
business, and we cannot do the best possible job for consumers
whom we both seek to serve while we are constrained by a
barrier that has long outlived its usefulness.
Thank you, Mr. Chairman.
Mr. Stearns. I thank you. I think we will have two rounds
of questioning, 5 minutes each, and I will start out with my
first line of questioning. I think one of the most alarming
statistics in your testimony deals with identity theft and I
guess according to your prepared statement regarding ID theft,
it has increased over 500 percent just in 2 years. In 2002
identity theft was the No. 1 consumer complaint made to the
Federal Trade Commission, approximately 43 percent of all
complaints, from your testimony. I have a person on my staff
who has actually had identity, ID theft, so he can speak to
this and he has pointed out to me he has been very happy and
was very clearly pleased with the response of the Federal Trade
Commission. So you have one case example where it is working.
Once a person logs on, in fact, I might point out that I guess
if a person has a complaint with ID theft, you have a toll free
number which is 1-877-IDTHEFT. And then you have a Web site, of
course it is www.consumer.gov/idtheft. But the question is once
a person logs a complaint into your ID theft data base, what
can they expect in terms of action at that moment from the law
enforcement agencies that use this data base? Is there a
particular threshold as to whether or not an ID theft complaint
will be investigated by either a local or Federal law
enforcement agency?
I will just start with the Chairman.
Mr. Muris. Well, we provide victim assistance. We don't
have the ability to bring cases. We also provide assistance to
law enforcement. In fact, we work with and train law
enforcement. I have actually sat and listened to several
consumer calls. When someone calls what we are particularly
good at is helping walk them through the steps they need to
take, both in filing a police report and in dealing with their
creditors and the credit reporting agencies. We published a
runaway best selling booklet that we can't print enough of, to
advise people on what to do if they are a victim of identity
theft. Since I became Chairman 2 years ago now, we now print
the booklet in Spanish, Robo Identitad. We have a very large
circulation in Spanish as well.
We continue to try to improve what we do. We have only very
recently increased dramatically our training and we are trying
to work with law enforcement officials. The Secret Service
works with us on this and we have tried to put together
packages using our data of possible problems to send to law
enforcement. Finally, I have supported increased criminal
penalties in the identity theft area. There are some bills that
would do that.
Mr. Stearns. Well, I guess one thing I think we should do
immediately, once there is suspicion of fraudulent activity
under his or her name is to file a fraud alert with the three
credit reporting bureaus and their report will reflect a notice
for any credit lender to contact the individual directly before
extending any credit. It is my understanding that some credit
lenders will continue to extend credit despite the fraud alert
and subsequently fail to actually contact the consumer.
I guess the question is, has your agency encountered any
complaints like that and how do we encourage credit companies
to heed the fraud alert when a credit report is pulled?
Mr. Muris. We have been talking to the credit reporting
agencies and creditors. One thing that we have done in the last
year or so is created a common form that people who are victims
of identity theft can use. More and more creditors accept this
form. In connection with the reauthorization of the Fair Credit
Reporting Act discussing possible reforms. We haven't come to
any recommendations yet. But we are considering changes and
improvements that would make it easier to attack identity
theft.
I think that in talking to the credit reporting agencies,
the problem that you are identifying does not come up very
often. We are the main regulator of the credit reporting
agencies and we talk to them quite a bit about this and other
issues.
Mr. Stearns. Do these credit reporting agencies talk to
each other, so once an account is fraudulent by one bureau,
does that bureau share that information with the other credit
bureaus if they also have records of the same fraudulent
account? And so should these companies be required to share
this information, I think is the question for you.
Mr. Muris. Well, at the moment I don't think they share the
information. They have different algorithms for determining
creditworthiness and this is a good thing in terms of
competition. They use fairly complex credit scoring models. We
are trying to work with them though in ways to deal with
identity theft, such as the common affidavit that I just
mentioned.
If you look at the three major credit reporting agencies
there are significant differences in the information that they
have and in how they use the information. The information comes
from so-called furnishers. The people who grant credit are a
primary example. The big picture is that, since the Congress
put us in the business of tracking identity theft information
and providing victim assistance, we have been on a very steep
curve in providing better assistance to consumers, better
working with the credit reporting agencies, and better
assistance to law enforcement. We are also doing, if I could
add for just a second, a nationally projectable survey which
will be the first time that we have a systematic estimate of
the scale of the problem of identity theft. The survey is out
in the field; they are compiling the results. We hope to
announce the results fairly soon, and we will do some very
useful things there. For example, we will look at different
kinds of problems. The problem of having your account number
stolen is significantly different, or can be, from someone who
actually goes out and gets a new credit card in your name. We
will look at different kind of problems, and I think that will
allow us to assist victims and law enforcement in a better way.
Finally, one thing we have encouraged and we are still talking
to the credit reporting agencies about, is to establish that
one call to us from a credit reporting agency will place a
fraud alert with all the three major credit reporting agencies.
I think that will be a positive step.
Mr. Stearns. Just in conclusion, TransUnion is one, credit
reporting, and Equifax is another. And TransUnion let us say,
takes it off of your report but Equifax doesn't. How do you get
these two to do it at the same time, so that the consumer isn't
constantly badgering one while the other did it, and I guess
how do we do that? Maybe that is not in your jurisdiction but--
--
Mr. Muris. The credit reporting agencies have been very
responsive in dealing with us. They understand the problem of
identity theft. The creditors are, obviously, extremely
interested. As you know, under current law, the credit card
companies get left holding a very large bill. ID theft is a
very damaging problem to consumers because of the time involved
in getting your good name back. The out-of-pocket costs are
borne by someone else. So I think the business community has a
lot of interest. We are working with them, and are making
progress.
Mr. Stearns. Thank you.
Ms. Schakowsky. Thank you, Mr. Chairman. Mr. Muris, I am
very happy that you put your book out in Spanish because I
think one of the problems that foreign language speakers may
find themselves in are immigration complications when there is
identity theft; so I am glad that you have done that. In my
district, we could probably use about 50 languages.
But I wanted to talk to you about the current law that says
that a person has 2 years from the time of theft, identity
theft, to seek court action. The Supreme Court in the TRW
versus Andrews supported this 2-year time limit. The Bush
Administration, I am happy to say, filed a brief in opposition
to the Supreme Court decision, and I also oppose that decision.
And in the last Congress, I introduced bipartisan legislation
that would have extended the statute of limitation to 5 years
from the time a victim learned or should have learned that the
identity theft had occurred. The current statute of limitations
makes it extremely difficult for victims to seek redress and
restore their good name in a timely fashion, and it is your
data that says that it takes on average 12.3 months for a
consumer to learn of the theft. Sixteen percent of the victims
are unaware of the theft for 2 years. So I wanted to get your
feelings on this to see if you support the administration's
earlier decision and advocate briefing in that case, and to
find out if you, if the credit, would support the legislation
to extend the statute of limitations.
Mr. Muris. I wasn't on the Commission at the time but I
believe the Commission signed on to that brief. My colleagues
are shaking their head yes. I guess I am not sure if we have
taken a position on legislation, but I personally believe that
2 years is too short. Let me turn to my colleagues.
Mr. Thompson. I would agree. Extending the time would be
helpful and especially because this kind of problem poses a
more heinous risk to underserved communities where people don't
necessarily know what their rights and remedies are or how to
exercise them. We have found at the FTC, with our educational
brochures in different languages and trying to reach out to
people, they are now getting more sophisticated and even the
credit reporting agencies are more sophisticated in how they
approach the problem. But the idea of the fact that the people
who are most victimized are often the people who are probably
less equipped to know what to do about it would dictate, at
least from my perspective, a longer period of time, I think
that would be helpful.
Ms. Schakowsky. Anyone else want to comment on that?
Thank you.
I wanted to ask about the Fair Credit Reporting Act. This
year financial institutions and credit bureaus are lobbying
Congress to extend the FCRA's preemption of State privacy laws.
While the legislation does not fall in this committee's
jurisdiction, it is the responsibility of the FTC and the
subcommittee to ensure that the FTC is enforcing the law. Late
last year, the Consumer Federation of America and the National
Credit Reporting Association performed a study that concluded
29 percent of credit files were inaccurate by a range of 50
points, and this is a big problem. These errors have serious
consequences. They can prevent people from being able to get a
mortgage or a student loan, a new job.
What steps has the Commission taken to monitor the accuracy
of the data supplied by credit reporting agencies and also what
steps has the Commission taken to ensure that credit reporting
agencies share information in a responsible manner? And,
finally, do you need additional authority to improve your
monitoring of credit reporting agencies?
Mr. Muris. We are the primary regulator over the credit
reporting agencies. The Fair Credit Reporting Act is quite an
ingenious statute in certain ways, although, some of its
complexity leaves something to be desired. The model of the
statute is extremely important to the credit economy, which has
been an extremely important part of the growth in our economy
in the last 10 or 12 years. What the statute does is it allows
the credit world to receive information on individuals without
their consent, but the information can only be used for
permissible purpose. It takes important steps about accuracy.
The most important step that it takes, and the one in which the
Commission in the last several years has really dramatically
emphasized, is when consumers are denied a benefit, when they
are denied credit insurance employment, because of information
in the credit report, they are to receive what is called an
adverse action notice. That way consumers are put on notice to
correct the information if it is wrong. We have brought a
recent important case involving that issue. We have other
investigations underway. We have a compliance project. We did a
compliance project with landlords, and we found there was
pretty good compliance with landlords in this. We also have
outlined additional steps that they could take.
On the particular study that you mentioned, I looked at
that with our staff. Unfortunately, I thought that there were
some problems with that study. There is different information
in different files as I was mentioning before. Although I
didn't agree with some of what was in that study, I do agree
that the accuracy issue is very important, the adverse action
notice is extremely important. In connection with the
reauthorization that you mentioned, it may be that we do
propose some additional legislative steps but we are not there
yet.
Ms. Schakowsky. Mr. Chairman, if I could ask unanimous
consent that all members' statements and extraneous material be
included in the record?
Mr. Stearns. By unanimous consent, so ordered.
The gentleman from New Jersey.
Mr. Ferguson. Thank you, Mr. Chairman.
Obviously, I am interested in this common carrier
exemption. I have a couple of questions for Mr. Leary. I am
going to try to be brief, and I would to ask you to be brief
because my time is limited. There are several industries, in
addition to telecommunications, that are exempt from FTC right
now. Banks, savings and loan's, airlines, air carriers, others.
These are all competitive industries. They have all undergone
enormous changes, convulsions in the last several years, 10
years or more. They have probably, in many cases, less
oversight than the telecommunications industry right now does,
by the FCC. Why is your recommendation to engage the telecom
sector, which already has substantial FCC oversight and not
perhaps other industries?
Mr. Leary. That's a very good question. I guess the short
and really serious answer is we are trying to be as
unimperialistic as possible. We don't want to take on an
enormous range of additional problems in this agency without
any compelling need for it. This particular one addresses a
situation where we are running into problems all the time, and
what we are trying to do is extend our jurisdiction in the
least intrusive way into the business of another agency or
indeed into the regulation of common carriers generally.
Mr. Ferguson. Do you see a scenario whereby--common
carriers, if they engage in noncommon carrier practices, they
are already subject to FTC regulation or oversight?
Mr. Leary. Theoretically, they are. If common carrier's
engage in noncommon carrier activities, we believe, and I think
the FCC agrees with us, that they are subject to our
jurisdiction. The problem is that this jurisdictional issue can
arise in litigation. Maybe I am anticipating a question that is
not in your mind, but we have a problem when people say, ``why
don't you just work it out with the FCC in your own way?'' We
are trying to do that, but that alone won't do it because any
deal that we make with the FCC to handle these concurrent
things won't mean anything if some private party out there says
that you, the FTC, are exceeding your jurisdiction.
Mr. Ferguson. But the Communications Act doesn't seem to be
ambiguous to me in my reading of it, and I will quote from it,
``A telecommunications carrier shall be treated as a common
carrier under this act only to the extent that it has engaged
in providing telecommunications services.'' When a company is
not engaged in providing telecommunications services, then the
company is not be considered a common carrier and would,
therefore, be subject to FTC scrutiny.
Mr. Leary. That is true, but we have encountered arguments
in dealing with actual matters where there is some dispute as
to whether the activity that people are engaged in is or is not
telecommunications. It is a definitional problem.
Mr. Ferguson. Just jumping back to something you just said,
it is not your belief that the FTC and the FCC could sort this
out?
Mr. Leary. We can try to sort it out among ourselves
without a statutory change, theoretically. All I am saying is
that whatever we agree to between ourselves is not binding on
some private party which would still be free to raise the
jurisdictional matter if we were to attempt to act pursuant to
agreement of the FTC.
Mr. Ferguson. Are there some examples of specific cases
that have brought to your attention----
Mr. Leary. We have specific examples, which quite frankly I
would rather not identify in a public forum, situations where
we decided not to sue someone, but we would be delighted to
supplement the record in any level of detail you would like.
Mr. Ferguson. I am not interested in the specific cases. I
am interested in what you do with those cases.
Mr. Leary. Some cases we take a pass because----
Mr. Ferguson. Do you ever refer them to the FTC?
Mr. Leary. Sure. Sure. And they refer them to us. We have
had an ongoing relationship with them----
Mr. Ferguson. It sounds like you have got it worked out
pretty well.
Mr. Leary. Well, we have a relationship that is working
better than it used to. You know, up until 5 years ago, the FCC
took the position they had no jurisdiction over advertising at
all, which was in some ways unfortunate because there were some
areas that then fell through the slats completely. The
situation is improving, but I think an optimal situation would
be one where the jurisdictional issue was laid to rest.
Mr. Ferguson. I am out of time.
Mr. Stearns. Would the chairman or any of the other
commissioners like to add to that? Feel free to do that.
Mr. Thompson. I think this is an area where the market
would probably benefit from some clarification. You know, as
Commissioner Leary raised, it wasn't very long ago that the FCC
didn't claim jurisdiction over certain things, and it left a
gap sort of, where consumers were sort of left in limbo. While
we are working on--trying to work through those gaps, trying to
find situations where we can have mutual agreement, it doesn't
prevent any telecom company which is engaged in nontelecom
activities from trying to characterize what they are doing as
telecom anyway, and that presents a certain kind of defense
within a court challenge, that challenge that could possibly
lead to some market confusion, and, actually, in the process,
leaves consumers without very much assistance.
Mr. Ferguson. Mr. Chairman, could I just respond to that.
What you are describing sounds in the way you are talking about
as if we need is an adjustment, we need a modest--we just need
to kind of sort this out a little bit. My interpretation is
something much more radical than that. You are talking about a
repeal of an exemption for an entire sector. My read on that is
that is not kind of a tweaking, a modest--you are talking about
an entire industry being subject to the FTC and the FCC. I
think the potential there for increased ambiguity, increased
miscommunication, or doubling of oversight sounds a little
chaotic to me, not a kind of a minor adjustment to oversight.
Mr. Thompson. I think--well, I guess this is a place where
I think working together with the FCC, which we have been
doing--I think we can reach understanding so there wouldn't be
that kind of overlap.
Mr. Ferguson. Precisely, but does that require a repeal of
an exemption of an entire industry? That's my concern.
Mr. Thompson. I think when you have something that is 70
years old that is on the books that doesn't really reflect what
is happening in the marketplace now, I don't think that's
necessarily helpful to anyone.
Mr. Leary. I understand what you are saying but we have got
to be careful if we were to try to fine tune an exemption to
the exemption, if you will, that addresses today's reality. We
are dealing in an extremely fast moving situation. As you know,
and as I think I said in my statement, there is an increasing
convergence and a blurring of the lines between what is common
carrier and what is not common carrier. So we don't want to
substitute one set of jurisdictional issues for another set of
jurisdictional issues, and that is one of the problems with
trying to fine tune it.
Mr. Ferguson. Thank you.
Mr. Stearns. The gentleman from New Hampshire, Mr. Bass.
Mr. Bass. Thank you, Mr. Chairman.
As a follow-up to my friend from New Jersey's question, Mr.
Leary you requested here an exemption for telecommunications
common carriers, and in answer to somebody's question, you said
that you didn't want to expand that request to other common
carriers. Now, there has been some publicity over the past few
months involving fraud and abuse in furniture moving companies,
and I believe if I am not mistaken, that you testified before
the Transportation and Infrastructure Committee, at some point
regarding this issue whether or not the Federal Trade
Commission should take from the Transportation Department some
jurisdiction over alleged fraud and abuse issues associated
with moving companies. Is this true or not?
Mr. Leary. Do you if----
Mr. Muris. Not to my knowledge but----
Mr. Leary. It doesn't ring a bell with me. We can look into
that Congressman, and see----
Mr. Bass. Is the Federal Trade Commission aware of this
problem? Is it a problem, and do you have any position on it?
Mr. Muris. We are certainly going to have to get back to
you. For the record, my general view is we are the experts of
dealing with advertising. It would make sense to apply for us,
with our expertise, to cover as broad a sector of the economy
as possible. We don't have jurisdiction over airlines. Airlines
have our statute, and we just filed a comment with the
Department of Transportation on Monday. In our comment, we
noted that they have the exact same statutory language we have,
yet they are relying on FTC cases in proposing the rulemaking
that the FTC repudiated 20 years ago and that the Congress
repudiated about 9 years ago. The point is that, if you believe
in agency expertise, and there is a question on what you could
disagree, but if you agree with agency expertise, it doesn't
make a lot of sense to kick us out of areas where there are
potential problems.
Mr. Bass. It does or doesn't?
Mr. Muris. It does not. I personally would repeal a lot
more than the common carrier exemption.
Mr. Bass. Are you going to get back to me on the issue of
whether the Federal Trade Commission feels that it should have
some regulatory authority with fraud and abuse allegations
associated with furniture moving companies?
Mr. Muris. I am told that we testified on this issue about
2 years ago, and I don't know what we said. So I will have to
get back to you on the record.
Mr. Bass. Thank you very much.
On the other subject, the FTC Do-Not-Call list is moving
forward, and we all support that effort. But there are some
concerns about the cost of this Do-Not-Call list that are being
assessed to the telemarketers. Now, the telemarketers
themselves apparently have these kinds of lists which they sell
for something like 10 percent of what the FTC is proposing to
charge. I understand it is on the order of something like $700
or $800 versus $5,000. Why does this list cost so much?
Mr. Muris. Well, first of all, we anticipate having
something like 60 million telephone numbers. There is no list
that is in any universe near that amount today. The law that
Congress passed, at our recommendation, that the President
signed, I think was based on the premise that if the
telemarketers can go into your home and force consumers to sign
up on a list, if they want to prevent that, then the costs
should be borne by the telemarketers, and we think that the
cost is a fair estimate. We have a rulemaking which we are
about to finish, but the size of our list is--borders a
magnitude bigger than anything else.
Mr. Bass. So what you are saying is, in essence, the cost
of your list to telemarketers will reflect what is normally
charged for lists of that size and will not be higher or out of
line from what they would normally charge themselves? In other
words, if they had a list of 60 million individuals on it,
they'd charge the same thing that you're planning to charge.
Mr. Muris. Well, let me put it this way. If you are a
telemarketer right now and you have to comply, there are 27 and
I think growing number of state lists. It will be much cheaper
to have one national list than all the individual State lists
from the standpoint of the telemarketer.
Mr. Bass. Mr. Chairman, am I on an 8-minute question or a
5-minute?
Mr. Stearns. We are going to give you an 8-minute.
Mr. Bass. I wanted to make sure because I was going to
yield back. During the 107th, 108th Congress, we had hearings
on the American Spirit Fraud Bill, which is a bill that doubles
penalties for charitable organization fraud in the aftermath of
9/11 and so forth. At that time, you commented that you were
having difficulty in quantifying the problem of keeping
records. Is there any progress on this issue? Do you know what
I am talking about?
Mr. Muris. Yes. One of the ramifications of Do-Not-Call,
which we were just talking about, is that the very large
complaint volume, large relative to the number of complaints
that we receive now, that we are anticipating is forcing us to
redesign our system of receiving complaints and getting
information. We are just in that process now. We are doing it
in a way that we hope we can better address that issue and a
myriad of other issues about information of the incidence of
fraud.
I mentioned the identity theft survey which is further
along than a second survey we are doing which is a nationally
projectable survey of fraud-type problems, and we are hoping
that these surveys will provide us better information on the
incidence of problems that consumers have in the economy.
Mr. Bass. In your proposal, you suggest allowing the FTC to
obtain ISP consumer complaints on spam. Would you support
requiring the ISPs to provide clear notice to the consumers of
this access when they either make a complaint to the ISP or to
you?
Mr. Muris. I think, in general, my experience from looking
at surveys is that consumers understand law enforcement use and
exceptions to various policies. I certainly wouldn't object to
that kind of notification, but I think consumers are what
lawyers like to call ``constructively on notice,'' and it is a
reasonable expectation.
Mr. Bass. But you wouldn't oppose having some sort of
notification on the complaint form that would alert the
consumer to the effect that that complaint will be going to a
Federal regulatory agency for their review, and it is
automatically done or----
Mr. Muris. Well, no. It certainly wouldn't be automatic. We
are not asking for the routine forwarding of all complaint
information. We wouldn't want it. What we are asking for is the
ability, in a particular case when we are investigating someone
for violating our statute, to be able to get this information.
Mr. Bass. So you don't expect, for example, a system that
would have a consumer complaint to be automatically forwarded
to you and the ISP at the same time? Rather, you want to be
able to decide what complaints you ask for from the ISP and
just have the consumer--you have no objection to the consumer
knowing that his or her complaint may be forwarded to you if
you request it?
Mr. Muris. That's correct. I think if you ask consumers
now, they understand that for law enforcement purposes, that
information they share with businesses may go to law
enforcement agencies.
Mr. Bass. Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman. Mr. Shadegg you're
welcome for a first round of questioning.
Mr. Shadegg. Thank you, Mr. Chairman. I appreciate that.
I want to ask a series of questions on identity theft to
begin with. One complaint that I have heard from identity theft
victims is the lack of accountability between Federal law
enforcement agencies and also among State law enforcement
agencies. Usually, one law enforcement agency will refer the
matter to another State or to another agency and so on and so
on. Victims do not know where it is they go for help. I think
that is one of the roles the FTC was supposed to play, was
assisting victims in finding the agency that would be of
assistance to them.
I guess my first question is do you think the FTC's
regional training sessions have helped alleviate that problem
by educating law enforcement agencies about their
responsibility? And what I mean by that is shortly after the
law passed, we met with a number of enforcement agencies in
Arizona to try to educate them about the law, and their first
position was, well, tell us what credit card was stolen, and we
explained, well, no, there was no credit card stolen. This is
the theft of an identity, and we had to begin by explaining to
them the essence of the crime, and then we had to go on and
explain to them that somebody had jurisdiction and somebody had
to take it over.
So my first question is, for any of you, do you think that
your efforts to educate law enforcement have been of value in
this regard, and what more could we do to try to assist the law
enforcement community in accepting and carrying out its
responsibility for identity theft?
Mr. Muris. We we are very active in this area, and you
helped us recently. It was May 22, where we just had a law
enforcement workshop in your State. We are on a very steep part
of the curve in improving our relationships with law
enforcement. In many parts of the country, the reaction that
you found was there, but we have been training a great many
people recently. We have been trying to put together a task
force. We have put together referrals working with the Secret
Service. I did a press conference recently with the Attorney
General announcing a very large number of cases including,
believe it or not, where someone was murdered to obtain the
particular identity. Fortunately, that is an extremely rare
event. We are doing a nationally projectable survey, which the
results are in and they are being tabulated, about various
kinds of identity theft. I think this will have a significant
impact on law enforcement. We will share the results with our
partners.
It is a fact of life that the system that we have, because
we don't have the criminal enforcement authority ourselves--
puts us in a coordinating position and not an enforcement
position, but I think that we are doing this task very well.
When we were discussing the Fair Credit Reporting Act here a
few minutes ago, I wouldn't be at all surprised if we make some
recommendations that will help in the identity theft area in
terms of the Fair Credit Reporting Act. We are waiting for
staff recommendations on that. We have some statistics I will
would be glad to share with you that show just how much more
active we have been each year. We have only been in this
business for a few years. Personally, I very much, and I am
sure my colleagues do as well, appreciate your particular
interest and help in this area.
Mr. Shadegg. Let me ask for a quick answer on this
question. Has the FTC developed guidelines for businesses which
are themselves victimized by identity theft?
Mr. Muris. That is an excellent question. With some of
these very large identity thefts recently, we are also in the
victims' assistance business. Several of them have called us
for help. We have developed materials. I'd be glad to supply
those materials to you, as this is a growing problem. The
problem of security itself is something that we are very active
in with consumers. My colleague, Commissioner Swindle, has been
very active in this. It is very important in the identity theft
area, particularly with smaller businesses who are not as
sophisticated, particularly in some of the techniques they need
to use to protect the security of the on-line information.
Mr. Shadegg. Third question, there has been some concern
expressed by victims of identity theft that in order to clean
up their record, they have to contact multiple credit reporting
agencies and that takes a substantial amount of time. In some
instances it is three and in some instances it's more than
three. Some have proposed, and we are considering in the
current draft legislation that I am working on, that you be
given the responsibility for requiring that there be a
centralization of that process. That is to say, that you would
report to one credit reporting agency, and they would be
required to tell the others. So that a victim could only
contact a single credit reporting agency and explain that they
have been victimized. Have you looked at that issue? Do you
think it is a responsible----
Mr. Muris. We have been encouraging the one call process.
My understanding is it is happening now. We are also
encouraging creditors to accept a single form, which we
developed in working with many in the business community, where
the victim of identity theft can fill out the relevant
information and then can submit that form without having to be
faced with someone asking slightly different variations of the
questions to some of the creditors. I think all of these
victims' assistance measures are extremely important, and the
business community has been very corroborative and quite
interested, as I mentioned earlier. They are left holding the
bag, the credit card companies, for example, in a very large
way, and their cooperation is important to us.
Mr. Shadegg. My time has expired. I appreciate your efforts
in this area, and I look forward to working with you in the
future.
Mr. Stearns. I thank the gentleman. We will now start a
second round of questioning.
In dealing with spam, I guess under Section 5, under
fraudulent practices is the area that you use your jurisdiction
for the rulemaking. I see on a lot of publications there is a
lot of software that is coming out to prevent spam, and I saw
your opening statement when you mentioned, Mr. Chairman, that
the Commission's statement on spam legislative proposals
qualified, ``admittedly, the Commission recognizes that these
legal steps will not solve the growing spam problem.''
I guess the question should be how should we interpret
those words and further explain your statement that, ``nor is
it clear what impact what these steps--that is, spam
legislative proposals--will have on some of the other problems
associated with spam in terms of security and volume.'' How
best the interrelated problems of volume and security be
handled?
So, I mean, that is just the sense I have. I just need an
explanation.
Mr. Muris. I will let Commissioner Swindle answer.
Mr. Stearns. Sure.
Mr. Swindle. Mr. Chairman, I think your questioning goes
right to the heart of the problem with spam, and that is its
complexity. I have stated, and I think I have stated in my
opening statement, that no single act or device due to a new
piece of legislation, is really going to solve the problem, and
I think our statement merely is just recognizing that
difficulty. Having said that, we have suggested that there are
steps and we recommend--we are recommending some amendments
possibly to the Telemarketing Act that would give brighter
definition to certain things and give more clarity to
interpreting everybody else as to what is acceptable and what
is not. Our problem today is not in a sense a lack of laws
because if you----
Mr. Stearns. Rules on the books, you mean?
Mr. Swindle. Yes, sir. If you falsify the from--to put it
very simply, if you falsify who you are when you send a message
and you are engaged in spam, that is deception. If you have a
misleading subject line, that might be considered deception,
and also unfairness, because it might be something that you
feel compelled to look at. You know, a subject line ``about
your recent billing'' or something of this nature. The problem
is finding these people who do this. And that is more a
technological problem, than it is a lack of a law problem, and
the point of my comments is to say we have got a tremendous
problem that we are all going to have to deal with.
Representative Shadegg was talking about the education
program we are on. Awareness alone is probably the biggest
challenge we have got. Collectively, all of us have got to make
consumers more aware of some of the dangers here. But we have
suggested, specifically, some possible amendments to the
Telemarketing Act, using that model, not all of it, but some
specific features that might be more precisely written that
would help us. But, again, it is not going to be the----
Mr. Stearns. It's not a panacea.
Mr. Swindle. I don't think there is a panacea, in all
honesty.
Mr. Stearns. Right. Like how are you going to handle
international spam?
Mr. Swindle. I mean, we could frame up the United States
with all the great laws and make it all perfect, and we still
have no control of what is coming from outside because there
are literally no laws out there, no boundaries.
Mr. Stearns. Would someone else like to speak?
Mr. Thompson. I agree with Commissioner Swindle to a
certain extent, but let me try to frame this a little
differently. What we learned in our spam forum is that the
problem is bigger than we may have originally thought. In other
words, for a long time we thought the problem is the annoyance
factor of just getting a whole bunch of e-mail in your mailbox.
What we have learned is that there are a lot of different
problems going on. One is the fraudulent and deceptive e-mail
that we are getting that victimizes certain people. The second
thing is we are learning about the volume, the possibility that
this inundation of spam actually could clog the arteries of the
Internet, and that is a real problem, not only in terms of
national security that this whole channel might be closed down,
but we also learned that there is another security problem
because e-mail is the vehicle of choice in many instances of
viruses. So we cannot address that problem alone just by
legislation. Legislation may have some piece involved into it,
but we also have to educate consumers and businesses. We have
to encourage technological answers that give consumers more
choices on how this information is managed, and in some areas,
like the volume problem, we may have to study a little bit
more. But all of those things--there is no one silver bullet.
Mr. Stearns. Let me just conclude by this breaching--coming
about crossborder fraud. Some of the materials you gave us said
that many of the proposed crossborder provisions were modeled
after existing authority enjoyed by a number of other Federal
Government agencies. Could you just explain that for me?
Mr. Thompson. Sure. That for example the SEC and the CFTC,
for example, and some other financial regulators already have
specific provisions that allow them to share information with
law enforcers, similar types of law enforcers overseas. That is
their way of being able to combat what we see as financial
fraud that goes0n around the world. What we are seeing is the
same kind of invidious action taking place in the consumer
fraud area where money moves around and people lie outside of
our borders trying to come in and victimize our citizens. We
see that all the time. It is a growing problem. So being able
to share information, for example, with those law enforcers is
going to be very very helpful. As I said, the CFTC, the SEC has
similar kinds of provisions right now.
Mr. Stearns. My time has expired. The gentlelady.
Ms. Schakowsky. Thank you.
I wanted to talk about sharing information as well. So I
understand that part of the proposal is to have Congress grant
you additional authority to share information, but let me ask
you some questions that it raises in my mind about privacy,
protection of that information. How can it be assured that the
data you share will only go to appropriate officials and will
not be shared with third parties by the foreign government? I
am just going to ask them all. Two, how do we guarantee the
rights of the accused if we share information with foreign
governments, what are the conditions? Three, how can we assure
that American citizens are not prosecuted for exercising their
freedom of speech? I am concerned that this information could
be used against those who simply have dissenting political
views from foreign leaders. And I want to understand the
additional FOIA exemptions that have been asked for. I am
concerned that this could weaken our oversight, not yours, but
our oversight of your agency's activities.
Mr. Thompson. Thank you. Let me first address your first
point, which is about confidentiality of information in foreign
governments. I think that the first thing is that we have
discretion about the information that we share with foreign
entities, and I think what we would do is ensure that they have
some of the same safeguards that protect the information that
we have in the investigatory process. That is a threshold. I
think right now we are not able to share at all. So for us they
have the same concerns about us so that information doesn't get
here either that could help us prosecute cases for our
citizens. So I think we would look for that kind of protection
in discussing before we share any information with anyone. But
as I said, this is similar to the kinds of protocols that exist
in other areas, for example sharing information about criminal
prosecutions or in securities or commodities. We would look for
the same kinds of protection.
Now, about the rights of the accused, I think that--I guess
it depends on which way it goes. I would like to understand
your question a little better. You are talking about American
companies who might be victimizing citizens overseas? I would
like to understand that question a little better.
Ms. Schakowsky. Yes. Exactly what we said, the rights of
American companies.
Mr. Thompson. Well, I think that to a certain extent
American companies who are availing themselves of going
overseas and dealing with another country's victims, citizens,
then they are already subject to whatever those countries' laws
are anyway. I think the kind of information that we have seen
that is the traditional request is just pretty basic
information about whether we have a similar type of
prosecution. Let us say there is a case involving one company
that victimizes citizens in both places. To be able to share
witness information or--I think that they have their right in
court to protect themselves the way they would in any other
type of legal proceeding.
The third question you asked about American citizens and
freedom of speech, I think that in terms of the cases that we
wind up prosecuting, I think that we are talking about hard-
core fraud and deception here, and I think we are clear in
looking at the cases that we wind up bringing and we would look
at those kinds of standards and the requests of other countries
as the distinction between what we think is a mere freedom of
speech problem or fraudulent, deceptive solicitations of
consumers. And I think that this is merely to sharing
information, I think that we would be free to make our own
judgments about whether we do share that information and that
includes inquiring how that information is going to be used.
You bring up a final question about FOIA, and I think it is
important to recognize that FOIA, right now, has an exemption
for prosecution. In other words, there is a protection for the
sanctity of investigation process when you are prosecuting a
case. I think that exists now. I think similar kinds of
protections would still exist here too. In other words, that
kind of information is not freely available. There is an
exception for that kind of information under FOIA.
Ms. Schakowsky. What I am asking is there are currently
exemptions in FOIA, as you say, business information, personal
privacy, records of financial institutions. So why do you need
an extension of the current FOIA exemptions?
Mr. Thompson. One of the keys is when we wind up sharing
information or getting information from a foreign entity to
assist us in a prosecution, that what we would like to have is
a more express understanding that that information is covered
under the same umbrella of an investigatory process.
Ms. Schakowsky. I am wondering if Commissioner Swindle
wanted to comment at all about this. Let me just say my concern
is that sometimes when we deal with these privacy questions
that there are unintended consequences of the goals that we
have in mind, and I think that Americans are very, very
concerned both about prosecuting fraud and deception but also
about the protection of privacy, and maintaining that balance
is very important.
Mr. Thompson. Can I add one thing though? Under FOIA we
provide confidentiality to foreigners the same way that we seek
assurances when sharing information, and one of the problems is
the FTC Act doesn't apply to foreign governments. So we need to
sit down and talk to them. We don't get that information at all
now if we are not able to at least provide some protection of
that information and the sanctity of that information because
there are many witnesses who would not come forward. There is a
lot of evidence that wouldn't exist, and that prevents us from
actually helping our consumers.
I will also say one other thing, that I share your concerns
about privacy. That is one of the issues that I am particularly
concerned about at the Commission. I think that this proposal
does not jeopardize privacy, and, in fact, actually recognizes
the investigatory process that we have now and allows us to get
information to protect consumers that we would not be able to
protect otherwise.
Mr. Muris. Could I ask Commissioner Swindle to answer the
question?
Ms. Schakowsky. Absolutely.
Mr. Swindle. Thank you. I think I would like to make a
short general comment to the concerns that you expressed, and I
guess one big word for it would be the Patriot Act would
certainty get a lot of attention, and people are a little bit
squeamish about this, and I am too because we respect
consumers, we respect the privacy of personal information. But
I think we are talking about two things here. One is our
ability to share information, and we sense because things are
now worldwide, we need the capacity and ability to share
information. That is one issue and we don't have it in the
cases where we think we need it. The second issue is protecting
that information from misuse. The first issue, needing that
ability, I think, can be debated without emotion to find the
bad guys and it is the same kind of a situation whether you are
looking for terrorists or fraud in selling business
opportunities, ripping people off. We need that as an
investigative tool.
The second issue of protecting that information that is
shared on either end, and then, God forbid, it gets out in all
the extremities for whom you share it with, this is an age-old
problem. It will never be solved. We have it right here in this
body, in Congress. Confidential briefings, things leak out. I
come from a military background where we have very rigid
classification of information, confidential secrets, top
secret, out of this world, and interestingly it is always--not
always. That is an exaggeration, it is constantly divulged
wrongfully so. And I think in all honesty the only way we will
ever solve that problem is just constant awareness, reeducating
ourselves, reminding ourselves, great leadership that says
don't you do that, and having people understand what they are
dealing with. And I don't know the solution to that. We might
solve it yet in my lifetime. So I think for us, from a law
enforcement standpoint, we feel a need and we have expressed it
in recommendations to have this capacity, to share information,
to retrieve information from other countries. The crossborder
thing, the jurisdictional issue are extremely complicated and
we try to work with our associated countries who are concerned
about these things and we realize right off the bat we agree on
80 percent of the things, and then there is this 20 percent
that we have really got some difference of opinion because very
few people know what we mean when we talk about freedom of
speech. It is certainly not codified into their constitutions
and documents that set them up to recognize and respect that
and honor it; so we have to work out those details, and we are
in constant contact and dialog with our foreign partners trying
to work out things such as this, but the need to be able to
reach out and find the bad guys is an overpowering thing. It is
made more dramatic by the Internet and the capacity broad
dissemination. So I think we have got to be rational as opposed
to being emotional about this and think it through and
recognize it. And then the last leg of the stool is this goes
for all of us, the administration, Congress, us and everybody
else. We have got to learn a way to discuss this without
creating the emotion of alarm that seems to surround this whole
issue. We are never going to get to that which we need, if we
quickly try to point out that there are extremists on both ends
or the people who are on both ends, acting in a manner that
conveys the idea that they are extremists. We have really got a
PR problem here, and I think we all need to get together to
work on it and do a better job of it.
Mr. Stearns. The gentleman from Arizona.
Mr. Shadegg. Thank you, Mr. Chairman. I will endeavor not
to use my full time.
From my opening statement, I think you can see that I come
at the issue of identity theft from the viewpoint of the
individual victim. My first approach or concern was this needs
to be a crime and it currently isn't a crime. You can steal
somebody's identity, but until you have taken the money,
actually stolen some money from them, or in some other way
committed a conventional crime, it was not a criminal conduct
at all, and we dealt with that issue. I think the second
problem we tried to address, and I think you are trying to
address, is the problem of convincing law enforcement that the
mere theft of identity, of inidentity, is in fact a crime and
that there is somebody that is responsible for it. One of the
issues is who is responsible? If I live in Virginia, and my
identity is stolen here, and somebody applies for a credit card
with Sears which is based in Chicago, but they apply for that
credit or seek that credit in LA, which one of the U.S.
Attorneys or which one of the county attorneys is going to take
care of that crime? What I found early on was they each kind of
said, well, the site of that crime is Virginia where you live
or in Chicago where Sears is located or it is LA and they would
each point at each other and not get anything done. The head of
your Identity Theft Unit has indicated to my office, as I said
in my opening statement, that this is now not so much an
individual case, a crime where an individual identity is
stolen, as it is the theft of massive amounts of information.
My first question of you is looking at that trend, No. 1,
do you agree with that? Is there a trend that it is the theft
of massive data bases? And No. 2, since we are looking at the
reauthorization of the FTC, do you need or do you perceive a
need for additional authority at the FTC to deal with those
large volume thefts of information?
Mr. Muris. We clearly see more cases of large-scale
identity theft. It is very hard since there hasn't been very
good information for very many years. Our whole process in
terms of getting the consumer complaints is very new to know
what the historical trends look like. We also don't have a good
idea of the national incidence of a lot of these problems. The
survey that we have just finished and are tabulating the
results will help there. I personally have supported increased
penalties at the Federal level for identity theft--I know there
are bills working their way through Congress--as part of this
procedure of reauthorizing the Fair Credit Reporting Act. As I
mentioned, we are getting a recommendation from the staff, and
we may propose some additional protections or changes in the
Fair Credit Reporting Act that would help on the identity theft
front.
The primary enforcement obviously is not us but the crime
because we don't do the criminal work.
Mr. Shadegg. Would any of the others like to comment?
Mr. Thompson. I think this is a very interesting challenge.
The bulk theft of the information especially as it appears on
line is one that may also fall under the umbrella of a Cyber
Security Act. So that is one area to pursue as well.
But I think you have highlighted the challenge. One of the
reasons why we have engaged in a lot of cooperative efforts and
in education efforts is not just having something on the books
but raising the priority of that item with law enforcement,
even criminal law enforcement officials throughout the United
States so it doesn't fall below the radar screen. That is a
very interesting challenge. But it is a very difficult
challenge.
Because what we see is that some jurisdictions are just
much more cooperative than others. What we are seeing, and it
is very helpful, is their willingness to talk to us about it
raises the profile of the issue; and I am sure that a large
percentage, for example, of the information and educational
materials that we put out goes to those localities who are
using them.
Mr. Shadegg. Thank you very much.
I yield back the balance of my time.
Mr. Stearns. Thank the gentleman.
The gentleman from Ohio.
Mr. Strickland. Thank you, Mr. Chairman.
I have two questions, and I have got 5 minutes, so I am
going to try to get both of them answered, if I can, as
succinctly as possible.
In 1997, the FTC proposed lowering the standards by which
the agency would determine whether a good could carry the made
in the USA label to acknowledge the globalization of production
that is occurring around the world. My question to you, what
are your views on the present standards that all or virtually
all of the product must be made in the USA? I think it is a
standard that we have had for 5 years or more. What is your
present view regarding that standard? Should it be maintained?
Should it be weakened or--I am just interested in knowing what
the thinking of the Commission may be in regard to the made in
the USA label.
Mr. Muris. I was on the Commission when it went through all
of this. I mean, in general, for me, for any issue it is a
question of consumer interpretation. Let me defer to my
colleagues who may have been on the Commission when it--oh, no
one was.
Mr. Thompson. Well, I think that Commissioner Swindle and I
came on just after, and I can tell you from talking to staff I
don't sense that there is a great clamoring of people asking
for changes here.
Mr. Strickland. Very good. You know I am willing to settle
for that answer.
Mr. Thompson. Okay. So either a lot of people are silent or
maybe we got it right.
Mr. Strickland. I think there was rather strong feelings
expressed on the part of the Congress in regard to that issue.
The second issue----
Mr. Thompson. In fact, Congressman, I--the one thing that I
was warned about when I first came on the Commission was don't
get involved in the made in the USA because there was a big
fight over it and people agree on what it is. So----
Mr. Strickland. Thank you so much.
The second question deals with gasoline pricing. In the
summer, spring and summer of 2000, the Midwestern part of the
country, including my State of Ohio, experienced soaring
gasoline prices; and at that time we approached the FTC and
asked for an investigation. In March of 2001, the FTC released
a report stating, and I am quoting, while the Commission found
no credible evidence of collusion or other anti-competitive
conduct by the oil industry, the investigation found a
combination of many factors that were likely responsible for
the price spike. These factors included circumstances beyond
the control of the industry, as well as those within their
control, quote, conscious but independent choices by industry
participants to engage in profit-maximizing strategies.
Now, I understand that the FTC is conducting a relatively
new and ongoing gasoline price monitoring project. The question
I would like to ask, would you please share with us the status
of this 2002 gasoline price monitoring project, and will you
regularly share updated information regarding that project with
the Congress?
Mr. Muris. We have begun in earnest to track gas prices on
a real-time basis all over the country at retail and also in
some places at wholesale. What have a model about historical
relationship of prices and we are looking for what we call
anomalies, when the price can't be explained by factors that
normally explain the price. When we find those anomalies, we
look to see what the source of the problem is.
I sent a letter to all 50 State attorneys general. The
response was overwhelmingly positive. One of the things we do--
they are often closer to the facts than we are--is talk to them
when we find these anomalies in place. When the anomalies can't
be explained by some natural cause, for example, a refinery
fire or a refinery outage, we investigate further; and it has
been a tool that has led us to have a much better understanding
and in some cases has led to further investigation.
Mr. Strickland. Do you believe that the FTC may need more
authority than you currently have to do this monitoring and any
follow-up corrective or remedial action that may be necessary
to prevent----
Mr. Muris. I think our antitrust and consumer protection
laws are adequate. This is an industry in which we spent a
tremendous amount of resources. We just brought a very large
case, which I mentioned in my opening statement, that is in
litigation now involving Unocal in California. The Commission,
through its merger review policy, has required more
divestitures in both size and just the sheer number of
divestitures than I believe in any other industry. I think our
presence is important and helpful here.
We are working on some reports as well to talk about our
merger enforcement policy and to discuss a couple of
conferences on the issue of the volatility of changes in gas
prices. We are going to be issuing reports on that. So this is
an area that both in the enforcement and trying to explain what
happens level we are quite active.
Mr. Strickland. Thank you. And thank you, Mr. Chairman.
Mr. Stearns. Thank you, gentlemen.
The gentleman from Massachusetts is recognized.
Mr. Markey. Thank you, Mr. Chairman.
Chairman Muris, where do we stand on the implementation of
the national Do Not Call data base?
Mr. Muris. We just announced, I believe it was last week--
we had thought we were going to have to roll it out across
country in terms of--there are two ways you could sign up. One
is by e-mail, and one is by the telephone. We had thought we
were going to have eight different zones in the country visa
telephone and we reduced that to two. We hope to begin the
launch in the sign-up very shortly, certainly by early next
month at the latest.
Mr. Markey. Have you spoken with Chairman Powell of the
Federal Communication Commission about their role in this?
Mr. Muris. Well, we have had extensive conversations with
them. As you know, Congress has directed them--and they were
working on this anyway--to decide if a similar rule to ours is
appropriate. I have every expectation that very shortly they
will make that decision. If they implement a rule like ours, it
will fill some jurisdictional holes that we have. We filed an
extensive comment with them, and I am optimistic that we will
move forward together. I obviously can't speak for the FCC.
Mr. Markey. So you are hopeful that they will act in a
timely fashion so that the expectations of consumers with
regard to those protections will be built in.
Mr. Muris. Yes, sir.
Mr. Markey. But you can't speak for them.
Mr. Muris. That is for sure.
Mr. Markey. Is it your observation that they are moving in
a timely fashion?
Mr. Muris. Yes, they have a rulemaking process. We filed
comments. We have had extensive discussions with them at the
staff level. I have--all the indications are they are moving in
a timely fashion.
Mr. Markey. Over in the spamming area, can you deal with
the question of how we are going to regulate off-shore
spammers? Since it is just as easy to spam from Boston or
Bermuda, how do we deal with those jurisdictional issues in
order to ensure that anything that is put on the books
ultimately winds up working, given all of the jurisdictional
conflicts issues that are raised?
Mr. Muris. Let me summarize very briefly. My two colleagues
have been talking about these issues at some length. We have
proposals we have been working on for over a year, fairly
extensive proposals dealing with cross-border fraud.
Unfortunately, more and more of the fraud in the United States
comes from outside the borders. A lot of that fraud is done via
spam, so there is a close intersection between the two.
We have some suggestions which we have made for dealing
with the cross-border fraud problem generally and the spam
problem particularly. They will provide better procedural
remedies for us and an ability to cooperate with law
enforcement agencies overseas. Spam is a very specific example.
When we send a CID to the ISPs--I am speaking jargon here.
Mr. Markey. CID for our C-SPAN viewers.
Mr. Muris. It is like a subpoena. It is a civil
investigative demand. What happens is, we are trying to
investigate someone who we think is committing fraud. Some of
the ISPs think that they are required to turn around and inform
the target that they have a CID from us, and we are asking that
the law be amended so that they don't have to do that.
That is just one of many procedural examples.
Mr. Markey. So we need kind of a spam coalition of the
willing around the world who will help us to isolate these
forces of evil.
Mr. Muris. Spam is the toughest problem I have seen for two
reasons. One, because of the nature of the Internet protocols,
you cannot track who is sending the spam. Through the way the
Internet works you have to follow the money and that could be
very hard to do. Second, unlike the telephone calls or the
letters, the cost of sending another 10,000 letters or making
an additional 10,000 phone calls is real. The cost of sending
an additional 10,000 spam is effectively zero. That makes an
extraordinarily difficult problem.
Mr. Markey. I only have 24 seconds left. It is my
understanding that the FTC and the State AGs work closely to
enforce the telemarketing sales rules. Is this a model that
works?
Mr. Muris. Yes. Our cooperation with the States is
excellent.
Mr. Markey. Is it a model as a result that you believe
should be included in the spam legislation?
Mr. Muris. We have suggested a model that follows the
Telemarketing Act. As Commissioner Swindle mentioned, the bills
that exist, the bill that has been introduced out of this
committee could easily follow that act. We think it has been
successful.
Mr. Markey. Do you agree with that, Mr. Swindle?
Mr. Swindle. I think it is a good model, certainly. He is
my boss. I have to agree with him, Mr. Markey. Thank you for
putting me in that box.
Mr. Markey. I have been reading a lot of your interviews.
Mr. Swindle. Yes, sir. I think it is a good model. Not in
its entirety, but we have laid out some specific things that we
think would give us more definition, more clarity.
It would also be good for industry to know, you know, the
bright light concept of making sure we all know what we are
talking about. And I think we are just going to have to grow
with the problem. I guess a better way to put that is we have
got to catch up with the problem, then we can grow along with
it and find solutions to it. But technology is going to have to
play an incredibly big role in this.
Mr. Markey. Could I ask do you agree with that, Mr.
Thompson?
Mr. Thompson. Sure. If not for any reason, the rulemaking
process allows a degree of flexibility; and, as we have seen in
this area, this is an area that changes fairly quickly. The
spammers are very smart and have every financial incentive to
be creative. But there are lots of things going on here with
regard to spam, including technological efforts, et cetera; and
I think a rulemaking under TSR would allow us to have that kind
of flexibility.
Let me just make one other point on your earlier question
about international spam, that this is a topic that is being
discussed at the OECD and other forums, that they are looking
to the U.S. for leadership here. I think we have the floor. I
think they are looking to find out what kind of balanced
response that we come up with, and the cross-border fraud
initiative that we have is also going to be an important
element because, to the extent that we want to be effective in
our enforcement, we have to be able to share information with
our counterparts around the world. I think they are looking to
us for guidance on how we do it.
Mr. Markey. Mr. Chairman, my mother would be very upset if
I didn't ask the Irishman on the panel for his opinion.
Mr. Leary, could you give us your view on the subject? What
high school did you go to, Mr. Leary?
Mr. Leary. I grew up in New Jersey.
Mr. Markey. So what high school?
Mr. Leary. I went to a place called Newark Academy, which
was a boys day school.
Mr. Markey. Catholic school.
Mr. Leary. It was not.
Mr. Markey. Oh.
Mr. Leary. Better not tell your mother that.
Mr. Markey. Actually, my mother would be impressed that
such a high-class Irish family was giving advice to her son.
Mr. Leary. I agree with the others. There is no magic
bullet, and we have to keep plugging away and plugging away and
plugging away. The only thing I would say is that, you know,
that is true to some degree of everything we do. We plug away
and we plug away and plug away at false and deceptive
advertising in this country, and it is still around us
everywhere. One of the biggest advantages of plugging away and,
quite frankly, publicizing what we do highly is that the more
consumer information is out there, the more wary consumers
there are out there, the less the problem.
Mr. Markey. Well, as you know, Mr. Leary, the great Jesuit
theologian Tiehard de Chardin, in his concept of the neosphere
and the interconnectivity of all of us on this planet, was that
essentially each of us working together collectively advances
bit by bit the perfectibility of mankind, making us more worthy
ultimately as a species of the next world.
In many ways, Marshall McLuhan pointed back to Tiehard as
his model anticipating the birth of the Internet; and many
people believe that Tiehard, the great Jesuit philosopher, is
the spiritual father of the Internet and all of those things
that are made possible. So you are right. You have to just keep
working at it, make it better, as good as you can make it in
your generation and then, you know, pass it on to the next
generation. But, as these problems emerge, you have that great
responsibility. And you, as an Irishman, presented the
opportunity for me talk about Tiehard de Chardin here today;
and I want to thank you for that.
Mr. Leary. Always pleased to oblige.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Muris. And, unfortunately, he is a Yankee fan.
Mr. Markey. No one is perfect, so we are trying to improve
the species in each generation.
Mr. Stearns. I thank the gentleman. We are going to plug
away and plug away and bit by bit try and get reauthorization
for the FTC which has not been done since 1966--1996.
Let me also, Chairman Muris, thank you for coming. It is
always nice to have you before our subcommittee and fellow
commissioners, and we will work certainly in the area of cross-
border fraud and spam to get a bill. So we want to thank you
very much for coming.
With that, the subcommittee is adjourned.
[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Federal Trade Commission
Office of the Secretary
July 2, 2003
The Honorable John D. Dingell
Ranking Member
Committee on Energy and Commerce
U.S. House of Representatives
Washington, DC 20515-6115
The Honorable Jan Schakowsky
Ranking Member
Subcommittee on Commerce, Trade, and Consumer Protection
Committee on Energy and Commerce
U.S. House of Representatives
Washington, DC 20515-6115
Dear Representative Dingell and Representative Schakowsky: This
responds to your letter of June 16, 2003, submitting questions from
several members of the Committee on Energy and Commerce to the
Commission, following up on the Committee's June 11 hearing entitled
``The Reauthorization of the Federal Trade Commission: Positioning the
Commission for the Twenty-First Century.''
Enclosed, for the hearing record, are the Commission's formal
responses to your questions.
Should you or your staff require further information or assistance,
please contact Anna Davis at (202) 326-3680.
By direction of the Commission.
Donald S. Clark
Secretary
Enclosure
Responses to Questions from the Hon. Jan Schakowsky
identity theft
Question: What resources has the Federal Trade Commission (FTC)
dedicated to address the problem of identity theft?
Response: The FTC launched its formal identity theft program
following the enactment of the Identity Theft and Assumption Deterrence
Act in 1998. That law directed the FTC to provide victim assistance,
develop a central repository of identity theft complaints, and share
complaints with law enforcement and private entities as appropriate.
Since that time the FTC has directed substantial resources to this
area, devoting 9.25 staff FTE and an additional approximately $2.3
million in non-compensation expenditures in fiscal year 2002.
These resources support an extensive program. From the beginning of
the ID Theft Program at the Commission we have:
1. Created the Identity Theft Data Clearinghouse, the database of
identity theft complaints, and its interface with the Consumer
Sentinel system to make the complaint data available to law
enforcement. The Clearinghouse currently houses more than
373,000 complaints, which are available to law enforcement
through the secure (and free) Sentinel network.
2. Established a toll-free number for callers with identity theft
issues and complaints, and staffed the call center with well-
trained phone counselors. On average, our toll-free number
receives more than 10,000 consumer contacts each week.
3. Developed the ID Theft Affidavit in coordination with financial
institutions and privacy organizations, to simplify victims'
efforts to dispute fraudulent accounts with creditors. The FTC
has distributed more than 600,000 copies of the form through
the web and in hard copy.
4. Developed and distributed consumer education materials including
Identity Theft: When Bad Things Happen to Your Good Name, a
comprehensive publication for ID theft victims in both English
and Spanish, and the newly released ID THEFT: What's It All
About?, a primer for the general population. We have
distributed more than 1.2 million copies of When Bad Things
Happen in hard copy.
5. Built and maintained the nation's central ID theft website,
www.consumer.gov/idtheft, which contains an online complaint
form, our ID theft publications, testimony, state laws and
other resources.
6. Trained law enforcement officers around the country through
workshops organized with the US Secret Service, US Department
of Justice, US Postal Inspection Service and the International
Association of Chiefs of Police. To date more than 700 officers
have been trained through these sessions. Three more sessions
are planned for the coming months.
7. Developed preliminary investigative reports on high impact leads for
further investigation by criminal law enforcement.
8. Assisted entities that have been subject to an information breach.
Such breaches could lead to identity theft for those whose data
was compromised.
Question: What further steps are you considering taking to help
victims regain control of their credit histories and their lives?
Response: We are continuously looking for new ways to assist
victims of identity theft and assist criminal enforcement in this area.
Extending The Accessibility of Our Consumer Education Materials and
Resources. We encourage multiple governmental agencies and private
entities to print, post, or otherwise make available our consumer
education material. We also make this material available through CD
ROM, enabling other organizations to print copies of the publications
and affidavit. We encourage the states to take advantage of the
resources we have developed. One model of cooperation is the Office of
the Attorney General of North Carolina, which has used FTC materials to
develop a victim response kit for state residents. The Attorney
General's website links to the FTC's complaint form and affidavit, and
he actively encourages law enforcement agencies throughout his state to
become Sentinel members with access to the ID Theft Clearinghouse data.
Working With Financial Institutions and Credit Reporting Agencies
to Streamline Victim Assistance. To simplify the process that victims
must go through to dispute accounts opened in their names, we are
working with the financial industry to modify the ID Theft Affidavit
and increase its usefulness for financial institutions and law
enforcement. We also encourage the consumer reporting agencies to
continue their initiatives to ease the burden on ID theft victims and
help them to restore their financial security. The three national
consumer reporting agencies recently launched a program to enable
callers to their fraud lines to call just one of the three consumer
reporting agencies with their request for a fraud alert and copy of
their credit report. That agency will then share the fraud alert
request with the other two agencies, thus eliminating the need for the
victim to call each of the three agencies. Through another program to
assist victims, the police report initiative, the consumer reporting
agencies have agreed to block trade lines if a consumer provides a
police report documenting the incident of ID theft.
Facilitating Criminal Enforcement. The FTC has continued to promote
aggressive prosecution of identity theft by local and federal agencies.
Our training of law enforcement and improvements to the Identity Theft
Data Clearinghouse should facilitate more efficient and focused
investigation and prosecution of this crime.
Improving Electronic Access. Our website is also scheduled for
substantial revisions, which will be unveiled in the next few weeks.
Additional educational material, geared to businesses, will debut with
the new website. A self audit guide and a business record theft
response kit will enable companies to safeguard consumer data, and
better respond when a breach occurs. The FTC is also working on a major
upgrade of the system that houses the Identity Theft Data
Clearinghouse. The upgrade will allow us to provide better customer
service to hotline callers, will facilitate the use of the data by our
in-house analysts, and will substantially improve performance of the
system for our law enforcement users around the country. Ultimately,
each of these improvements will benefit victims of ID theft.
Question: Have you considered creating a separate office within the
department that is solely dedicated to combating identity theft and
helping victims restore their credit record? Do you have adequate
resources to address this problem?
Response: Currently, the Bureau of Consumer Protection's ID Theft
program maintains a core team that is focused solely on ID theft
issues. Other parts of the Bureau of Consumer Protection help support
the ID theft programs. The Commission's Consumer Response Center plays
a key role, with an off-site phone center that handles incoming calls
and consumer complaints and in-house FTC staff who ensure data quality
and performance standards by the phone counselors. FTC data analysts
play another central role, reviewing the ID theft data in the
Clearinghouse to develop reports and analyses. The Bureau's Office of
Consumer and Business Education supports the program by developing,
promoting, and distributing ID theft educational and outreach
materials.
The work of the ID theft program is also supported by other Bureau
units that enforce issues related to privacy, including security. For
example, enforcement of the safeguard rules, which were promulgated
under Gramm-Leach-Bliley, and law enforcement actions against companies
that misrepresent their security measures (see, for example, the recent
settlement with Guess.com at www.ftc.gov/opa/2003/06/guess) are
important features of our consumer protection program.
Additionally, colleagues in other agencies complement the work of
our staff. We have forged strong partnerships with many agencies and
work closely with them on most aspects of our work. The US Secret
Service has detailed a special agent to work with the ID theft team to
enhance our work with criminal law enforcement. The Office of Inspector
General for the Social Security Administration systematically transfers
the ID theft complaints from their Social Security Number fraud system
into our Data Clearinghouse. Assistance from these agencies is critical
to the program.
Finally, deterrence of ID Theft by increased criminal enforcement
remains a critical need. Recent interagency training efforts focusing
on local law enforcement as well as efforts to increase participation
by state and local law enforcement agencies in the ID Theft Data
Clearinghouse are all essential to this effort.
Thus, we continue to place a priority on our work in the ID Theft
program and this work extends across several offices of the Bureau of
Consumer Protection. Although additional resources would always be
desirable, the current resources allocated to the program are balanced
with our many other consumer protection responsibilities. We do not
believe that creating a separate office through which all ID Theft-
related efforts are conducted would improve our efficiency or
productivity.
consumer reporting agencies
Question: Can you please tell me about the Commission's efforts to
monitor smaller consumer reporting agencies?
Response: The Commission is aware of several categories of smaller
consumer reporting agencies.1 First, there are a small and
dwindling number of local credit bureaus that are affiliates of the
``big three'' nationwide repositories. These bureaus own records of
local consumers that are maintained on the centralized databases of the
nationwide repositories. Almost no small credit bureaus still maintain
their own, local-level databases.
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\1\ ``Consumer reporting agency'' is the term used in the Fair
Credit Reporting Act (``FCRA''), and reflects the fact that consumer
information is collected and reported for a variety of purposes in
addition to credit transactions. In common terminology, however, the
agencies are known as ``credit bureaus'' or ``credit reporting
agencies.'' The term ``repository'' is most often reserved for the
large, national bureaus that collect and store information on over 190
million consumers. As your question recognizes, there are large credit
bureaus, which operate nationally, and smaller credit bureaus, which
operate regionally or offer more specialized services. The major
bureaus are sometimes referred to as the ``big three,'' in recognition
of the three major companies that have predominated for several years--
Equifax, Experian, and Trans Union. (A fourth company, Innovis Data
Services (an affiliate of CBC Companies), also maintains ``a national
database of consumers with unfavorable current or past credit
histories.'' See http://www.innovis-cbc.com/products.htm.)
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Another type of small credit bureau is represented by
``resellers,'' consumer reporting agencies that purchase consumer
information from one or more of the major repositories and then resell
it, usually after re-formatting, categorizing, or otherwise assembling
the information.
Finally, the consumer reporting industry has also witnessed the
emergence of companies that collect and report specialized, non-credit
information such as check writing histories, rental records (including
evictions), drivers'' records (for the trucking industry 2
and other users), utility exchanges (records of consumer payment
histories with electric companies and other utilities), and criminal
history and other public records databases. Each of these entities is
covered by the FCRA if the data are used, among other things, for
purposes of determining a consumer's eligibility for credit, insurance,
employment, or other goods or services for which the consumer has
initiated a business transaction.
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\2\ Changes to the FCRA provision governing use of consumer reports
for employment purposes were enacted by Congress in recognition of the
unique needs of the interstate trucking industry. Pub. L. No. 105-347,
112 Stat. 3208 (1998), Sec. Sec. 2 and 3 (codified at FCRA
Sec. Sec. 604(b)(2)(B) and (C); 15 U.S.C. Sec. Sec. 1681b(b)(2)(B) and
(C)).
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The Commission stays abreast of developments with smaller consumer
reporting agencies in a number of ways. The Commission maintains a
Consumer Response Center (CRC) to receive and record consumer
complaints against all kinds of businesses. The CRC logs consumer
complaints by, among other items, type of business (in this case,
credit bureaus) and the company named in the complaints. We can review
individual complaints against smaller bureaus.
Commission staff meets from time to time with representatives of
smaller consumer reporting agencies and their trade association, both
to learn of new developments in the industry and to respond to concerns
and inquiries. The staff also responds to numerous telephone inquiries
from small or specialized consumer reporting agencies, and from their
representatives, about interpretation of FCRA requirements in the
sometimes-unique contexts of their individual businesses and needs.
The Commission also undertakes efforts to insure that those
entities that use smaller consumer reporting agencies with specialized
databases, such as landlords or insurance companies, comply with FCRA
requirements to supply adverse action notices when the user takes an
adverse action, such as denial of apartment rental, based on
information from a consumer report. Adverse action notices must
disclose the name of the consumer reporting agency from which the user
obtained the information, and consumers can thus obtain disclosure of
the information on file at the agency and dispute any incomplete or
inaccurate information that they find. Adverse action notices, a key
provision of the FCRA, are thus of even greater importance in the
context of small, non-credit reporting agencies, the existence of which
is likely even less evident to consumers than conventional credit
bureaus.
The Commission has given high priority to assuring compliance with
FCRA adverse action notice requirements by all consumer report
users,3 and places special emphasis on compliance by users
of smaller, specialized consumer reporting agencies. For example, staff
recently conducted an investigation of fifteen landlords in five cities
across the United States. The staff found a high level of compliance
with the adverse action requirements of the FCRA.4 The
Commission has taken actions to assure compliance by resellers of
consumer reports (small agencies that purchase consumer reports from
the major bureaus and resell them),5 as well as specialized
agencies that issue bad check lists,6 or supply medical
information.7
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\3\ See, e.g., Quicken Loans Inc., D-9304 (Apr. 8, 2003).
\4\ The Commission's January 15, 2002 press release on the
investigation and resulting business education brochure can be found at
http://www.ftc.gov/opa/2002/01/fcraguide.htm.
\5\ See I.R.S.C., 116 F.T.C. 266 (1993); CDB Infotek, 116 F.T.C.
280 (1993); Inter-Fact, Inc., 116 F.T.C. 294 (1993); W.D.I.A., 117
F.T.C. 757 (1994) (consent orders against resellers settling
allegations of failure to adequately insure that users had permissible
purposes to obtain the reports). See also First American Real Estate
Solutions, LLC, 1999 FTC LEXIS 137 (Jan. 27, 1998) (consent order with
a reseller concerning the dispute obligations of consumer reporting
agencies).
\6\ Howard Enterprises, 93 F.T.C. 909 (1979).
\7\ MIB, Inc., 101 F.T.C. 415 (1983) (prohibits a non-profit
medical reporting agency from conditioning the release of information
to a consumer on his/her execution of a waiver of claims against the
firm; requires timely reinvestigations of disputed information;
requires that agency contact, when possible, the source(s) of disputed
information or other persons identified by the consumer who may possess
information relevant to the challenged data and modify its files
accordingly). In 1995, the Commission reached a further agreement with
MIB, to ensure that insurance company users of MIB reports would supply
consumer applicants with adverse action notices in those cases where
information from an MIB report figured in adverse action by the
insurers. See http://www.ftc.gov/opa/1995/06/mib.htm.
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Question: How accurate are the data at smaller credit reporting
agencies?
Response: The FCRA uses two major avenues to achieve the goal of
optimal accuracy. First, the FCRA establishes mechanisms for consumers
to learn about possible errors in their credit reports and have them
corrected. The statute gives consumers both the right to know what
information the credit bureau maintains on them, and the right to
dispute errors. Second, it provides that consumer reporting agencies
must follow ``reasonable procedures to assure maximum possible accuracy
of the information'' they report.8
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\8\ By its terms (``reasonable procedures . . . maximum possible
accuracy''), the statute itself recognizes that absolute accuracy is
impossible. Section 607(b); 15 U.S.C. Sec. 1681e(b). Pragmatic
consideration of the large volume of data that credit bureaus must
store and process also bears on this issue.
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The Commission does not directly examine the content of consumer
reporting databases. Some specialized consumer reporting agencies, such
as employment screening services, do not maintain databases of their
own (using public record databases if reporting criminal or driving
history as part of their report). Others, such as tenant screening
services, keep information on local apartment residents and also
provide landlords with a credit report from one of the national
repositories in the agency's report to a landlord on an individual
rental applicant.
With respect to the accuracy of reports from smaller reporting
agencies, we have only limited information, but our complaint
statistics do not suggest that consumers lodge a significant number of
accuracy complaints against smaller agencies.
Question: Have you taken enforcement actions against these smaller
agencies?
Response: Yes. The Commission has taken action when patterns of
practices indicated a problem with FCRA compliance. See supra, e.g.,
notes 3 through 7, and accompanying text.
predatory lending
Question: I am pleased that last year the FTC took an enforcement
action against Citicorp which was formerly known as Associates because
it was deceiving consumers. Nevertheless, is the FTC working with other
regulators to bring additional cases under the FTC Act? If yes, can you
discuss with us today any particulars regarding these cases or what has
prompted actions by the FTC?
Response: As you know, the FTC's case against The Associates and
Citigroup was recently settled, requiring the defendants to fund a $215
million consumer redress program. It is worth noting that the FTC's
case followed on the heels of an action brought by the State of North
Carolina, the settlement of which returned $20 million to consumers in
that state.
The FTC's enforcement program in the subprime lending area is
ongoing, and we continue to work closely with state and federal
agencies to enforce lending laws. We maintain close relationships with
several federal agencies with responsibility in this area, including
the Federal Reserve Board, the Department of Housing and Urban
Development, the Office of the Comptroller of the Currency, the Office
of Thrift Supervision, the Federal Deposit Insurance Corporation, and
the Department of Justice. The ties we have cultivated allow us to
exchange information about potential law enforcement targets and, in
some cases, to join efforts to pursue cases. In the past few years, for
example, we have partnered with HUD to pursue cases against Mercantile
Mortgage Company and Action Loan Company, and with the Department of
Justice and HUD against Delta Funding Corp. All of these cases resulted
in settlements providing substantial relief for consumers.
State regulators have also been important partners in our law
enforcement efforts, providing leads for potential cases and bringing
joint enforcement actions. For example, we are currently pursuing a
case in federal court jointly with the State of Illinois against a
mortgage broker for allegedly deceptive and other illegal practices in
brokering subprime loans. This particular defendant was brought to our
attention by the Legal Assistance Foundation of Chicago. Last year, we
partnered with the Attorneys General of Florida, California, Arizona,
Illinois, and Massachusetts and the New York State Banking Department
to pursue a case against First Alliance Mortgage Company, a California-
based subprime lender charged with numerous unlawful practices. The
case was settled jointly by the government parties, as well as a number
of private plaintiffs, resulting in an approximately $60 million
redress fund.
In addition to our joint litigation, the FTC routinely consults
with state regulators to learn more about problematic practices
occurring in their states. For example, Kentucky regulators assisted
our investigation of two companies, Granite Mortgage, LLC and LAP
Financial Services, allegedly engaged in violations of the
Homeownership and Equity Protection Act of 1994.
Last month, the FTC co-sponsored a law enforcement summit meeting
on subprime lending issues, attended by dozens of federal and state law
enforcers from around the country. At the day-long meeting, the
attendees shared ideas and experiences and developed strategies to
further our combined efforts to combat subprime lending fraud. At the
present time, we have several active investigations of subprime
lenders.
Question: Can you discuss your general investigation and
enforcement efforts in this area?
Response: The FTC has focused its efforts to target lenders that
deceive consumers about the terms of their loans. Since early 1998, the
Commission has brought 17 actions alleging deceptive or other illegal
practices by subprime lenders. These cases have included lenders of all
sizes and from different regions of the country.
Our cases have involved a variety of allegedly deceptive or other
illegal practices that occur at or prior to loan origination, including
deceptive representations about costs or other loan terms. For example,
some of our cases have alleged that lenders hid origination fees or
balloon payments from borrowers or made misrepresentations about
prepayment penalties. We also have brought cases alleging that lenders
deceived consumers into purchasing costly credit insurance and other
ancillary products in connection with their loans, a practice known as
``packing.'' Still other cases alleged that lenders made false claims
that consumers would achieve savings by refinancing their debt with the
lender. Several of our cases have alleged violations of specific
federal credit laws, in addition to the FTC Act, including the Fair
Credit Reporting Act, Truth in Lending Act, Equal Credit Opportunity
Act, Homeownership and Equity Protection Act, and Fair Debt Collection
Practices Act. We have also challenged deceptive and unfair loan
servicing practices. For example, in our Capital City Mortgage case,
currently in litigation in federal court, the FTC complaint alleges
that the lender imposed charges on borrowers' accounts for fees that
the borrower did not owe.
Of the Commission's seventeen recent cases, fifteen have resulted
in settlements, returning in the aggregate hundreds of millions of
dollars to defrauded consumers. The FTC settlement with The Associates
and Citigroup includes a $215 million redress judgment, the largest in
FTC history. Two cases are currently in litigation: the Capital City
Mortgage case and an action against Mark Diamond, a mortgage broker in
Illinois who allegedly misrepresented loan terms to borrowers.
In addition to its seventeen subprime lending cases, the Commission
recently filed two cases alleging that firms had sent unsolicited email
to the public with false promises for low-rate mortgages. The cases
also allege that the spammers were using the lure of attractive
mortgages to dupe consumers into divulging detailed financial
information, which they then tried to sell to third parties.
Question: What is the most effective way for our constituents to
bring abusive lending cases to your attention? When do my constituents
go to the FTC versus another regulatory agency?
Response: Individuals can file a complaint online, at www.FTC.gov
or can call toll free at 877-FTC-HELP. Although we cannot resolve
individual disputes, consumer complaints are an extremely valuable
source in enabling us to identity patterns of violations.
The FTC has jurisdiction over most lenders other than banks
regulated by the Federal Reserve Board, the OCC, or the FDIC; thrifts
regulated by the OTS; and credit unions regulated by the National
Credit Union Administration. If consumers are not sure of the agency to
which they should complain, our counselors can direct them to the
appropriate agency.
Another way for consumers to know which federal agency regulates
their lender is to access the website at www.ffiec.gov/nic, click on
``institution search,'' and input information about their lender.
Individuals can also file complaints with their own state attorney
general's office or state banking department.
Responses to Questions from the Hon. Diana DeGette
Question: Let me start by asking how the FTC has maintained a high
level of service in the regions that do not have offices, most
specifically the Rocky Mountain Region?
Response: The FTC's level of service is higher now than ever.
Thanks to an expanded Consumer Response Center, an improved Consumer
Sentinel, more and better communications with state and local law
enforcers, and an aggressive outreach, communications and training
program, more consumers know about the FTC, report their fraud and
identity theft complaints to the FTC, and ask for information from the
FTC than at any time in the agency's past.
Law Enforcement
Law enforcement is a core mission at the FTC. And, Rocky Mountain
consumers, including Colorado consumers, directly benefit from the
FTC's law enforcement efforts. Some recent examples include:
Operation Phoney Philanthropy--In May 2003, our Northwest
Region coordinated a nationwide law enforcement sweep targeting
fraudulent charities and fundraisers. With assistance from the
Colorado Attorney General's Office, the Commission filed a case
against a Canadian telemarketer which claimed to be affiliated
with local hospitals and represented that donations would be
used to send children's activity books to the hospitals. The
alleged scam affected a number of hospitals in Colorado,
including Denver Children's Hospital. FTC v. DPS Activity
Publishing, Civ. No. CO3-1078C (W.D. Wash. May 2003).
FTC v. Leasecomm, Civ. No. 0311034-REK (D. Mass. May 2003)--In
May 2003, the Commission entered a settlement with a
Massachusetts finance company that provided for cancellation of
millions of dollars in judgments that the finance company
allegedly obtained through deception. This provided relief
totaling over $1 million to 300 consumers in the eight states
previously served by the Denver office. (See attachment 1)
FTC v. Triad Discount Buying Club, Civ. No. 01-8922-CIV-Zloch
(S.D. Fla. 2001)--Also this past year, we sent redress checks
to over 11,000 consumers in the Rocky Mountain Region as their
share of a redress pool in a case against an allegedly
deceptive buying club. (See attachment 2)
Cooperative Law Enforcement--We continue to work with state
and local law enforcement to bring joint enforcement actions.
Since 1999, the Commission has announced 40 of these actions,
known as sweeps. A total of 35 state and local agencies in the
Rocky Mountain Region participated in 15 separate sweeps. (See
attachment 3)
Local Antitrust Cases--In the past year, staff from the
headquarters office of the FTC has been involved in the
investigation and eventual settlement of Aurora Associated
Primary Care Physicians, C-4063 (July 16, 2002); Physician
Integrated Services of Denver, C-4054 (July 16, 2002); and
Professionals in Women's Care, C-4063 (Oct. 11, 2002), three
cases involving groups of competing, independent physicians in
Denver, Colorado. These cases are significant, as they are
among the first in which the FTC has taken action against non-
physician agents for coordinating the allegedly illegal
activities of physicians, including price-fixing and concerted
refusals to deal except on collectively determined terms.
Commission staff from both the headquarters office and the
Western Regional Office in San Francisco also have been
involved in another two non-public investigations in Colorado
involving antitrust issues.
Consumer Response Center
Through the Consumer Response Center, the FTC responds to about
24,000 consumer calls, emails, voice mails, and letters each week. In
the past three years, the number of contacts from Colorado consumers
has almost doubled, from 6554 in calendar year 2000, to 12,761 in
calendar year 2002. Much of this increase can be attributed to
marketing the new toll-free number which was established in July 1999,
and the ability of consumers to file complaints directly over the
Internet.
Consumer Sentinel
More fraud complaints mean a more robust pool for investigators to
determine trends and identify law enforcement targets, and ultimately,
better protection for consumers. Fraud complaints are shared with law
enforcers throughout the country through Consumer Sentinel, the FTC's
award-winning database. There are currently 44 Sentinel members in the
states formerly served by the Denver Regional Office, including 11
located in Colorado. (See attachment 4) Non-law enforcement
organizations also contribute information to Sentinel; 11 Better
Business Bureaus (``BBBs'') located in the Rocky Mountain Region
(including those in Denver and Fort Collins) are Sentinel contributors.
Outreach
Consumer and business education is a significant part of the FTC's
mission. Through publications, Web sites, media outreach, partnerships,
exhibits and presentations, the Commission is able to reach millions of
consumers and businesspeople each year. The more the FTC reaches out to
consumers, the more they respond: more and more consumers are
contacting the Commission to report fraud and identity theft, and to
request information; and the information on www.ftc.gov is attracting
more hits than ever. Much of the Commission's outreach program is based
on a ``wholesale/retail''--or intermediary--concept: the Office of
Consumer and Business Education (``OCBE'') distributes information
about spotting, stopping and avoiding scams and frauds to organizations
and media that, in turn, disseminate it directly to consumers.
Every law enforcement action that the Bureau of Consumer Protection
announces has an education component. In addition to the mass media,
the FTC sends publications to local newspapers, special interest
publications and organizations that would have a special interest in a
particular topic. The Commission also frequently sends out consumer
information that is not directly related to a law enforcement action.
For example, OCBE recently sent articles on buying a used car, negative
option plans, ID theft, weight loss, and tar & nicotine ratings to
community college and university newspapers in every state. OCBE also
sent information to high school newspaper editors on scholarship scams
and other age-appropriate subjects.
A review of our records for FY 2003 shows that the FTC has many
``customers'' in Colorado who are ordering hundreds--and in some cases
thousands--of the Commission's brochures at a time. They then
distribute these publications to their own constituents. For example,
since October 2002, FTC customers have included:
Boulder County Justice Center: 19 publications, totaling 5,060
copies.
Western National Bank, Colorado Springs: Identity Theft, 500
copies
Douglas County Adult Services: 11 publications, totaling 1,100
copies.
ENT Federal Credit Union, Colorado Springs: Site Seeing on the
Internet, 500 copies.
DC County Sheriffs Office, Castle Rock: 9 publications
totaling 900 copies.
District Attorney, Denver: 2 publications on ID Theft, 110
copies.
Denver Federal Credit Union: Site Seeing on the Internet, 250
copies.
BBB of Colorado Springs: 17 publications totaling 1,710
copies.
Small Business Development Center, Colorado Springs: 35
publications totaling 3,100 copies.
National Association of Retired Federal Executives, Denver: ID
Theft, 110 copies.
Keller Williams Realty, Woodland Park: 6 publications totaling
910 copies.
GMAC Mortgage, Englewood: 1 credit publication, 200 copies.
Our regional offices are involved in additional outreach efforts.
For example, an attorney in the Western Region's San Francisco office
recently delivered a ``Report From the FTC'' to presidents and vice
presidents of 18 Western BBBs and several representatives of the
national BBB at the BBB Western conference. She covered a range of
topics, including the Telemarketing Sales rule, ID Theft, privacy,
spam, Internet auction fraud, office supply scams and Consumer
Sentinel, as well as the upcoming national Do Not Call Registry. (See
attachment 5 for examples of other regional outreach efforts in the
Rocky Mountain Region states.)
Question: Have you been in contact with the external stakeholders
since the restructuring to get an outside assessment of how well
consumers needs are being met? In areas that you have no regional
offices nearby, and let's use the example of Denver, how are you
evaluating how well consumer needs are being met? How do you conduct
outreach in these areas?
Response: As described above, the Commission maintains regular
contact with local law enforcers and consumer groups in all of the
Rocky Mountain Region states, including the State Attorneys General,
and representatives of AARP and the local BBBs. Through these contacts,
the Commission continually evaluates how it can best meet the needs of
consumers. The FTC's law enforcement and outreach efforts in the Denver
area are discussed above.
Question: How can staff located in an office in San Francisco be as
responsive to consumer fraud problems in Colorado as a more centrally
located office?
Response: The FTC finds that its staff is able to communicate
effectively with many agencies and organizations through frequent
telephone calls, e-mails, and occasional visits. In addition, the
Commission is fortunate to have members of the former Denver Regional
Office in both the San Francisco Office of the Western Region and the
Northwest Regional Office. These staff members have kept in touch with
their contacts in the states previously served by the Denver office,
and have also introduced members of WR-SF and NWR staffs to these
contacts.
Sentinel data suggest that Colorado consumers are as likely to be
targeted by fraudsters operating outside Colorado as they are by
fraudsters within the state. (See attachment 6) Indeed, in the cases we
discussed above, where redress was provided to Colorado victims,
defendant companies were located outside Colorado.
Question: The Denver FTC office used to work very closely with a
local senior advocacy group and met with them regularly to exchange
information on fraudulent activities, hold public outreach conferences
and distributed educational materials. I think this is a good example
of some of the most important consumer protection work that needs to be
done, and my concern is that these seniors' needs are not being met as
effectively since the restructuring. Can you address this?
At the time the restructuring proposal was made, FTC officials
expressed confidence that technological advancements and new
innovations, including the new consumer complaint handling center and
the Internet site, would allow the FTC to be able to fill in the gaps
left by fewer regional offices.
However, wouldn't you agree that certain targeted populations
(meaning likely targets by fraudsters), such as immigrants, low-income
individuals and seniors, might be less likely to proactively seek out
assistance, go online to get information and report fraud or be as
willing/able to navigate an automated phone mail system to get the
information or help they need?
Response: Reaching out to groups that are targeted by scammers,
including seniors, immigrants, and low-income groups, remains a high
priority for the FTC. The Commission recognizes that some consumers may
not seek information over the Internet, so we continue to reach out to
consumers through more traditional means. The Office of Consumer and
Business Education supports all regional offices as they participate in
local events like Senior Scam Jams, produced by BBBs, and Consumer
Universities, held by state chapters of AARP. Regional staff also
participate in community outreach, with local law enforcers, local
libraries, local community colleges, and local business consortia;
display publications at local malls; and give presentations to seniors
and other citizen groups as well as industry associations.
Over the last few years, the FTC has taken a proactive role in
encouraging the media to carry stories that will benefit consumers. Our
Office of Public Affairs maintains a list of local media outlets that
receive all FTC press releases. (See attachment 7) The agency also
relies on local media to highlight particularly important consumer
issues. For example, when the FTC conducted a major outreach project on
ID Theft, each of our regional offices (including the offices that
serve Colorado and the other Rocky Mountain States) contacted its major
media outlets, provided data on the number of ID Theft victims in each
of their respective states, and participated in a number of radio
interviews about how consumers can protect themselves against ID Theft.
(Staff in the San Francisco Office of the Western Region were
interviewed by radio stations in Colorado.) This approach has expanded
our ability to provide information to targeted populations--whether
located in urban or rural areas.
Responses to Questions from the Hon. Gene Green
Question: One spam bill, H.R. 2214 (Burr/Tauzin/Sensenbrenner)
imposes a knowledge standard that the Commission must prove to
successfully bring a civil action for violations of three provisions of
the bill.
How does this compare with common FTC's enforcement authority?
Is it safe to say that the FTC would be less likely to bring an
action in situations where it would be required to prove a
knowledgeable standard?
Knowledge standards under the FTC Act
Response: The key statutory provision respecting the FTC's consumer
protection mission is Section 5 of the FTC Act. That section empowers
the Commission to take action against ``unfair or deceptive acts or
practices in or affecting commerce.'' A showing of knowledge or intent
is not required for the agency to obtain injunctive relief or issue an
administrative cease-and-desist order. If the act or practice is indeed
unfair or deceptive, ``harm to the public interest is presumed,''
9 and remedial action is appropriate.10 The court
or the Commission can order a halt to the practice and can adopt a
range of additional remedies suitable to the particular circumstances
of the case.
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\9\ FTC v. World Wide Factors, Ltd., 882 F.2d 344, 346 (9th Cir.
1989).
\10\ The legal tests for deception and unfairness incorporate
standards to assume that the Commission acts in the public interest.
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On the other hand, an FTC action seeking civil penalties for
violation of a rule issued under Section 18 of the FTC Act requires a
showing that the defendant acted ``with actual knowledge or knowledge
fairly implied on the basis of objective circumstances that such act is
unfair or deceptive and is prohibited by such rule.'' 15 U.S.C.
Sec. 5(m)(1)(A).
In general, the seller or marketer of a product or service is
liable for any misleading or unsubstantiated claims it makes or
authorizes to be made about its product or service. Similarly, under
the do-not-call provisions of the Telemarketing Sales Rule, issued to
prevent abusive telemarketing, both the seller and the telemarketer
(the party actually conducting telemarketing calls) are liable for
failure to honor consumers'' do-not-call opt out requests. 16 C.F.R.
Sec. 310.4(b)(1)(iii).11 This provision includes
telemarketer liability for calling consumers who have made company-
specific do-not-call requests to a seller.
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\11\ ``It is an abusive telemarketing act or practice and a
violation of this Rule for a telemarketer to engage in, or for a seller
to cause a telemarketer to engage in, the following conduct: Initiating
any outbound telephone call to a person when [that person has placed
his or her number on the national do-not-call registry or] previously
has stated that he or she does not wish to receive an outbound
telephone call made by or on behalf of the seller.''
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Knowledge standards under H.R. 2214
H.R. 2214 as introduced contains three knowledge requirements:
Section 101(b)(2)
Section 101(b)(2) of H.R. 2214 provides that, if an email recipient
requests to ``opt out'' of receiving email from a sender, it is
unlawful for any person acting on behalf of the sender 12 to
initiate 13 the transmission of an unsolicited commercial
email (``UCE'' or ``spam'') message to that recipient if such person
``knows, should have known, or consciously avoids knowing'' that the
transmission falls within the scope of the recipient's ``opt out''
request.
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\12\ The term ``sender,'' when used with respect to a commercial
electronic mail message, means a person who initiates such a message
and whose product, service, or Internet web site is advertised or
promoted by the message, or such person's successor in interest.
Sec. 304(15) (emphasis supplied).
\13\ The term ``initiate,'' when used with respect to an electronic
mail message, means to originate such message or to procure the
origination of such message, but shall not include actions that
constitute routine conveyance of such message. Sec. 304(10).
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This provision deals with the situation when one party actually
transmits UCE messages on behalf of another party--the ``sender.'' H.R.
2214 places responsibility for providing the method of opting out on
the ``sender.'' Sec. 101(a)(1)(C). The bill also contemplates that
recipients will direct their opt out notices to the ``sender.''
Sec. 101(b). There does not appear to be an affirmative duty on
``senders'' to ensure that persons acting on their behalf are aware of
opt out requests they have received. This omission, coupled with the
defense for persons acting on the sender's behalf who lack the
requisite knowledge that a UCE message is within the scope of a
recipient's opt out request, weaken the enforceability of this
provision. Without an affirmative requirement that the initiator
inquire into opt-out requests received by the ``sender,'' the knowledge
requirement may be difficult to establish when the person transmitting
the email is different from the sender.
The analogous provision in the Telemarketing Sales Rule places
liability on both the ``seller'' (analogous to the ``sender'' of spam)
and the ``telemarketer'' (analogous to the initiator of spam) for
failure to honor consumers' do-not-call opt out requests. 16 C.F.R.
Sec. 310.4(b)(1)(iii). This approach reflects our law enforcement
experience showing that telemarketing scammers typically structured
their scams in a manner designed to make it difficult for law
enforcement to pin down various parts of the scam, such as who had
responsibility for writing the script, delivering the pitch, fulfilling
the order. This approach provides for straightforward enforcement, by
making both parties responsible.14 This approach also seems
appropriate in the commercial e-mail context.
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\14\ The Rule contains a narrow safe-harbor for telemarketers that
allows for a defense by showing that the telemarketer had established
procedures to comply with the ``do-not-call'' provisions, maintains,
among other things, a list of people not to contact, and any subsequent
call is an error. We believe that this safe harbor avoids any undue
finding of liability
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Section 101(b)(3)
Section 101(b)(3) of H.R. 2214 provides that if an email recipient
requests to ``opt out'' of receiving email from a sender, then it is
unlawful for any person acting on behalf of the sender to assist in
initiating the transmission to the recipient, through the provision or
selection of addresses to which the message will be transmitted, of a
UCE message that such person knows, should have known, or consciously
avoids knowing would violate the bill's prohibition on sending a UCE
message to a recipient who has made an opt out request. This raises the
same issues discussed above.
Section 101(d)
Finally, Sec. 101(d) of H.R. 2214 prohibits any person from
initiating a commercial email message prohibited by certain of the
bill's requirements,15 or from assisting in the origination
of such message by providing or selecting email addresses to which the
transmission of such message is initiated, if such person knows, should
have known, or consciously avoids knowing, that the email address was
harvested from an Internet website or proprietary online service in
contravention of the wishes or posted policy of the website or service.
As a practical matter, proof of a violation of this provision may be
difficult. Proving knowledge would add to the burden.
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\15\ Specifically, the bill's requirements that the email message
contain:
an identification that the message is an advertisement or
solicitation;
a notice of the opportunity to opt out;
a functioning method to opt out through a return
electronic mail address or other Internet-based mechanism; and
the sender's street address.
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Conclusion
The knowledge standards contained in H.R. 2214 exceed those
required to obtain a district court injunction or administrative cease
and desist order under Section 5 of the FTC Act. Further, the knowledge
standards contained in H.R. 2214 are unnecessary in connection with a
civil penalty action, in light of the knowledge standard imposed for
civil penalty actions under FTC Act Section 18 rule violations.
Moreover, the knowledge standards set forth in H.R. 2214 are expressed
differently from those of the FTC Act, potentially giving rise to
litigation issues about differences in the standards. Given the harmful
nature of the conduct proscribed by this proposed legislation, the FTC
should be able to enjoin future violations readily, and to impose civil
penalties where appropriate without a duplicative burden of meeting two
arguably different knowledge standards. Therefore, we anticipate that
retention of the knowledge standards in H.R. 2214 would reduce the
enforceability of its provisions.
Question: On April 30, 2003, the FTC released a report entitled
``False Claims in Spam.'' In that study, the commission reported that
22 percent of the unsolicited commercial email it studied contained
false information in the ``Subject'' line. The Burns-Wyden bill (S.
877) includes a prohibition against deceptive ``Subject'' headings,
which is not in H.R. 2214. Is such a provision important and something
you think should be included in a spam bill?
Response: It is important that companies know that placing false
information in the ``subject'' line of an email is illegal. Currently
the FTC can reach false or deceptive claims within the FTC's
jurisdiction,16 regardless of the medium in which they are
made. Thus the FTC could reach false or deceptive claims occurring in
the subject line of an unsolicited commercial email.
Legislation expressly prohibiting false or deceptive
representations in subject lines of commercial email messages could
provide additional useful law enforcement tools to the FTC, if the
prohibition follows the current standard of liability and proof under
Section 5 of the FTC Act.17 The particular provision in S.
877, Section 5(a)(2), however, is narrower than the reach of Section 5
of the FTC Act because it imposes knowledge as a requisite element of
proof in every case.18
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16 The FTC has limited or no authority over banks,
common carriers, and insurers, for example.
17 As discussed above, the FTC's proof would include the
statutory knowledge standard in order to obtain civil penalties.
18 ``It is unlawful for any person to initiate the
transmission to a protected computer of a commercial electronic mail
message with a subject heading that such person knows would be likely
to mislead a recipient, acting reasonably under the circumstances,
about a material fact regarding the contents or subject matter of the
message.''
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