[Senate Hearing 108-951]
[From the U.S. Government Publishing Office]
S. Hrg. 108-951
REAUTHORIZATION OF THE
FEDERAL TRADE COMMISSION (FTC)
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 11, 2003
__________
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Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South
CONRAD BURNS, Montana Carolina, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas JOHN D. ROCKEFELLER IV, West
OLYMPIA J. SNOWE, Maine Virginia
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada RON WYDEN, Oregon
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
MARIA CANTWELL, Washington
FRANK R. LAUTENBERG, New Jersey
Jeanne Bumpus, Republican Staff Director and General Counsel
Robert W. Chamberlin, Republican Chief Counsel
Kevin D. Kayes, Democratic Staff Director and Chief Counsel
Gregg Elias, Democratic General Counsel
------
SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, AND INFRASTRUCTURE
GORDON H. SMITH, Oregon, Chairman
CONRAD BURNS, Montana BYRON L. DORGAN, North Dakota,
SAM BROWNBACK, Kansas Ranking
PETER G. FITZGERALD, Illinois BARBARA BOXER, California
JOHN ENSIGN, Nevada BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
FRANK R. LAUTENBERG, New Jersey
C O N T E N T S
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Page
Hearing held on June 11, 2003.................................... 1
Statement of Senator Dorgan...................................... 2
Statement of Senator Lautenberg.................................. 40
Statement of Senator Nelson...................................... 3
Statement of Senator Smith....................................... 1
Statement of Senator Wyden....................................... 2
Witnesses
Cooper, Scott, Manager, Technology Policy, Hewlett-Packard
Company........................................................ 66
Prepared statement........................................... 67
Deutsch, Sarah, Vice President and Associate General Counsel,
Verizon Communications......................................... 56
Prepared statement........................................... 57
Grant, Susan, Director, National Fraud Information Center/
Internet Fraud Watch, National Consumers League................ 53
Prepared statement........................................... 54
Leary, Hon. Thomas B., Commissioner, Federal Trade Commission.... 10
Prepared statement of the Federal Trade Commission........... 11
Muris, Hon. Timothy, Chairman, Federal Trade Commission.......... 3
Rotenberg, Marc, Executive Director, Electronic Privacy
Information Center (EPIC); Adjunct Professor, Georgetown
University Law Center.......................................... 46
Prepared statement........................................... 48
Sarjeant, Lawrence E., Vice President Law and General Counsel,
United States Telecom Association (USTA)....................... 59
Prepared statement........................................... 61
Schwartz, Ari, Associate Director, Center for Democracy and
Technology..................................................... 75
Prepared statement........................................... 76
Swindle, Hon. Orson, Commissioner, Federal Trade Commission...... 8
Thompson, Hon. Mozelle W., Commissioner, Federal Trade Commission 5
Appendix
Burns, Hon. Conrad, U.S. Senator from Montana, prepared statement 87
REAUTHORIZATION OF THE
FEDERAL TRADE COMMISSION (FTC)
----------
WEDNESDAY, JUNE 11, 2003
U.S. Senate,
Subcommittee on Competition, Foreign Commerce, and
Infrastructure,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:07 p.m. in
room SR-253, Russell Senate Office Building, Hon. Gordon H.
Smith, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Ladies and gentlemen, let the hearing come
to order, and I apologize for the delay. I think you are
probably all aware that we are in the midst of a series of
roll-call votes. But in the interest of time, in the interest,
frankly, of all the very accomplished witnesses who have
assembled here today, I thought it well that we at least get
going. And I want to welcome my colleague from Oregon, Senator
Wyden, who is here. And hopefully, between these opening
statements and the next vote, we can keep someone here to keep
this hearing going forward. But again, I thank all of our
witnesses, who have made, many of them, special arrangements to
be here today.
The purpose of this hearing is to examine the performance
of the Federal Trade Commission in fulfilling its mission, and
to discuss legislative proposals for reauthorization.
The FTC is vital to ensuring fair treatment for American
consumers in the marketplace. However, the Commission has not
been reauthorized since 1996. I am pleased to say that, earlier
today, Chairman John McCain and myself introduced the Federal
Trade Commission Reauthorization Act of 2003. Now, we hope to
consider the legislation during the Committee's executive
session next week. Therefore, today's hearing is very timely,
indeed.
The bill would authorize funding for the FTC for Fiscal
Years 2004 through 2006. It also includes a number of
provisions requested by the Commission. Among other things, it
would enable the FTC to accept reimbursement from law
enforcement agencies for investigative or other services
provided in assistance by the FTC.
The bill also provides the FTC enhanced authority to
respond to ever-growing international consumer fraud by
allowing improved cross-border fraud action. Specifically, the
FTC has requested, among other things, that it be able to more
readily exchange information with its foreign counterparts,
seek redress on behalf of foreign consumers for U.S.-based
fraud, make criminal referrals, delay notice to perpetrators of
fraud in certain circumstances, and assist the Justice
Department in foreign suits relevant to the FTC's interest. I
look forward to further exploring this complex issue during
today's hearing.
In addition to the provisions in the bill, this hearing
will also address the FTC's request for the repeal of the
common-carrier exemption in the Commission's organizing
statute. This exemption currently blocks the Commission from
exercising authority over certain activities of
telecommunication's common carriers. I know that this issue
involves a wide range of views, and I am hopeful that the
Subcommittee will learn more from those appearing today.
And again, we thank our witnesses who are here, and I am
pleased to be joined by the Ranking Member of this
Subcommittee, Senator Dorgan. Senator Dorgan, please proceed if
you have an opening statement, then Senator Wyden and Senator
Nelson. Welcome, gentlemen.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. I think,
because of the time, we have another vote that will be starting
soon, and these interruptions make it very difficult to
complete a hearing. Because of the time, let me just say this.
The FTC is a very, very important Federal agency. They are
working on a lot of interesting and very important issues--the
Do Not Call Registry, the cross-border fraud, spam. I am
interested in the common-carrier exemption. There are a series
of things that are really very important for us to consider.
Let's proceed to the hearing.
Senator Smith. Thank you, Senator Dorgan.
Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. I, too, will be
very brief. And there are a lot of topics to cover, but I want
to touch on two, in particular.
First, on the issue of spam. Gentlemen, I believe that the
U.S. Senate is going to pass a bill on this topic. I think it
will involve having a tough national standard, with respect to
discouraging the scourge of spam that really is threatening to
poison the medium. But the real challenge is--and the Burns-
Wyden legislation, of course, has penalties in it, criminal
penalties, civil sanctions--the real challenge is to make sure
the Federal Trade Commission enforces what the U.S. Congress
does, because unless there is a very tough enforcement message
sent, you are really going to find it very hard to deal with
this problem. And I am particularly anxious to hear the
Commission describe what the strategy is to enforce efforts to
stem this flow of spam. There is some limited authority now. We
seek to expand it. And I am anxious to hear the Commission's
views on that.
Also, as Mr. Muris knows, I would like to know at what
point the Commission is going to get serious about taking
action to protect consumers in the energy market. If you look
at the first quarter of 2003, gasoline prices spiked to record
levels, the Big 5 oil companies recorded huge profits of $20
billion. These are profits that were more than three times
higher than the first quarter of last year. I have been trying
to find out what the Federal Trade Commission wishes to do to
promote competition in this area for well over a year. And in
response to my requests, I have gotten back a bunch of
newspaper articles saying that essentially all these price
spikes are due to refinery fires. I would hope that there would
be a formal proposal forthcoming at some point to actually
produce some competition in the energy business, and I hope
that we will hear some efforts are underway at the Commission
to do that now.
Mr. Chairman, I thank you.
Senator Smith. Thank you, Senator Wyden.
Senator Nelson.
STATEMENT OF HON. BILL NELSON,
U.S. SENATOR FROM FLORIDA
Senator Nelson. Thank you, Mr. Chairman. And I want to
thank you for your participation in that rather lengthy but
very insightful hearing that we had on the spam legislation.
And it is my understanding next week that the Committee is
going to mark up the Wyden bill, and I have had the privilege
of participating with them and will have some modest amendments
to strengthen portions of it. But I would just underscore what
Senator Wyden said, that the FTC's vigilance in making it
happen, as a regulator, would be very important for consumers.
Furthermore, I am interested in pursuing your ideas on
consumer credit reporting and whether or not there are audits
to make sure that the consumer credit reporting is accurate. I
hear examples back in my State of Florida where there is not
the accuracy that one would hope for. And a lot of financial
decisions ride on the accuracy of those credit reports.
So, again, I thank you all for your public service. I think
you have done a fine job. I think we have got a lot of work,
and a lot of it we can do together.
Thank you, Mr. Chairman.
Senator Smith. Thank you, Senator Nelson.
We are pleased that our first panel consists of our FTC
Commissioner, the Honorable Tim Muris, Chairman. And he is
joined by Commissioners Mozelle Thompson, Orson Swindle, and
Thomas Leary. We thank you all, gentlemen, for being here. And
I understand, Mr. Muris, you will lead off, and each of you
will have comments.
STATEMENT OF HON. TIMOTHY MURIS, CHAIRMAN,
FEDERAL TRADE COMMISSION
Mr. Muris. Thank you very much, Mr. Chairman. We certainly
appreciate the opportunity to testify today about our
reauthorization.
On behalf of the Commission, let me first start by
expressing our sincere thanks to you, Mr. Chairman, and all the
Members of this Subcommittee, for your continued support of the
agency.
Since our hearing last summer, our dedicated staff has
continued to take innovative and aggressive actions to protect
consumers and promote competition. I would like to briefly
outline our mission and some of our recent accomplishments. My
colleagues will then each discuss specific legislative
proposals, some of which--well, in fact, all of which you have
mentioned in your opening statements.
Our consumer-protection mission focuses on attacking fraud
and deception, consumer privacy, deceptive lending practices,
and cross-border law enforcement. This program provides
Americans with impressive results. Since April 1st of 2002, we
have organized 12 joint 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, we devote significant
resources to protecting consumer privacy. This year, with your
assistance, we are set to launch the National Do Not Call
Registry. Implementation of this registry will begin soon; and,
once it is in place, consumers who have registered will begin
to receive 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 consumer concern. We
are addressing consumer concerns about spam through law
enforcement, consumer and business education, and research. In
addition, the Commission has legislative ideas that
Commissioner Swindle will discuss.
We have been equally as active protecting consumers from
anti-competitive conduct that could raise prices, particularly
in the healthcare, energy, and high-tech industries. In
healthcare, a number of FTC activities will likely provide
consumers with more affordable drugs. For example, we published
a study examining the frequency of anti-competitive abuses to
block market entry of low-cost generic drugs, provided comments
to the FDA on the potential for misusing the Hatch-Waxman Act
that governs generic entry, and we brought law enforcement
actions against branded companies allegedly improperly delaying
generic entry.
Recently, for example, we announced a settlement with
Bristol-Meyers-Squibb concerning alleged abuses of the Hatch-
Waxman process to obstruct the entry of generic competition for
two anti-cancer drugs and an anti-anxiety agent. This case and
our efforts, I believe, will save consumers tens, if not
hundreds, of millions of dollars.
We have also been active in protecting consumers from anti-
competitive conduct that may raise the price of oil and gas,
and I certainly look forward to discussing this issue at more
length with Senator Wyden.
We recently 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, in the last year, begun a project that monitors
wholesale and retail prices of gasoline in a real-time basis in
approximately 360 cities across the United States, in an effort
to identify possible anti-competitive activities.
We are also making several recommendations for legislative
changes, and we would be very happy to work with you and your
staff on these recommendations.
First, Commissioner Thompson will provide an overview of
our recommendations to improve cross-border fraud enforcement.
These proposals are also critical to the fight against
deceptive spam, because spammers often send their messages from
anywhere in the world to anyone in the world.
Second, Commissioner Swindle will discuss our
recommendations to enhance the FTC's effectiveness in fighting
fraudulent spam. These proposals would improve our ability to
investigate and sue possible targets.
Finally, Commissioner Leary will discuss our
recommendations to eliminate the FTC Act's exemption for
communication's common carriers.
Thank you very much.
Senator Smith. Thank you.
Gentlemen, do you desire to go vote now and then--take a
short recess and come right back? OK.
Mr. Thompson, we will just sort of move in and out. OK. Mr.
Thompson.
STATEMENT OF HON. MOZELLE W. THOMPSON, COMMISSIONER, FEDERAL
TRADE COMMISSION
Mr. Thompson. Thank you.
Good afternoon, Mr. Chairman and Members of the Committee,
and thank you for the opportunity to appear before you today
and offer testimony in support of the FTC's reauthorization.
Last year, when I appeared before the Committee, I
discussed the FTC's work in the area of international consumer
protection. I noted, at that time, that improvements in
communication and technology have created a global marketplace
in which American consumers and American businesses play an
important and active role. I also noted that these same
improvements left American consumers open to new types of harm,
and that these cases were 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.
As you can see from this chart, the same technological
tools that have expanded markets across international
boundaries have allowed fraudsters to act more efficiently and
quickly to extend their reach beyond domestic markets. This
shows you where some complaints from American consumers lie,
these various countries listed in blue. The FTC needs new tools
to effectively combat cross-border fraud and deception, and we
ask you for them today.
Now, there was a time not long ago when the biggest
challenge to American consumers was whether they wanted to do
business with the 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 might be legitimate, a rapidly
growing number are fraudulent and deceptive.
As you can see from this chart, what is contained in light
blue is some of our complaint data. This large percentage, in
light blue, is U.S. consumers' complaints against companies
just located in Canada. The other, the dark blue, is U.S.
consumers against companies located in other countries. This is
a tremendous proportion of some of our cross-border complaints.
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 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 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 memoranda of
understanding, and they include our participation in the
International Consumer Protection Enforcement Network, or
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 the work that we do at the Organization for
Economic Cooperation Development, or OECD, 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 combating cross-border fraud. We
hope that these guidelines will be finalized and approved later
this month. But our participation in these international fora
are not enough.
Criminal law enforcers saw the need for international
cooperation a long time ago. They found ways to permit
Government authorities to share investigatory materials 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 the CFTC were given certain powers
that enable them to better prosecute such frauds across
national borders.
Unlike our sister agencies, the FTC's tools to combat fraud
and deception have simply not 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 deception,
and sometimes even hinder our ability to engage in such
activity.
The growth of cross-border fraud demonstrates the pressing
need for new tools. Our statistics show a sharp increase in the
number of cross-border complaints from American consumers about
foreign companies, from 7,600 or so in 1998 to 24,213 in
calendar-year 2002. And you can see that from this exhibit,
Exhibit 3. And in fact, just from 2001 to 2002, the number of
complaints almost doubled.
Even at our recent Spam Forum----
Senator Dorgan. Mr. Thompson, may I stop you on that point?
With respect to the consumer complaints against companies
located in foreign countries, can you give me a ballpark
estimate of what percent of those come from Internet
transactions or credit-card transactions, either one?
Mr. Thompson. I do not want to give you that off the top of
our head. There is a large portion of them that are. The
Internet has facilitated the growth of that kind of problem.
But if you look the percentage that go across the border to
Canada, a lot of that comes from television and phone
solicitations. So I would want to be more precise in giving you
a number, but the Internet has caused this to grow
exponentially.
Senator Dorgan. I asked that question--I had two charges
from a French company on a credit card about a year ago, and
when I began checking into it, I was told, ``Well, this
company's name is well known, because they have done it many,
many times.'' And so credit-card Internet transactions, I
assume, are real locations for this sort of fraud. Is that
right?
Mr. Thompson. Uh-huh. Well, it is no secret that our market
is the richest market, so people want to come here to defraud
our consumers. But right now, the way our laws are situated,
that--we would have a difficult time sharing information about
your complaint about a French company with French authorities;
or, for that matter, if they were to prosecute a French
company, and they knew that they had recovered funds that
belong to you, they would have a hard time sharing that
information with us, or for us to receive it, in order to get
you your refund. That is because the way our law is situated,
that it really is designed for a domestic market.
But if you look at what we are doing with spam, just
because we see that so much of it comes from outside of our
borders, for that reason alone, cross-border fraud legislation
is necessary to make spam legislation effective.
Senator Dorgan [presiding]. Mr. Thompson, let me interrupt
you and say I also am going to leave to go vote. Senator Wyden
has voted and returned.
[Laughter.]
Senator Dorgan. I know that you may have taken it
personally that you have driven most of the Members out of the
room, but----
[Laughter.]
Senator Dorgan.--but we actually have a vote, and that is
why we are moving back and forth.
Mr. Thompson. People have said worse things to me.
Senator Dorgan. Anyway, your testimony is very interesting.
Senator Wyden?
Mr. Thompson. Well, I am just about ready to conclude.
Senator Dorgan. Why don't you proceed?
Mr. Thompson. The legislative proposal, in sum, that we
have given to you is intended to address some of the problems
that I have outlined and to improve our ability to protect
consumers who are defrauded across borders. Quite simply, we
are just asking for tools to make us more effective in meeting
those new challenges.
So I am here to answer your questions about--and I will
start all over again, Senator Wyden, if you want me to.
Senator Wyden [presiding]. Very good. Commissioner Swindle,
why don't we go to you next.
STATEMENT OF HON. ORSON SWINDLE, COMMISSIONER, FEDERAL TRADE
COMMISSION
Mr. Swindle. Thank you, sir. Thank you, Mr. Chairman and
Senator Wyden and Members of the Committee, for this
opportunity to appear before you 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, or unwanted
E-mail, or spam, as it has come to be known. 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 it is a rapidly growing threat to
Web-based services.
The Commission's testimony, provided in lengthy form to the
Committee, provides the Committee with an overview of our
efforts to combat spam and also legislative recommendations to
address spam. The legislative recommendations are modeled after
the Telemarketing Act. However, many of the Commission's
recommendations are already contained in the Burns-Wyden Spam
Bill. For example, like the Telemarketing Act, the Burns-Wyden
bill provides for State law enforcement action in Federal court
and allows collection of civil penalties. More details on
procedural and substantive legislative proposals are addressed,
as I mentioned, on pages 43 through 48.
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 the
consumers, to businesses, 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 app of the
Internet--that is, the use of E-mail and E-commerce. If
consumers lose trust and confidence in Web-based services and
stop using them as tools for communication and online 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 would help to shore up
trust and confidence. Surely this is possible right now. Why
has the 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 very good first step. Industry
must do this, and it must do it now.
The Commission will continue its multifaceted efforts to
address spam. For example, the Commission will continue--and I
must repeat, will continue--its aggressive law enforcement
program 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
website, www.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 dialogue and to explore possible
solutions to spam. The forum was remarkable in its discussions
and participation. Over 80 panelists and 400 people attended
the conference.
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 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, Government,
consumers, and other end users in the civil society
organizations must be a part of a continuing dialogue 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, not a
destination, and we have miles to go before we sleep.
Thank you very much, Mr. Chairman.
Senator Smith [presiding]. Thank you very much. Mr. Leary.
STATEMENT OF HON. THOMAS B. LEARY, COMMISSIONER, FEDERAL TRADE
COMMISSION
Mr. Leary. Mr. Chairman and Members of the Subcommittee, my
role here today is to present, once again, our unanimous
recommendation that the Federal Trade Commission Act be amended
to eliminate the special exemption for telecommunication's
common carriers. We want to thank the Committee for acting
favorably on this recommendation last year when you reported
out S. 2946. We have also noted the concerns expressed by some
Members on this issue, and I intend to say something about
these concerns this afternoon.
When the common-carrier exemption was included in the FTC
Act many years ago, the exemption made sense. It was logical to
exempt the 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 and more by competition
today. 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 unqualifiedly subject to our jurisdiction.
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 that, like the FTC,
have a broad jurisdiction over a large number of sectors, but
monitor a limited range of activities in any one sector.
Three, we, in the FTC, have, therefore, 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 into the FCC's 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 precedents that I really believe are
unmatched anywhere in this country or, indeed, the world.
Now, some ask why we are asking for 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 of whom are not, (b)
where 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 an ongoing exchange with the FCC on
this subject. I want to thank Senator McCain and his staff
particularly for facilitating discussions on how to make a
shared jurisdiction effective. We want to avoid duplicative
efforts, but we also want to remedy the present situation where
companies engaged in the same conduct in competition with one
another are subject to different regulatory regimes.
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 very much.
[The prepared statement of the Federal Trade Commission
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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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 website. 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).
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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 website, , 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 websites 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 websites 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 website 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
website, ``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 percent of the e-mail that it
analyzed was untraceable. Two panelists at the forum estimated that 40
percent to 50 percent 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.
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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 percent 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).
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
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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.
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\42\ FTC, Marketing Violent Entertainment to Children: A Review of
Self-Regulation and Industry Practices in the Motion Picture, Music
Recording & Electronic Game Industries (Sept. 2000), available at
; FTC, Marketing
Violent Entertainment to Children: A Six-Month Follow-Up Review of
Industry Practices in the Motion Picture, Music Recording & Electronic
Game Industries (Apr. 2001), available at ;
FTC, Marketing Violent Entertainment to Children: A One-Year
Follow-Up 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 Follow-Up 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).
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).
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 .
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).
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).
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 website 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 website.
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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.
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\62\ Southern Union Co., File No. 031-0068 (May 29, 2003)
(agreement accepted for public comment).
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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.
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\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.
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\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 .
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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\
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\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 .
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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
3. 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\
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\70\ Bayer AG and Aventis S.A., Dkt. No. C-4049 (July 24, 2002)
(consent order).
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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.
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\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.
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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.
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\73\ MSC.Software Corp., Dkt. No. 9299 (Oct. 29, 2002).
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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.
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\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\
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\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 e-mail
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.
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\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).
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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\
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\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.
---------------------------------------------------------------------------
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.
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.
Senator Smith. Thank you very much.
Again, we apologize for the disjointed nature of this
hearing, with all of the Senators having to come and go; but we
appreciate your indulgence, because we have been able to
continue on with your testimony.
If it is agreeable to my colleagues, we will do 5-minute
rounds.
I am interested in pursuing further the whole issue of the
common-carrier exemption. And, Mr. Muris, I believe it was in
your testimony, where you stated that, quote, ``The exemption
has proven to be a barrier to effective consumer protection,
both in common carriage and in other telecommunications
businesses.'' You continue by saying that, ``The exemption has
sometimes stymied FTC efforts to halt fraudulent or deceptive
practices by telecommunications firms.'' Could you provide some
specific examples of instances where the exemptions served as a
barrier for an FTC action against a non-common carrier activity
or telecom common carrier?
Mr. Leary. Well, Senator, for reasons that should be
obvious, we would prefer to provide the specific examples in a
different setting than an open hearing like this, because I do
not think it is fair to a potential company to identify the
possibility that we might have brought an action against them,
were it not for this exemption.
But we did have a situation that wound up in litigation in
a case where both the FCC and the Federal Trade Commission
agreed that we had jurisdiction. And yet the respondent
disagreed, took the matter to court. We have, thus far, been
successful in the preliminary--they made a motion to dismiss
our complaint--we have been successful at that level, but that
is still pending. And that is one reason why the mere fact that
we can agree informally with the FCC on a particular matter is
not conclusive, because some judge out there might read the
statute differently. So that every time we have a situation
where there is the possibility of that kind of an argument,
that kind of a jurisdictional barrier, we have to confront it
up front. It is an initial stumbling block for us. And I think
we ought to be able to work out a solution to that problem.
Senator Smith. Thank you. Will you explain what agencies,
notwithstanding the FTC, are affected by your cross-border
proposal, and describe their recent reactions to your proposal?
Mr. Thompson. Well, we have talked to some agencies. For
example, we have worked together with the Department of
Commerce, Department of State. We have also worked with the
Department of Justice. We are talking to some of those agencies
right now. We have some questions to answer, but we think that
any questions that we have, we will be able to work through.
I think that there is a general understanding of the
importance of the need to streamline and update our ability to
share information so that we can prosecute cross-border fraud
cases, because it has grown of greater importance to our
consumers to be able to provide them with remedies for
transactions that they engage in that involve parties outside
of our country.
Senator Smith. And I am wondering, as we contemplate your
proposal, as it relates to cross-border fraud, you have
requested exemption from FOIA, the Freedom of Information Act,
that it is somehow necessary to be exempted from that. Can you
speak to that further?
Mr. Thompson. I can, briefly. You know that, for law
enforcement, that there is a general exemption that we have for
FOIA for investigations that we conduct, but it is not entirely
clear that if it is information that we get pursuant to our
relationship with another country, that they share with us
their law enforcers, that that would be worthy of a similar
protection. This clarifies that, so that--what we are concerned
about right now is information--for example, from a foreign law
enforcer--that really deals with our citizens or activity that
takes place here, we cannot get that information at all. And
unless we have some way to protect the integrity of the
investigation--that includes witness statements, expert
testimony--then we need that information so that we actually
know what is going on and that we can protect our citizens.
Senator Smith. Thank you.
Mr. Muris, your Commission has a range of consumer-
protection oversight, obviously, and one of the things that any
parent is concerned about is these peer-to-peer file-shared
Websites, like Kazaa, Morpheus, Grokster, which lure
unsuspecting minors to look at free access to their supposed
copyrighted material under words like ``Harry Potter'' or
``Britney Spears,'' and what they find is not kid-friendly at
all; it is grossly pornographic. And I am wondering, is this
deceptive trade practice--it seems to be under the FTC's
jurisdiction, under Section 5, which prohibits or prevents
unfair or deceptive trade practices--have you looked into this
growing problem? And do you have a solution that can help us,
as we go into the future, to protect our young people from what
is clearly deception when it comes under the heading of ``Harry
Potter'' and is just pornography?
Mr. Muris. Well, we have found, quite frankly, some very
disturbing things in this area, and we have just begun to look
at it. We will be addressing--we are doing a follow up report,
at congressional request, on the marketing of violent
entertainment media, and we are looking--in that report, we
will be looking at the extent to which this new channel for
distribution of these products is used.
We are looking, specifically, at the question that you
mentioned. We find, in some of these areas, unfortunately, they
are quite explicit about what they are leading you to, and, in
that sense, not deceptive.
On the other hand, we have found--and this fits in with a
lot of what we are talking with spam, deception, with what we
do--we have had some startling examples of deception leading to
pornography. For example, we found a spam that said, ``Win a
free Sony Playstation.'' And in five clicks of your mouse, you
were on a pornographic Website, where your phone bill was being
billed to a 900 number, and all that was happening in a
deceptive fashion, and we shut them down. So we are still in
the midst of looking at this area. But unfortunately, you know,
what we are finding is not very promising, from the perspective
of parents.
Senator Smith. I am going to turn this over to my
colleague, Senator Wyden, but I--along this line of
questioning, I am also concerned that consumers who use these
software devices--in tapping into these things they also expose
their own private materials--health information and other
things--to the general public domain. And I think somehow there
has got to be a way to find some protection against that.
Mr. Muris. Well, yes, Senator. And you are absolutely
right, there are very serious, more general privacy concerns
beside the concerns that we were discussing, in terms of
children.
Senator Smith. Thank you.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Mr. Chairman, first, on the spam-enforcement issue, I do
think that Congress is going to pass an anti-spam bill with
criminal and civil penalties into it. And the question then
becomes enforcement. And I am of the view that bringing several
high-visibility, major enforcement actions against these
significant spammers would send a very significant message of
deterrence and that things would be different. I would like to
know if you agree and if you will commit to the Committee today
that if the Congress passes legislation, with real penalties
that are civil and criminal, that you will make it a high
priority to go out and bring several significant enforcement
actions, so as to actually get a message out there that there
is going to be some deterrence.
Mr. Muris. Well, first of all, Senator, I think I want to
compliment you for being a prophet ahead of your time. You have
been pushing this issue legislatively for years. We have made
attacking deceptive spam--and, unfortunately, the overwhelming
majority of it is deceptive and fraudulent--a priority.
Certainly, if legislation is passed--particularly, we hope,
legislation would give us some new procedural authority making
it easier for us to investigate--that would be helpful.
Commissioner Swindle may want to comment on this, as well.
I am agnostic, at best, about the impact that we would have
with cases. We are bringing cases. We are actually working with
U.S. attorneys to bring--they would bring criminal cases. We
just do not know if there are thousands of spammers or if it is
concentrated in a relatively small area. We do know they cannot
be traced through the Internet. They have to be traced by
following the money trail. So we are committed now to
increasing our efforts to go after them. I think new
legislation would be helpful. But I just cannot answer the
question whether--you know, of what the impact would be, given
our ignorance about what is going on in the spam world.
Commissioner Swindle, did you want to----
Senator Wyden. Well, and maybe Mr. Swindle wants to get
into this.
I mean, it seems to me, right now--we heard this from the
spammer--it is pretty much the cost of doing business. I mean,
it is not considered any big deal. And what I want to do is
send a message that the world is different, that this will be
treated as something that faces serious sanction.
One of the things I am proudest of--with Senator Specter, I
wrote the Armed Career Criminal Bill. It was discretionary. But
when prosecutors brought a relatively small number of cases,
and career criminals saw that the world was different, it
actually began to make a difference on the ground.
And what I want to see is a Commission that is going to
say, ``If Congress passes a law, we are going to go
gangbusters,'' in terms of trying to send an enforcement
message that there is some teeth out there. Because nobody
thinks there is any teeth right now.
Commissioner Swindle, did you want to add to that?
Mr. Swindle. Senator Wyden, first I would like to assure
you that we are incredibly serious and professional in
implementing our law enforcement role and enforcing the laws
that the Congress passes. Please do not question that--I want
to assure you that we are--I mean, I have been associated with
the agency for 5 years. I have never met a more professional
group of people in my life than those who work at the Federal
Trade Commission. I mean, they are earnest, they burn the
midnight oil. We expend enormous resources, and people
literally work over there overtime without the pay. I mean,
this is a professional outfit, and we are very earnest about
this, and we do pursue them aggressively.
History teaches us, at the Federal Trade Commission, that
there must be at least 100 scams in the world. At least 100. I
am being a little facetious, because there is probably millions
of scams. We have had a number of recently--a number of
relatively good hangings, with regard to law enforcement. And
it does have a deterrent effect. But the scams keep going on.
We are seeing scams that have been around, certainly since my
childhood. They have just taken a new form.
So I think narrowly defined new legislation that more
accurately defines the problem, what is right and what is
wrong, I think those kind of things can help. And, as I said,
many of the suggestions that we make in our formal testimony,
written testimony, are incorporated in Burns-Wyden, and we want
to see less ambiguity about what is right and what is wrong in
this business.
Unfortunately, it is not as simple as some of the other
scams that we have seen, where there are, sort of, finite
constraints. There is a boundary. There are a limited number.
Here, we have a phenomenon, a means of scamming people that is
boundless, it is open. The technology is literally open, and
that may be one of the problems.
The point is, we have got to have strong law enforcement;
solid, narrowly defined laws that do not do more damage than
they do good. And we have to have technology improvements. And
we have to have aggressive people pursuing it, and industry
leading the way to find some solutions, also. I can assure you,
from the FTC's standpoint, we will be pursuing things
aggressively. And if new laws are passed, we will----
Senator Wyden. Let me just see if I can----
Mr. Swindle.--be pursing those aggressively, also.
Senator Wyden.--I can get into one other area before the
light goes off.
Nobody is doubting the intentions and the professionalism
of the FTC, Commissioner. The problem is, a spammer sat right
where Mr. Leary is, just a couple of weeks ago, and he said,
``There are essentially no restraints on us today, and there
are not any hangings going on.'' That is what the fellow said,
sitting next to him. That is what I would like to try to
change. We are going to see if we can get you the tools. I want
a commitment for enforcement.
If I could, Mr. Chairman, just one question on the
gasoline-prices issue.
Chairman Muris, you all have been monitoring gasoline
prices for a year now. But as far as I can tell, there has not
been an action to protect the consumer. And in fact, the
Federal Trade Commission's action against Unocal was for
misrepresenting to the oil industry about its research. And I
was struck, even in your testimony, you talk about how you are
helping industry participants. Your concern there was industry,
rather than the consumers that Senator Smith and I know are
getting shellacked all up and down the West Coast.
So my question is, What is it going to take to get the
Commission to do something to help the consumer, the people on
the West Coast of the United States, who are consistently
getting the highest gasoline prices? You all found that there
were anti-competitive practices in the West Coast market. That
was a finding in your West Coast study. And you have done
something that is of value to industry. And I am certainly in
favor of stopping misrepresentation. But I would like to know
what you are going to do to help the consumer.
Mr. Muris. Well, Senator, this is the third year in a row
in which there has been a hearing. And I know you sent us a
letter, that we received yesterday, where you have been largely
critical of the Commission's practices. Most of what you have
been critical of, I had not been a part of. So after last
year's hearing, I committed to personally spend many hours on
this issue with de-novo review, if you will.
First, it is simply not true that we have not done
anything. The Commission, for example, since 1997, has acted in
over 150 energy-industry markets requiring divestitures in
merger cases. No other industry is the Commission--these are
the largest and most extensive divestitures.
Second, the Unocal case--let me talk about the complaint;
the case is in litigation, so let me just stick to the
complaint--it is about protecting consumers. Everything we do
is about protecting consumers.
Senator Wyden. At page 31----
Mr. Muris. The alleged----
Senator Wyden.--of your testimony----
Mr. Muris.--the alleged misrepresentations were to the
California regulatory authorities that harmed consumers. And
the way they harmed consumers--again, according to the
complaint--was that Unocal offered to give this technology
without charging for its intellectual property. The industry
did rely on that. They invested. And then Unocal said, ``We
want royalties.'' Well, that harmed the companies, but that
harmed the consumers, because the--and that is what we care
about. The allegation is, the consumers were harmed because the
royalties get passed through to the consumers.
Senator Wyden. Well, again, I would just refer to page 31
of the testimony. Your concern there was, there was a
misrepresentation to industry participants. I still cannot find
anything that is going to be of any value to West Coast
consumers. My door remains open to you to have an opportunity
to work with you. As you know, I presented a proposal to you,
and I thought we were ready to go forward on a bipartisan
basis, and I would still like to do that.
Mr. Muris. Well, if I----
Senator Wyden. Thank you, Mr. Chairman.
Mr. Muris. Could I respond, Mr. Chairman?
Senator Smith. Yes.
Mr. Muris. In fact, one of the things we did--I know you
are concerned about zone pricing--we asked the
Interdisciplinary Center for Experimental Economics at George
Mason University to look at this issue. It is headed by Dr.
Vernon Smith, who is last year's Nobel Laureate in Economics.
To date--and they are not quite finished--but what their work
has shown is that zone pricing lowers prices; it does not raise
prices.
Zone pricing provides--I said I would to a de novo review,
and that is--and I am telling you where the evidence has led
us--zone pricing provides suppliers with a way of preventing
dealers who have location-specific advantage--and that happens
all the time; you will have a dealer, because of zoning or some
advantage, can charge higher prices--it prevents the dealers
with a way limiting the dealers from reaping the benefits of
those advantages.
The focus on zone pricing and the proposals that you have
made, I think, would actually lead to higher prices, not lower
prices.
Senator Wyden. Mr. Chairman, my time is up. I would like to
make part of the record the study that Mr. Muris is talking
about.
[The information referred to follows:]
The final version of FTC Working Paper 263, Experimental Gasoline
Markets (February 2006), by Bart Wilson and Carey Deck, can be found at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=445721&download=yes
Senator Wyden. The proposition that zone pricing is good
for the consumer is one of the most farfetched ideas I have
heard in my time in the U.S. Congress. I look forward to----
Mr. Muris. Well, can I respond again, Mr. Chairman?
Your premise is a premise that had a lot of support in the
antitrust laws 35 or 40 years ago. And the premise was that
intra-brand competition--that is, competition between dealers--
is what the focus of the antitrust law should be.
Since then, we now focus on inter-brand competition. In
other words, instead of focusing on competition between
McDonald's franchisees, we focus on competition between
McDonald's and Burger King and the others.
And in fact, by focusing on that inter-brand competition, I
think we provide more benefits to consumers. And the position
that I think, after your letter, I now understand you to be
espousing, is a position that has been repudiated in the
antitrust laws, beginning with a Supreme Court decision, in
1977, which reversed a 1967 Supreme Court decision, and it is
now widely recognized that the focus needs to be not on
McDonald's effort to tell its--to restrict competition between
McDonald's franchisees, but on competition between the inter-
brand firms, between the gasoline refiners, between McDonald's,
Burger King, et cetera.
Senator Wyden. Mr. Chairman, my colleagues are anxious to
ask their questions.
The current law, so that we are aware of it, is that people
similarly situated have to be treated in a similar way by a
company. That is the current Supreme Court decision. That is
why zone pricing has been so pernicious.
And I want to let my colleagues ask their questions. And I
am certainly interested in hearing how, somehow, something that
has resulted in huge damage awards in our State essentially as
an anti-competitive thing, is judged by Chairman Muris as
somehow good for the consumer.
And I thank my colleagues.
Senator Smith. Senator Dorgan?
Senator Dorgan. Mr. Chairman, let me ask members of the
Commission whether you think we are losing the battle on spam.
I ask that because, as a parent struggling through parental
controls on ISPs, with two teenage children, my observation is
that even as we talk about this battle to deal with spam, we
are losing, in a very big way, and losing very rapidly. Would
you all agree that we are, at this point, losing the battle in
a significant way?
Senator, I certainly would comment on that, and I made
reference in my opening remarks--I am not sure the Senator was
here--but I said we may be seeing the killing of a killer
application for the Internet, Web-based services, right now,
because as much as we have been looking for that one thing that
is really going to make broadband take off, we still have not
found it. But the thing that is popular is E-mail and E-
commerce. People--we all shop on the Internet, and this
nature--and people are getting fed up with even doing that,
because there is so much spam.
We are not going to lose this battle, but we may lose
untold opportunities from people turning away at this point in
time and us not capitalizing, in an economic sense, on the
benefits of this technology because they have gotten fed up
with it.
So I think we have got to just redouble our efforts. It is
going to take a combination of a lot of things. I have been a
great supporter of industry, in the information-technology
industry, certainly, trying to avoid onerous laws for privacy
and these things. While I think they are very important, we
have to be careful how we do it, because the industry changed
so quickly that laws passed to day may very likely have more
adverse effect tomorrow than they will do good.
But at this point in time, I think there are things that
industry can do--and I have so much as said it, I think, in
this testimony--that they can provide to consumers and end-
users an ability to be in control--that end-user be in
control--of what comes into their computer, in the form of E-
mail and----
Senator Dorgan. Well, let's hope that is the case, but that
has not been the case so far.
Mr. Swindle. That's right.
Senator Dorgan. The fact is, this problem is growing
exponentially worse, not better.
Mr. Swindle. Yes, sir.
Senator Dorgan. We are not even holding our own. It is
getting much, much worse. It is disgusting, it is intrusive;
and the fact is, we are losing the battle.
Mr. Swindle. Yes.
Senator Dorgan. And I do not at all question the interest
of the Federal Trade Commission in dealing with this. I think
you want to deal with it. We want to deal it.
Commissioner Muris, you indicated that we are not able to
find the location of the sender, except by tracking the money.
Can you give me some indication of what kind of investigative
effort is underway at the FTC? What kind of resources, what
kind of money? Is this----
Mr. Muris. Sure. I----
Senator Dorgan. Is this a big-time investigation going on?
And if so, what is the result of it?
Mr. Muris. We have, as part of--since I have become
Chairman, we have now easily doubled our resources in privacy
in general, and spam has been a part of that. Obviously, we do
not----
Senator Dorgan. What does that mean, double your resources?
Mr. Muris. You mean how many people?
Senator Dorgan. From one to two? Or----
Mr. Muris. No, no, no. We are----
Senator Dorgan.--from 100 to 200?
Mr. Muris.--talking where we were spending 30 to 40 FTE and
several hundred thousand dollars in support to--close to or not
more than doubling the FTE, and the support has probably gone
up, you know, by an order of ten times. This is on privacy, in
general.
Now, on spam, we have--and we are trying to do what Senator
Wyden asked, in terms of--in Commissioner Swindle's eloquent
phrase, ``public hangings''--because I agree, that is what
needs to happen here. We are working with some U.S. attorneys,
because obviously the criminal sanctions are tougher than
sanctions that we can apply. Just to find someone, because you
cannot track them through the Internet, takes multiple CIDs.
And one of the frustrations of this--that is our term for a
subpoena--one of the frustrations of this is, you do not know--
in many law enforcement investigations, when you start, you
have some idea of what you are going to find. Here, you do not
know whether you are going to find, you know, a couple of
hundred guys out there, a couple of big guys. You do not know
until you start. And that is frustrating.
The economics of spam--you are absolutely right, we are
losing the battle, which is why it is going to take a
multifaceted approach. I absolutely agree----
Senator Dorgan. But my question, Mr. Commissioner is--the
resources that you are devoting to these investigations--I am
wondering--I think Senator Wyden was asking what additional
authority you need.
Mr. Muris. Uh-huh.
Senator Dorgan. And I am asking what additional authority
do you need, and what additional resources do you need? Because
you cannot wage this war against spam--and, believe me, it is a
war we are losing at this point--if you have got 15 or 20 or 25
people against billions of E-mails spammed every single day. I
mean, so the question is, What kind of resources are you
committing, and what do you need?
Mr. Muris. We cannot solve the problem by ourselves, no
matter how many resources that you give to us. We are spending
numerous FTE and much support money on this. We are working
with our partners in the States. We are working with two U.S.
attorneys on spam-specific criminal investigations.
This is going to take an approach of technology, of
consumer education. It may even take some basic changes--I hope
not, because they are complicated to do--some basic changes in
the way the Internet works.
I think we are on the same page here completely. I have
never seen a consumer-protection problem this difficult.
Senator Dorgan. All right. Two other quick items, and my
time is about up. One, with regard to the common-carrier issue.
I assume you are still in discussions with the FCC about an MOU
on that. That is, I think, a very important issue. And I wanted
to just mention one thing, and you can respond to that.
I noticed, the other day, with great fanfare, the
indictment of Martha Stewart. And that, of course, was--in the
24-hour, 7-day-a-week news cycle, was big news. I met with you,
Mr. Muris, and a couple of other Commissioners, at the time
that I was chairing hearings dealing with Enron. And I find it
fascinating and somewhat--more than somewhat--I find it really
disappointing that Mr. Kenneth Lay and Mr. Skilling, who sat at
the table you sat at, are still sitting behind their gated
communities. They ran a corporation that, in my judgment,
bilked the stockholders and employees out of a substantial
amount of money. I see no legal action with respect to some of
the biggest targets, with respect to the Enron Corporation, and
yet prosecutors move with Martha Stewart, in a very high-
profile situation. I do not know Martha Stewart. I mean, I do
not watch her programs and do not know much about her.
But I met with you, because I was curious why the FTC did
not have a piece of the action with respect to investigating a
company whose executives were telling both the employees and
the public, ``Buy this stock, because it is going to go up. Buy
this stock. It is a good value,'' at the same time they were
selling their stock, and at the same time they were running
that company into the ground and were creating a hollow shell
and, you know, a financial picture that was, in my judgment,
criminal.
And I only say this to you in the hope that we can still
find a way for the FTC to be relevant on these issues. You told
me why there has been this understanding, over decades, with
another Federal agency, but the----
Mr. Muris. Well, sure. In fact, the SEC literally,
literally, came out of the FTC. Two commissioners and a couple
of hundred employees went over and started the place. So----
Senator Dorgan. I understand that. My interest is in seeing
that you, at some point, can claim a part of the responsibility
to be involved in this, because, you know, I am not really
happy seeing the lack of results in this with the SEC.
And so, having said all that, I just wanted to put on the
record--we had a long discussion about this on, I think, two
occasions. And I think it is right in the center of the bull's-
eye, what the FTC ought to be concerned about, as well. And I
know that you--at this point, and for customary reasons, you
have deferred to the SEC, and you point to the law and some
other things that suggest that you cannot be involved.
But having said all that, would you just tell me that you
are involved with the FCC on the common-carrier issue, still
involved in discussions with an MOU on them?
Mr. Muris. Yes, Senator, we are. You have been a very good
friend of us, and you were in your chairmanship, and you
continue to be. I understand your point. It is, I think, for
the reasons that we discussed, an area on which I thought
deference was appropriate by us. I think we have been very
aggressive in the areas that we have within our call. I do
think, as Commissioner Leary was discussing, because of our
expertise dealing with advertising, we would be a natural in
the common-carrier area to deal with those issues, as well. And
that is why we are asking for your help.
Senator Dorgan. Yes, well, just one final point. On both
spam and on the issue of corporate malfeasance and so on, I
think, to the extent you can, you should walk loudly and carry
a big stick. And my colleague talked about public hangings. He
meant that in, I think----
Mr. Muris. That was Commissioner Swindle.
Senator Dorgan. Yes, we will pass it off----
Mr. Swindle. It is an old Marine Corps term.
[Laughter.]
Senator Dorgan. We all know what you meant by that. But
walking loudly and carrying a big stick is very important in
battling these kinds of actions, and I hope you will do that.
Senator Smith. I think Senator Dorgan wants you to find a
Martha Stewart of spam.
Senator Dorgan. Or an Enron executive of spam.
[Laughter.]
Senator Smith. All right, thank you.
Mr. Muris. We will look. It would not surprise me.
Senator Smith. Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. I commend Commissioner Muris and his
colleagues for having made this agency truly a law enforcement
agency, doing a good job. And this is kind of a first touch
with me in my second round in the U.S. Senate, so I am happy to
see you again.
And just a couple of questions. I noticed that, in the
statement that was offered here by you, that you referred to
protections for children, Spanish-speaking, consumers, the
military, and so forth. The elderly are a particularly
susceptible group. Do we have specific programs to protect the
elderly from deceptive practices, fraud, et cetera?
Mr. Muris. Absolutely, Senator. We work very closely, for
example, with the AARP. They have been very supportive of us.
They were extraordinarily supportive on the Do Not Call list,
for example. We have worked closely with them in trying to work
with that particular population. As you know, it is a fairly
diverse population, actually, in terms of their susceptibility
to some of the problems. But there are scams that are aimed
especially at them, and we pay special attention to that.
Senator Lautenberg. I hope so. And it is not because I am
part of that group. I take care of myself. But there are
other----
[Laughter.]
Senator Lautenberg.--they may need some help.
I want to ask you, is telemarketing a legitimate business?
Mr. Muris. If you look at the size of the telemarketing,
and contrast it with the spam business, the size of the
telemarketing business is a very legitimate business. B-to-B,
for example, business-to-business, is bigger than business-to-
consumer. The part of telemarketing where--you know, I recently
saw--I grew up in California in the 1960s; I think Senator
Wyden did, as well--I recently saw a Beach Boys tape. You know,
it said, ``Call a 1-800 number.'' I called it and ordered the
tape. That is a bigger part of telemarketing than when they
call you--you know, the kind of calls we are restricting on Do
Not Call.
Charitable fundraising is obviously a very big part of
telemarketing. Political fundraising is a big part of
telemarketing. Surveys are a big part of telemarketing. All
this, I think, is in pretty stark contrast to what we are
finding in spam, where we have got a world of fraud and
deception.
Senator Lautenberg. Yes. No, I had enough spam when I was
in the Army, and I am not looking for more.
[Laughter.]
Senator Lautenberg. I can tell you that, in the process--
and I feel as strongly as do my colleagues about eliminating
spam as much as we possibly can. But the fact is that if it is
a legitimate industry, are we doing anything that protects the
legitimate purveyors, or at least lets them operate without
being harassed by the FTC?
Mr. Muris. Well, one of the things that has happened is--
unlike telemarketing, again, we could do a Do Not Call list in
telemarketing, because we are dealing, overwhelmingly, with
legitimate businesses.
In spam, we did a--one of the things I had our staff do--we
collect spam. We are the only people in the world that like to
get spam. We get over 120,000 a day now. And we look through a
random sample of spam. And we have found, without looking hard,
two thirds of them were deceptive; and, certainly, a bigger
percentage of the others were. Most States, or a lot of States,
including California, a very big State, already requires spam
to be labeled ADV or some variation of that. Only 2 percent of
the spam follow that, and you know everybody sending spam has
to be sending it with--you know, some of it is going, at least,
to California.
We are dealing with--it is quite possible that if we
somehow cleaned this up, maybe we would have a situation where
we had a lot of legitimate businesses, and we could do some of
the regulation that we have done in telemarketing, but that is
not the situation we face now.
Senator Lautenberg. I am curious about tobacco. And are you
reviewing the claims made by tobacco companies about low-tar
cigarettes? And what are you finding, if you have been?
Mr. Muris. Well, the Commission--this is an issue--I was
involved with it at the Commission when I was head of the
Bureau of Consumer Protection in the early 1980s. This is an
area--the Commission started, with Congress' ultimate blessing
and through various lawsuits, the tar-rating system. And it is
broken.
And what the Commission, under the previous chairman, Bob
Pitofsky, asked, was to get the scientific agency--sent a
letter over to HHS to get the scientific agencies to fix it. In
fact, we think it ought to be run--or that the Commission, in
that letter--and I have endorsed this--think it ought to be
run, the tar-rating system, by those agencies. NCI issued a
report in 2001, which just affirmed what we knew, that the
system is broken, and we now hope that they will work with us
and the more science-based agencies to try to fix it. Because
there is no doubt that because of what is called
``compensation,'' consumers smoke lower-tar cigarettes harder
than they smoke higher-tar cigarettes----
Senator Lautenberg. Right.
Mr. Muris.--so that the proportional--you know, they do not
get what you might think, in terms of proportional delivery--
that there are serious problems with the system.
Senator Lautenberg. What do you think can be done to expose
the problem more obviously? Right now, there is a seduction
process to get people to the low tars. And again, it really is
not a safer product for one's health. But the advertising goes
on, and it attracts a lot of new smokers.
You know, I was very active in anti-tobacco use in my
previous term. And when we started with the ban on smoking in
airplanes, it kind of revolutionized the approach of the whole
industry and the view of tobacco, and I think it has been very
helpful.
I want to ask you this. Given the fact that the industry
continued to advertise the Joe Camel image, despite the FTC's
effort in the 1980s to stop the campaign, do you now think that
you have the kind of authority, the regulatory authority, that
is necessary to stop the current or future harmful targeted
tobacco advertising, such as Joe Camel?
Mr. Muris. Well, the Commission has authority. The
Commission actually brought a complaint against the Joe Camel
advertising. Many of those issues are now covered by the
agreement between the tobacco companies and the States, and
where the tobacco companies have agreed to do less of some of
the kind of advertising that they did before.
We certainly have the substantial ability to deal with
deceptive advertising, and we will continue to do that. There
are obviously many issues involved of a scientific nature, such
as the tar system I was just talking about, about which I think
the scientific agencies are better able to deal with than we
are.
Senator Lautenberg. Thanks, Mr. Chairman. Thank you very
much for your----
Senator Smith. Thank you, Senator Lautenberg.
I know we have a second panel. I have one brief question.
My colleagues may have additional questions, as well.
You have mentioned the Do Not Call list. I am wondering if
there is a Do Not Spam list and whether that would be
effective?
Mr. Muris. Well, for a couple of reasons, at the moment--
for at least three reasons--we have a lot of skepticism about a
Do Not Spam list. One is--that I was just talking about a
minute ago--there is so much of this that, unlike
telemarketing, we are dealing with people who are already
breaking the law. I would, personally, at the moment, be very
reluctant to have my name on it, to have my E-mail on a Do Not
Spam list, because I would be very afraid the spammers would
get it. And third, there is a finite number--there is some
technological problems we would need to explore. We do not have
a definitive view on this. But there is a finite number of
telephone numbers, relative to the combinations and
permutations you can do with E-mail addresses, and it may be
that the number would be so large it would become unmanageable.
I am not say we know that for sure, but that is a significant
difference between--those, combined, are significant
differences between Do Not Call and Do Not Spam.
Senator Smith. Commissioner Swindle, do you share that
view?
Mr. Swindle. I would go so far as to say I do not think
there is any practical way to even consider that. With all the
things that we can do----
Senator Smith. Might there be a technological invention
coming along that would make that----
Mr. Swindle. I do not hear it from people in the industry
that I talk to, and I am constantly challenging them to solve
these problems, to empower consumers. And nobody drifts over to
that approach----
Senator Smith. You have heard nothing from the high-tech
industry, in terms of a technological fix to Do Not Spam?
Mr. Swindle. I have not heard anything, and I am highly
skeptical if it could be arranged.
Senator Smith. Thank you very much.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman. Just a couple of
other online questions.
The Commission talks, in its testimony on spam, that they
seek support for the development and deployment of
technological tools to fight spam. I assume you all are not
talking about subsidies from, you know, the Congress to fight
spam. But I am curious what kind of support you want the
Congress to provide.
Mr. Swindle. In the battle against spam?
Senator Wyden. I am quoting from your testimony,
Commissioner. You are saying a spam solution should include,
and I quote, ``support for the development and deployment of
technological tools to fight spam.'' My question is, What kind
of support do you want Congress to provide?
Mr. Swindle. Well, one of the things I, personally, think
that Congress could provide is--you have many dealings with
industry. I think we need to elevate this issue, through--what
is the proper word here?--``jawboning,'' that might be an
appropriate word. I think everybody is in this together, and we
have to solve this problem for our collective good. We need to
get the best possible solution. Legislation alone is not going
to do it. Technology alone is not going to do it. We have an
enormous awareness challenge here of educating consumers and
small businesses and large businesses and everybody involved
with it, that there are just certain things we have to do.
And this goes further than just spam, Senator, as you well
know. So much--in fact, I think a large proportion, if not the
vast majority of, the viruses and Trojan horses and malicious
code that are spread, are spread through spam, and this gets
beyond just the nuisance that you and I experience, and Senator
Dorgan is terrified of because of his children. It goes into
the capacity to literally shut down our critical
infrastructure, which really gets into big bucks.
And we are talking--I heard someone quote a figure the
other day, I think, in our Spam Forum, that spam, in this
country this past year, would cost something up to the tune of
$10 billion. That is high crime, as far as I am concerned.
Senator Wyden. I just wanted to make sure that when you
were talking about congressional support, you were talking
about something along the lines that you have mentioned and not
something where somehow we were supposed to be spending money.
The only other question deals with an Internet privacy
issue. Obviously, a lot of companies have privacy policies that
are online, and a lot of the stuff is just incomprehensible. I
mean, it just goes on and on and on in legalese and
gobbledygook. You all have been concerned about it in the past.
We are concerned about self-regulation.
My question to you--maybe the Chairman wants to get in
this, as well--how do you all find out if a company is
violating its posted privacy policy? In other words, they have
got something online, and it goes on for pages and pages, so it
does not help consumers that way. And then I am curious what
you do to find out if they are even complying with what they
said they would do.
Mr. Swindle. Well, obviously, consumer complaints----
Senator Wyden. Right.
Mr. Swindle. Eli Lilly is a good example of where a privacy
policy was, I think--as it turned out, through their own
carelessness--was violated, and some very personal information
was revealed through lousy internal controls. But I think we
get most of it probably from consumer complaints. It would be
impossible for us to monitor all companies. In fact, I think
that would cause a lot of alarms to go off.
But I think, in all honesty, we have been talking privacy,
as the Senator certainly well knows, for five or 6 years now,
and the chatter, the constant debate, the constant
disagreements and eventual agreements on different things, has
made the general public aware. The general public now is saying
to firms, ``If I am going to do business with you, especially
in the online world''--and this obviously has an application to
the offline--``you had better respect my privacy and how you
deal with the information I give you.'' Once consumers start
demanding that, business will react.
And business has reacted. You know, we have less privacy
laws here than they do in Europe, and I have seen at least one
survey, and I think I saw it repeated a second time, saying
that we do a better job here, about protecting people's privacy
and posting good privacy practices, than they do in Europe.
One, I think, heartening note is, there is a group of
people in the industry right now looking at ways to make
simplified privacy notices, that I think has a lot of promise.
And it is being bandied around now. I know it is going to be a
topic of discussion down in Australia in September, when I am
down there with Privacy Commissioners, by those who are working
on it.
So I think we are making progress. I agree with you, some
of these privacy notices are absolutely insane. Some of the
ones we get in paper from our credit-card companies are even
more insane than the ones online. We have got a long way to go,
but I do not know that we get there by snapping our fingers. I
think it is going to be an evolutionary process, and back again
to that support that leaders like you can give us by saying,
``Get this done.''
Mr. Muris. Senator, if I could just add one--I agree with
what Commissioner Swindle is saying, but one point--and for
this, is something I am very grateful for you--our mutual
friends in the privacy groups, many of whom are here today. I
know you introduced me to many of them early on in my
chairmanship, and they have been very helpful in this area in
bringing these problems to us. And we have, on occasion, done
some looking on our own. And as you know, we have started,
under my chairmanship, doing something that has not been done
before, which is going after these security problems. We have
brought three cases. And I will not use Commissioner Swindle's
eloquent phrase, but those clearly have gotten the attention of
everyone in the same way that you want to get the attention of
the spammers.
Senator Wyden. The Chairman has got a long afternoon ahead
of him, so I am not going to go into this any further. I think
what concerns me, because I do very much support the self-
regulatory efforts that Commissioner Swindle is talking about.
I think we saw that, in 2000, the Commission said that we
really needed some kind of baseline with respect to online
privacy, and I would hope that the Commission would continue to
look at trying to figure out a way to do that so as to not
burden the many responsible companies that are out there, but
also to deal with the scofflaws. Because the problem is that
you can have 90 percent of the people, plus, playing by the
rules and being straight with the consumer, and the 10 percent
can inflict a tremendous amount of damage.
And the only exception I would make to what both of you
have said in this area is, we should not have to wait until you
have an Eli Lilly disaster before a consumer-protection effort
kicks in. You want to do something before you have that. And I
think you know that, and I do not think you intended it to come
out that way, Commissioner. And----
Mr. Swindle. But Senator, I can assure you we are not
waiting on another Eli Lilly. We are busy at work----
Senator Wyden. No, no.
Mr. Swindle.--day in and day out, and we will be. And thank
you for your support.
Senator Smith. Thank you, Senator Wyden.
And to our distinguished panel of Commissioners, we thank
you for your participation today, and we will dismiss you, with
our appreciation, and call up our second panel.
It consists of Mr. Mark Rotenberg, Executive Director,
Electronic Privacy Information Center; Ms. Susan Grant,
Director, National Fraud Information/Internet Fraud Watch; Ms.
Sarah Deutsch, Vice President and Associate General Counsel,
Verizon Communications; Mr. Larry Sarjeant, Vice President and
General Counsel of the U.S. Telecom Association; Mr. Scott
Cooper, Manager of Technology Policy at Hewlett Packard, and
Mr. Ari Schwartz, Associate Director, Center for Democracy and
Technology. Welcome you all.
Why don't we start at Mr. Rotenberg's side of the table,
and we will just go across, and thank you all for your patience
today as we had this important hearing and dealt with a lot of
other Senate business simultaneously.
Mr. Rotenberg.
STATEMENT OF MARC ROTENBERG, EXECUTIVE DIRECTOR,
ELECTRONIC PRIVACY INFORMATION CENTER (EPIC);
ADJUNCT PROFESSOR, GEORGETOWN UNIVERSITY LAW CENTER
Mr. Rotenberg. Thank you very much, Mr. Chairman.
My name is Marc Rotenberg, and I am Executive Director of
the Electronic Privacy Information Center. We are a public-
interest research organization here in Washington. We work in
close association with consumer and civil-liberties
organizations, both in the United States and around the world,
on emerging policy issues.
And I would like to thank the Committee for drawing
attention to the problem of cross-border fraud. This has
clearly become an important issue. As the use of the Internet
has increased, commercial opportunity has increased; but so,
too, has the opportunity for consumer fraud.
And I also wanted to recognize the work of the Federal
Trade Commission, the chairman and the other members, for their
efforts over the last several years to focus public attention
on this issue, to work with consumer organizations, and also to
work in association with the Organization for Economic
Cooperation and Development, which we think is a very important
policymaking forum, particularly as these new issues arise.
I am going to focus my comments today on a draft
legislation, the so-called Internet Consumer Protection
Enforcement Act, which I believe is being considered as Title
III of the FTC reauthorization. This draft bill, which has been
put forward by the FTC, would facilitate an important effort to
enable cooperation among consumer-protection agencies around
the world. And we certainly support that, and I want to make
clear our support for this effort. At the same time, I would
like to draw your attention to a few concerns we do have about
the draft bill, particularly the impact that it might have on
privacy protection and open Government as the U.S. works in
cooperation with foreign law enforcement agencies. And I would
also like to make a few general comments about privacy
protection, going forward, at the FTC in the context of the
reauthorization.
But I am going to focus, really, on three critical issues
related to this draft legislation and urge you and the other
Members of the Committee to consider making some changes. As I
said, we think this is an important effort that should go
forward, but some changes, we believe, will be appropriate.
Now, what this legislation attempts to do is to enable data
sharing, investigative files and information between the FTC
and sister agencies in other countries, so as to go after
people who are taking advantage of the Internet to commit fraud
and to basically hide behind other jurisdictions to make it
more difficult to locate them. So to solve this problem, you
clearly need to have some cooperative relations and some
agreements about this sharing of the investigative information.
But it is important, in doing that, that we do not sacrifice
some of the privacy safeguards and procedural rights that exist
in the United States.
For example, as a general matter, we would provide a notice
to the target of a subpoena, so that the person who is going to
effectively become the subject of the criminal investigation
might be given the opportunity to oppose, if this was
appropriate and necessary.
There are provisions in the draft bill that essentially
remove those notification requirements, and the argument is
made that this is necessary so as not to tip off the target.
But you see, that argument could be applied just as easily
within the United States, and we do not think this is a good
precedent. We think it will also send a bad message to law
enforcement agencies in other countries about how the United
States pursues criminal investigations.
I wanted to draw your attention also to some proposed
changes in the Freedom of Information Act, which, for us, is a
very important law. It enables public oversight of the
activities of Government, allows us to assess how well
Government agencies are doing their job. The FTC is proposing,
in this draft bill, to create new exemptions that would allow
them to withhold information that would otherwise, because it
is public-record information, be available to the public if
they choose to go after it.
Our view is that these exemptions are not necessary,
because the FTC currently has authorities, under the current
exemptions, to withhold information that might be, for example,
used in a current ongoing investigation--that is the (7)(a)
exemption--or that might be obtained under a confidential
agreement from a foreign law enforcement agency. That is the
(7)(d) exemption.
And I should mention that my group, EPIC, has particular
experience with how the FTC uses these exemptions under the
Freedom of Information Act, because we have requested
information from the agency in our own efforts to assess how
well they were doing their job. And they withheld some of the
documents that we sought, citing just these same exemptions, or
at least citing the (7)(a) exemption.
So our view is that they know they have these exemptions.
They know how to use these exemptions. We may disagree about
whether or not they are properly applied, but we do not see a
basis for creating new exemptions.
The third point I wanted to speak to concerns access to the
NCIC, which is the criminal justice records system. We can see
why this may be necessary as the FTC becomes more deeply
involved in law enforcement matters, but because there was a
recent decision to remove the data-quality obligation to ensure
that the information in that database is accurate, we have some
concerns now about opening it up to further use by the FTC, and
even under provision in the draft bill that would allow the FTC
to provide access to foreign law enforcement agencies, to this
criminal justice system maintained in the United States.
Finally, Mr. Chairman, I just wanted to say, briefly, that
we would like to see some new reporting requirements, so, as
the FTC gets this new authority to investigate, you, the
Committee Members, and the public have the ability to assess
how well they are doing their job. And we would like to
continue to urge the agency to focus also on privacy issues in
the United States, because privacy protection continues to be a
critical concern for American consumers.
So I would like to thank you very much for the opportunity
to testify. I would be pleased to answer your questions.
[The prepared statement of Mr. Rotenberg follows:]
Prepared Statement of Marc Rotenberg, Executive Director, Electronic
Privacy Information Center (EPIC); Adjunct Professor, Georgetown
University Law Center
Mr. Chairman, members of the Committee, thank you for the
opportunity to testify today regarding consumer fraud and the
reauthorization for the Federal Trade Commission. My name is Marc
Rotenberg and I am the Executive Director of the Electronic Privacy
Information Center (EPIC). EPIC works with a wide range of consumer and
civil liberties organizations both in the United States and around the
world.
I would like to begin by thanking the Committee for focusing on the
issue of cross-border fraud. One of the consequences of the rapid
growth of the Internet has been the dramatic expansion of both
commercial opportunity online and of commercial fraud. It is clearly in
the interests of businesses and consumers to ensure a stable, growing,
and fair online marketplace. Fraudulent and deceptive business
practices that would otherwise be prosecuted in the United States
should not be beyond the reach of United States law enforcement simply
because an operator sets up shop outside the country. In similar
fashion, government agencies seeking to protect the interests of
consumers in their jurisdictions should expect the cooperation of the
Federal Trade Commission when cross-border problems emerge.
I would also like to thank the FTC Chairman and the other members
of the Commission for their efforts to address this new challenge and
for the workshop in February that provided a wide range of important
perspectives on this topic. Chairman Muris outlined the plan to pursue
cross-border fraud in November of last year. He said that the FTC would
advocate the adoption of a recommendation of the Organization for
Economic Cooperation and Development (OECD) on cross-border fraud and
would seek appropriate legislation. Commissioner Thompson, working
through the International Marketing Supervision Network and in
cooperation with the FTC's international counterparts, has helped
develop a common understanding of what constitutes core consumer
protection in the international realm.
The February workshop, organized by the FTC, set out the views of
consumer and privacy organizations, businesses and foreign agency
officials. Chairman Muris noted that cross-border complaints by U.S.
consumers rose from 13,905 in 2001 to 24,313 in 2002. Canadian
consumers also report a near doubling of complaints with online
commerce between 2001 and 2002. The Consumer Sentinel, the FTC's
central complaint database, records over 72 million dollars lost by
U.S. consumers to cross-border fraud in 2002, nearly seventeen percent
of all money lost to fraud. According to the FTC, 68 percent of all
fraudulent foreign money offers come from companies located in Africa;
41 percent of fraudulent advance-fee loans come from Canadian
companies, and 61 percent of fraudulent prize and sweepstakes offers
are from companies located in Canada.
There was consensus at the February FTC workshop on the need to
tackle the problem of cross-border fraud and to enable better
cooperation between the FTC and its counterparts. The FTC proposal
grows out of the work of the February meeting, the OECD, and the
continued efforts to promote international cooperation.
EPIC has a particular interest in the protection of consumers in
the global economy. We have successfully pursued privacy complaints on
behalf of consumers under Section 5 of the FTC Act that have
international implications. For example, our earlier work on the
privacy implications of Microsoft Passport, the online authentication
scheme, was considered favorably by both the Federal Trade Commission
and the European Commission. EPIC also work closely with consumer and
civil liberties organizations on the development of international
policy. In particular, the Trans Atlantic Consumer Dialogue (TACD), a
coalition of sixty consumer organizations in the United States and
Europe, has urged officials on both sides of the Atlantic to address
this challenge. Similar views have been expressed by consumer
organizations in other parts of the world. We have also worked with the
OECD for more than a decade, in areas such as privacy protection,
consumer protection, cryptography, and electronic commerce, to promote
the development of policies that promote economic growth and safeguard
democratic values. We are pleased that these efforts have come together
in the current proposal before the Committee to combat cross-border
fraud.
In the statement today, I will recommend passage of legislation
that will enable the Federal Trade Commission to work more closely with
consumer protection agencies in other countries to safeguard the
interests of consumers and users of new online services. Nevertheless,
in creating these new enforcement authorities, there is a clear need to
safeguard important legal safeguards that are central to the U.S. form
of government. In particular, certain provisions of the draft
International Consumer Protection Enforcement Act, put forward by the
FTC, should be revised to safeguard privacy, promote government
accountability, and enable the development of reporting standards that
will allow this Committee and the public to assess how well the FTC is
doing its job and whether further steps may eventually be necessary.
Without these changes, the legislation opens the door to abuse in that
it creates new enforcement authority without corresponding safeguards.
Civil liberties groups in both the United States and Europe have
already expressed strong opposition to a proposal of this type that was
put forward by the Council of Europe to combat cyber crime.
It is particularly important to understand that when the United
States provides information about consumers and business in the United
States to foreign law enforcement agencies it opens the door to
prosecution that may not satisfy the substantive requirements or
safeguard the procedural rights that would be available in this
country.
Specific Provisions In The FTC Proposal
Information Disclosure to Foreign Governments (Sections 3 and 4)
We recognize that the cross border enforcement of consumer fraud
will require cooperation between the FTC and sister agencies in other
jurisdictions. To some extent, the sharing of information between
agencies will be necessary to pursue violators and enforce judgments.
At the same time, it is critical to ensure that only the necessary
information is disclosed and that appropriate safeguards are
established when such information is disclosed.
In our view, the FTC proposal creates too few restrictions on the
disclosure of information concerning individuals and entities within
the United States. One particular provision is simply offensive. A
proposed amendment to Section 6 of the FTC Act that enables the FTC to
assist foreign law enforcement agencies states that ``such assistance
may be provided without regard to whether the conduct identified in the
request would also constitute a violation of the laws of the United
States.''
This provision further should be removed. We further recommend that
the disclosure be only to ``appropriate'' foreign agencies, not ``any''
foreign agency as is currently specified in the bill, and we urge the
FTC to post the names and contact information for any foreign agency
that it considers appropriate to receive information. Not only should
the FTC share information with appropriate agencies, it should share
information only at appropriate times and in connection with a specific
investigation. The Custom Service, for example, limits the exchange of
information and documents with foreign customs and law enforcement to
those instances where the Commissioner ``reasonably believes the
exchange of information is necessary. . .'' 19 C.F.R. sect. 103.33. The
FTC should not permit disclosures to any foreign government agency
where the public and concerned parties cannot readily identify the
agency.
We further recommend the recognition of a dual criminality
provision to ensure that the United States assists in the prosecution
of individuals and entities within the United States only in those
circumstances where the crime charged would also be a crime under
United States law. Absent such a provision, it is conceivable that a
bookseller or music publisher in the United States could be subject to
prosecution under foreign law where such government does not provide
for strong protections for freedom of expression. This problem could
arise in particular with publications that criticize state governments.
Amendments to U.S. Privacy Statues (Sections 6 and 7)
The FTC legislative proposal would amend two critical U.S. privacy
statutes to reduce the likelihood that the target of an investigation
would be notified of the investigation. In particular, the
International Consumer Protection Enforcement Act would amend the
Electronic Communications Privacy Act, and the Right to Financial
Privacy Act. But the arguments for denying notice to the target of an
investigation could too easily be made with respect to targets in the
United States. The proposed changes here not only set a bad precedent
but would also send a bad message to consumer protection agencies in
other countries about the conduct of investigative actions by
democratic governments.
We recommend that the provisions that reduce procedural safeguards
be removed.
Disclosure of Financial Information (Section 8)
This provision would give the FTC authority to access financial
bank reports and other financial data under the guise of fighting
against cross-border consumer fraud and deception. However, there are
no reporting or notification requirements that record the exchange of
information; there are no audit provisions that oversee the exchange of
the information; there is no limit on who within the authorized
agencies can exchange information, and there is no limit on what the
content of the reports, records or other information shall consist off.
These provisions make it too easy for the listed agencies to share
financial information. The provision would give the FTC discretion to
share financial information without any oversight to make sure it is
shared appropriately. This discretion leaves the exchange of
information open to abuse. Moreover, there is no limit on what sort of
information can be exchanged. There is no provision that states that
records or information cannot consist of information identifiable to a
particular customer. In this way, the authorized agencies could examine
records about customers of financial institutions, without notification
requirements, under the guise of examining records regarding the
financial condition of the institution.
Although the objective of the proposed amendment, to ease the
sharing of information amongst agencies involved in protecting
consumers against fraud, is laudable, the amendment should include
provisions that ensure that personal financial information is shared in
an accountable and transparent manner. Acknowledging the FTC's desire
to be able to share information appropriate to real-time law
enforcement needs, the following additions to the amendment may be
appropriate:
a provision that information exchanged under 1112(e) cannot
contain information identifiable to any one individual without
triggering a reporting requirement.
a provision that a designated official at the authorized
agencies have a log of all personal information that is
exchanged under 1112(e).
a provision that such a log is available to the public under
FOIA, unless there is a compelling law enforcement reason to
exempt it.
Adding such provisions would allow an appropriate amount of
accountability into the information exchange process, while still
allowing the FTC and the other listed agencies to have the flexible use
of information for their law enforcement needs.
Freedom of Information Act Exemptions (Sections 5 and 7)
The FTC proposes to exempt itself from certain open record
obligations under the Freedom of Information Act. We believe this
change is unnecessary and, if enacted, will reduce government
accountability.
The current FOIA exemptions for ongoing criminal investigation,
Sec. 552(b)(7)(A), and for the protection of confidential sources,
(b)(7)(D), would likely prevent the disclosure of information that the
FTC seeks to protect without any further amendment. Moreover, three
other exemptions may also apply to information collected by the
Commission; the exemption for business information under
Sec. 552(b)(4); for personal privacy under Sec. 552(b)(6); and for
records of financial institutions under Sec. 552(b)(8).
EPIC has already pursued an extensive FOIA request with the FTC
involving the investigation of privacy complaints under Section 5 of
the FTC Act. In that case, the FTC has demonstrated its willingness to
apply the current statutory exemptions. Some of the information we
sought concerning current matters was withheld. The FTC cited the
(b)(7)(A) exemption.
Since the existing exemptions already provide adequate protection
for the Commission, a new exemption is not necessary and only adds
confusion to a long-standing statutory scheme that has been subject to
judicial interpretation for almost thirty years. Therefore, we
recommend that provisions to limit the application of the Freedom of
Information Act be stricken from the FTC proposal, or at the least that
a thorough analysis be done to determine whether the current exemptions
combined with current case law are sufficient before any new exemption
is created.
Access to Criminal Justice Records (Section 12)
Section 12 of the proposed Act would grant the FTC access to the
National Crime Information Center, the Nation's most extensive
computerized criminal history database, following an agreement with the
Attorney General to (A) establish the scope and conditions of the FTC's
access to the database, and (B) establish the conditions for the use of
the data. Section 12 would further permit the FTC to disclose NCIC data
to foreign law enforcement agencies pursuant to procedures that require
at least prior certification that such information will be maintained
in confidence and will be used only for official law enforcement
purposes.
While we recognize the interest that the FTC may have in accessing
the NCIC record systems, there are three problems with this proposal.
First, it was never anticipated that the FTC would have access to this
record system and it was also never anticipated that the FTC could
allow foreign law enforcement agencies access to this record system.
This is precisely the type of mission creep that results from the
creation of criminal justice databases lacking adequate statutory
constraints that civil liberties groups on both the right and the left
have opposed.
Second, this proposal to expand access to the NCIC follows just a
few months after a decision by the FBI to exempt itself from the data
quality obligations that would otherwise apply to this system of
records under the 1974 Privacy Act. More than 90 organizations and
5,000 individuals across the United States expressed their opposition
to this decision by the Bureau. The lack of data quality obligations
for the NCIC increases the likelihood that individuals will be wrongly
stopped and detained, perhaps even placed in dangerous law enforcement
interdictions, because of errors in the most important criminal history
record system in the United States that the Department of Justice no
longer feels obliged to keep accurate. The further expansion of NCIC
use, while this issue remains unresolved, should be postponed until the
data accuracy obligation is restored.
Finally, it is important to note, particularly in the context of
transborder data flows that the NCIC record system does not meet all of
the international standards for privacy protection. Most significantly,
the proposal does not provide for access by the record subject to
inspect and correct records concerning the individual. Further
amendments may be necessary to enable first party access to NCIC
records.
We recommend against providing the FTC with access to the NCIC
until the data quality obligation is restored and some right of first
party access to the record system is established. In the alternative,
we would recommend revisions to the proposed bill that would add a new
provision that would require the FTC to ``establish with a high degree
of confidence that the data obtained by the FTC from the NCIC is
accurate.'' We further recommend that section 12 more accurately
specify the purposes for which the FTC may use NCIC data. In
particular, the FTC should be required to show that evidence gathered
from the NCIC would likely reveal that the data subject has previously
committed an act that would fall within the FTC's jurisdiction or that
the data subject may have moved assets across national borders to avoid
prosecution.
General Recommendations
Reporting
We recommend the creation of new reporting requirements that would
focus specifically on the FTC's activities undertaken pursuant to this
new legislative authority. There should be an annual report provided to
the Congress and made available to the public at the website of the
FTC. This report should include such information as the number of
complaints received during the past year, the number of investigations
pursued, and the outcome of these investigations including whether any
damages were assessed and whether any relief was provided to consumers
as a result of the investigation. The report should also indicate which
foreign agencies the FTC cooperated with and the nature of the
information provided and the information received.
The FTC has already begun the process of making some of this
information available with the Consumer Sentinel website. Canada,
Australia and the United States, have also established eConsumer
project that helps provide similar information on the international
front. While both projects are important, we believe that formalizing
reporting requirements for investigations as well as complains will
make it easier to assess how well the FTC and other agencies are
responding to the challenges of cross-border fraud.
We would also urge the FTC to consider the creation of an advisory
council for the major multilateral law enforcement groups, such as the
International Consumer Protection and Enforcement Network, that would
allow the participation for a U.S. consumer representative and a U.S.
business representative. Participation by representatives of the
consumer and business community will help ensure oversight and reduce
the risk of unaccountable activities.
International Privacy Framework
The OECD proposal for protecting consumers in the global economy is
consistent with other efforts of the OECD to promote economic growth
while safeguarding democratic values. In this spirit, we would like to
underscore the need to ensure that new efforts undertaken by the United
States in cooperation with other governments should be consistent also
with the OECD recommendation on privacy protection. The FTC has already
worked to ensure that principles similar to those contained in the OECD
Privacy Guidelines were established for transborder data flows between
the United States and Europe in the context of the Safe Harbor
proposal. That arrangement allows U.S. firms to enter European markets
and process data on European consumers on the condition that they
follow and enforce strong privacy standards.
We urge the adoption of a similar framework to regulate the
transfer and use of personal information that will occur between
national governments as they pursue joint investigations and
prosecutions. Governments, no less than the private sector, should be
held to high standards in their use of personal information,
particularly because the misuse of such information may subject
individuals to unfair and unfounded prosecutions.
Continued Focus in Privacy Issues in the United States
Even as the Federal Trade Commission pursues its efforts to address
the challenge of crossborder fraud, it is important not to lose sight
of the important work that must still be done in the United States to
safeguard the interests of consumers. We commend the Commission for its
leadership in the creation of a national telemarketing ``Do-Not-Call''
list, and for its victories for consumer privacy in the two Trans Union
cases upholding protections in the Fair Credit Reporting Act and the
Gramm-Leach-Bliley Act.
However, as the top consumer watchdog in the government, the
Commission must continue to set a high standard to protect individuals'
privacy. The Commission only recognizes four Fair Information Practices
(notice, choice, access, security) to evaluate individuals' privacy
rights. This falls short of the standard set by the Privacy Act of
1974, which recognizes additional rights including use limitations,
data destruction, and rights of correction. Internationally, consumer
protection watchdogs have adopted eight Fair Information Practices
(collection limitation, data quality, purpose specification, use
limitations, security, openness, individual participation, and
accountability) in order to establish rights and responsibilities in
the use of individuals' data.
We believe the Commission should endorse best practices for
Internet mailing lists and support the opt-in approach. This will have
a significant impact in the efforts to reduce spam, or unsolicited
commercial e-mail. We also note that the Commission has failed to
endorse strong consumer safeguards for the Fair Credit Reporting Act,
which is a critical consumer statute now under review by the Congress.
Strong leadership on the FCRA is important for the mission of the FTC.
Furthermore, the Commission should begin to consider new
technologies that have significant privacy implications for consumers
in the marketplace. For instance, RFID, or ``Radio Frequency
Identification'' chips may enable tracking of individuals in the
physical world the same way that cookies do on the Internet. This week
Microsoft announced that it plans to support RFID applications in
future versions of its software. It would be appropriate for the FTC to
begin the process of exploring how these new tracking techniques may
affect consumer confidence and whether new safeguards may be required.
Conclusion
There is a clear need to enable the Federal Trade Commission to
work in cooperation with consumer protection agencies in other
countries to investigate and prosecute cross-border fraud and deceptive
marketing practices. New legislation will be necessary to accomplish
the goal. Nevertheless, the bill should be drafted in such a way so as
to safeguard important American values, including procedural fairness,
privacy protection, and open government. These principles of good
government will assist consumer protection agencies around the world
combat cyber fraud, and will help strengthen democratic institutions.
References
Statement of Cedric Laurant, EPIC Policy Counsel, on ``Potential
Partnerships among Consumer Protection Enforcement Agencies and ISPs
and Web Hosting Companies'' for the Public Workshop on Public/Private
Partnerships to Combat Cross-Border Fraud, before the Federal Trade
Commission (February 19, 2003)
EPIC, ``Joint Letter and Online Petition: Require Accuracy for
Nation's Largest Criminal Justice Database''
Federal Trade Commission, Consumer Sentinel, Cross-Border Fraud
Trends, January--December 2002, (February 19, 2003)
Federal Trade Commission, Budget Summary, Fiscal Year 2004,
Congressional Justification
Federal Trade Commission, Budget Summary, Fiscal Year 2003,
Congressional Justification
Federal Trade Commission, Consumer Sentinel website
Federal Trade Commission, Cross Border Fraud website
Federal Trade Commission, ``FTC Chairman Muris Presents the FTC's
New Five-Point Plan for Attacking Cross-Border Fraud and Highlights
Links Between Competition and Consumer Protection'' (October 31, 2002)
In the Matter of Microsoft Corporation, No. 012-3240, before the
Federal Trade Commission
International Consumer Protection Enforcement Act of 2003, draft,
May 21, 2003
Organization for Economic Cooperation and Development (OECD),
Directorate for Science, Technology and Industry, Committee on Consumer
Policy, ``Cross-Border Co-operation in Combating Cross-Border Fraud:
The US/Canadian Experience.'' (February 6, 2001)
Organization for Economic Cooperation and Development (OECD),
Recommendation Concerning Guidelines Governing the Protection of
Privacy and Transborder Flows of Personal Data (``OECD Privacy
Guidelines''), reprinted in Marc Rotenberg, ed., Privacy Law
Sourcebook: United States Law, International and Recent Developments
324-352 (EPIC 2002)
Transatlantic Consumer Dialogue, ``Resolution on Protecting
Consumers from Fraud and Serious Deception Across Borders,'' Doc No.
Internet-28-02 (November 2002)
About Epic
The Electronic Privacy Information Center (EPIC) is a public
interest research center in Washington, D.C. It was established in 1994
to focus public attention on emerging civil liberties issues and to
protect privacy, the First Amendment, and to promote the Public Voice
in decisions concerning the future of the Internet. More information is
available online at www.epic.org.
Senator Smith. Thank you, Mr. Rotenberg.
Ms. Grant.
STATEMENT OF SUSAN GRANT, DIRECTOR,
NATIONAL FRAUD INFORMATION/INTERNET FRAUD WATCH,
NATIONAL CONSUMERS LEAGUE
Ms. Grant. Thank you for inviting the National Consumers
League, America's pioneer consumer organization, to testify
today. I am going to focus specifically about cross-border
fraud, but I would be happy to answer questions about spam or
privacy, in general.
We know about fraud, because we hear about it directly
every day. Since 1992, we have operated a telemarketing fraud
hotline for consumers to get advice and report suspected fraud.
And in 1996, we expanded that service to cover Internet fraud.
We do not just hear from consumers. Businesses are also
targeted for a variety of scams.
The information that we get from victims of telemarketing
and Internet fraud is transmitted quickly and automatically to
law enforcement agencies in the U.S. and Canada. We also upload
that information, on a weekly basis, to the FTC's Consumer
Sentinel Database.
As the FTC pointed out earlier, the marketplace has become
more global, and so has telemarketing and Internet fraud. In
1995, only about 5 percent of the telemarketing-fraud
complaints we received involved companies in other countries.
In 2002, that was nearly 17 percent. In 1997, foreign companies
represented about 6 percent of the Internet-fraud complaints
that we received. In 2002, it was nearly 15 percent. And I
think it is fair to say that these numbers understate the
problem, since, in many instances, consumers may think that
companies are in the U.S., when, in fact, through call
forwarding, mail forwarding, and other ways of fooling them,
the con artists are really in other countries. Internet and E-
mail can also mask the true identity and location of con
artists.
In addition, the growing use of electronic-payment systems
makes it easy for crooks to pick consumers' pockets across the
border. As a result, financial institutions and others also
suffer financial harm from these scams.
One example of a typical fraud complaint that we receive,
of a cross-border nature, a New York man received a
telemarketing call offering him a credit card with $1,000
credit limit if he paid an up-front fee of $198. And these
scams are often targeted at people who are having financial
problems and difficulty getting credit cards. He agreed. He
gave his bank account number for the fee to be debited. He did
not get a credit card. These people never do. He got a list of
card insurers who he could contact directly, with whom this
company, I am sure, has no relation. And this is information
that a consumer could easily get by going on the Internet or
going to the library. And it appears that the company is based
in Barbados.
Victims of fraud expect Governments to help them and stop
bad actors from robbing others. They do not understand that
there will be any impediment to helping them, simply because a
company turns out to be located across the border.
And we all want people to be more confident when they shop
by telephone and online. We want them to be able to take
advantage of this global marketplace to buy goods or services
from abroad, and also consumers in other countries to buy goods
and services from legitimate business here in the U.S. And
consumer organizations everywhere have these same concerns.
Last year, the Transatlantic Consumer Dialogue, a coalition
of U.S. and European Union member-country consumer
organizations, adopted a resolution supporting the OECD
guidelines to improve enforcement against cross-border fraud
and deception. The U.S. is leading that effort, and now it
wants to put words into action by asking Congress to remove
unnecessary barriers to sharing information about fraud and
deception with agencies in other countries, providing mutual
assistance to bring legal actions against cross-border fraud,
and get restitution for victims, make it easier to get
information about cross-border fraud and deception from the
private sector, who often hears about it first, and give the
FTC more flexibility and resources to pursue con artists
wherever they are. And we are confident that this can be done
with appropriate safeguards for privacy and due process.
Thank you.
[The prepared statement of Ms. Grant follows:]
Prepared Statement of Susan Grant, Director, National Fraud Information
Center/Internet Fraud Watch, National Consumers League
Thank you very much for inviting me to comment on this important
legislation. The National Consumers League (NCL) is a nonprofit
organization that was founded in 1899 to protect and advance the
economic and social interests of consumers and workers. In the early
days of NCL's history, there was no telemarketing or Internet fraud,
but there were unscrupulous people promoting bogus investment
opportunities, miracle cures, pyramid schemes, phony games of chance,
and other types of fraud through newspaper ads, the mail, door-to-door,
and other marketing methods of the day.
Since then, new marketing channels such as telemarketing and the
Internet have been developed. Not surprisingly, con artists have seized
on them to widen their reach. Because these scam operators are often in
one location and their victims are in others, it is very confusing for
consumers to know whom to contact to ask questions or seek help. That's
why in 1992 NCL created the first nationwide toll-free hotline to offer
consumers advice about telemarketing solicitations and notify law
enforcement agencies quickly about fraudulent telemarketers. In 1996
the Internet fraud component was added to our system.
Consumers can call 800-876-7060 to speak to a live counselor or go
to www.fraud.org. The website has tips about the most common types of
telemarketing and Internet scams, a special section on fraud against
seniors, fraud statistics, and a complaint form. Consumers can report
suspected telemarketing and Internet fraud by telephone or online. That
information is automatically transmitted electronically to the
appropriate agencies among more than 200 local, state and Federal
agencies in our system from the United States and Canada, alerting them
to scam operators that may merit investigation and victims that need
their help. It is also uploaded on a weekly basis to the Federal Trade
Commission's Consumer Sentinel database for use by law enforcement
agencies.
As the marketplace has become more global, so has telemarketing and
Internet fraud. In 1995, only about 5 percent of the telemarketing
fraud complaints we received concerned companies in other countries; by
2002 foreign companies accounted for nearly 17 percent of our
telemarketing fraud complaints. In 1997, the first full year of our
Internet Fraud Watch program, about 6 percent of complaints involved
foreign companies; by 2002 it was nearly 15 percent. These statistics
probably understate the problem, since in many cases consumers may not
be sure where the fraudulent operators are located. Call forwarding,
mail drops, and the growing use of electronic payment systems that
negate the need to send checks or money orders to vendors make knowing
where they actually are very difficult. The Internet and e-mail can
also mask the sellers' true identities and locations.
Consumers lose millions of dollars to cross-border scams every
year. Businesses are negatively impacted as well. Many telemarketing
and Internet frauds are targeted specifically at business victims.
Financial institutions and others also suffer damages as a result of
disputed credit card charges or debits for fraudulent transactions,
nonpayment for services provided to fraudulent vendors, and general
loss of consumer confidence.
Here is an example of a typical cross-border complaint from our
hotline. Michael M. from Brooklyn, New York received a telemarketing
call offering him a credit card with a $1,000 line of credit for an
upfront fee of $198. We don't know his particular financial situation,
but these types of scams are often targeted to people who are having
credit problems. He agreed and gave his bank account number for the fee
to be debited. He didn't get a credit card. What he received was four
sheets of paper listing banks that offer credit cards--information that
is available free from the local library or on the Internet. The
company appears to be in Barbados.
We don't know if this man realized where the company was located,
but even when consumers are aware that they are dealing with vendors in
other countries, that fact may not discourage them from making
purchases--nor should it. We want consumers to feel confident about
taking advantage of the global marketplace, whether they are U.S.
consumers interested in goods or services from abroad, or consumers in
other countries who want to do business with companies here.
We know from our direct contact with fraud victims that most don't
understand that recourse will probably be more difficult, perhaps
impossible, if the culprits are in other countries. They want and
expect their government to help them. They don't think it's fair that
fraudulent operators may be able to get away with it simply because
they're across the border. It's not only U.S. consumers who want to
shop with confidence and expect their governments to stop the bad
actors in the marketplace--consumers in other countries have the same
expectations.
Last year, the Trans Atlantic Consumer Dialogue, a coalition of
consumer organizations from the U.S. and European Union countries,
adopted a resolution supporting the efforts by the Organization for
Economic Cooperation and Development to craft guidelines for improving
enforcement against cross-border fraud and deception. That document can
be found at http://www.tacd.org/cgi-bin/db.cgi?page=
view&config=admin/docs.cfg&id=179.
The U.S. and the Federal Trade Commission in particular, has led
the work on these forward-looking guidelines. Now the U.S. is leading
again by putting words into action, asking Congress to: remove
unnecessary barriers to sharing information about fraud and deception
with law enforcement agencies in other countries; provide for
assistance in bringing cross-border legal actions; make it easier to
obtain information about suspected con artists from the private sector;
and give the Federal Trade Commission more flexibility and resources to
pursue con artists wherever they are.
We believe that these changes are absolutely necessary to protect
consumers and legitimate businesses in the marketplace of the 21rst
century. We are confident that Congress and the Federal Trade
Commission can agree on legislation that will give law enforcement
agencies the tools they need to combat cross-border fraud and deception
more effectively, with the appropriate safeguards for privacy and due
process.
Thank you very much for giving us the opportunity to share our
views on this matter. We will be happy to provide you with any
additional information you may need.
Senator Smith. Thank you.
Ms. Deutsch.
STATEMENT OF SARAH DEUTSCH, VICE PRESIDENT AND ASSOCIATE
GENERAL COUNSEL, VERIZON COMMUNICATIONS
Ms. Deutsch. Thank you, Mr. Chairman and Members of the
Committee, for the opportunity to testify on the issue of
cross-border fraud.
The issue of cross-border fraud is a serious and growing
problem. We were pleased to participate in the FTC's Public-
Private Partnership Workshop to combat cross-border fraud, this
past February. And Verizon has had considerable experience
working with law enforcement to fight Internet fraud and to
protect our customers and the public.
As an Internet service provider, we have most commonly
encountered credit-card fraud schemes, a host of Nigerian fraud
scams, and, of course, a huge amount of spam, including E-mail
that fraudulently contains spoof domain names, including domain
names originating falsely from Verizon.
We have carefully studied the proposed draft legislation to
expand the FTC's authority in assisting foreign law-enforcement
agencies. We also support that effort and offer, today, a few
suggestions on how to strengthen such legislation.
Verizon believes that one critical missing prerequisite in
the proposed legislation is a concept called ``dual
illegality.'' Before the FTC conducts investigations or assists
in enforcement for any foreign counterpart, the underlying
activity must, at a minimum, be considered illegal in both the
foreign country requesting assistance and in the United States.
For example, in many European countries, advertising laws
prohibit activities such as comparative advertising, money-back
guarantees, such as that offered by the Land's End catalog,
sales promotions, giveaways, or advertising particular
professions, such as medicine or law. The global reach of
content on the Internet means that legal activity originating
from one country can result in potential liability in another.
In Australia, Dow Jones was successfully sued for
defamation, because the Website it hosted in New Jersey
contained an article that an Australian citizen found
offensive. Yahoo! was found liable in France for auctioning
items, on its U.S. auctionsite, that were considered illegal in
France, yet protected here at home under the First Amendment.
So common sense dictates that U.S. taxpayer dollars should
not be spent investigating legal activities that could later be
used by foreign governments to harm U.S. companies.
The FTC should also validate the authenticity of a request
coming from a foreign government to ensure that it originates
from a legitimate foreign counterpart to the FTC. Section (2)
of the proposed bill broadly defines a foreign law enforcement
agency to include multinational organizations and even private
organizations that can be vested with authority by undefined
political subdivisions of a foreign state. In order to prevent
the resources of the FTC and other parties from being diverted
or diluted, we believe that a foreign law enforcement agency
should be narrowly defined as ``the foreign legal equivalent of
the FTC.''
Verizon looks forward to cooperating with the FTC, in its
role as a civil-enforcement agency, in investigations under the
Electronic Communications Privacy Act, in the same manner that
we assist criminal law enforcement agencies today. We are
concerned that Section (6)(d), of the proposed legislation
would allow the FTC to obtain, using its own administrative
subpoena, the text of E-mail messages without prior notice to
the subscriber, as currently required under Section 2703 of
ECPA. This provision is inconsistent with other provisions in
ECPA that prohibit any governmental agency to obtain this same
information without notice to the customer in the absence of a
judicially ordered search warrant.
As you may know, Verizon is currently defending the due
process and privacy rights of our Internet subscribers in a
highly publicized copyright lawsuit that also involves the
issue of when a judge must issue a subpoena. The RIAA sued
Verizon, arguing that any private party claiming to be a
copyright owner should be entitled to obtain an Internet users
identity for activity not occurring on our system or network by
filing a one- page form with the clerk of a court, rather than
first filing a lawsuit and obtaining a subpoena from a judge or
magistrate. And although Verizon does not support piracy in any
way, we believe that this overly broad process will result in
instances of consumer fraud, way beyond piracy issues, and
ultimately wind up on the FTC's doorstep.
So we are looking to Congress to offer a legislative fix to
the RIAA case, and hope that the FTC inconsistency will be
worked out so they operate under the same rules as other law
enforcement agencies.
Finally, third parties who cooperate in good faith with the
FTC in its cross-border fraud investigations should enjoy a
broad exemption against viability in the statute and should be
entitled to reimbursement of the provider's cost. Providers are
currently reimbursed for their costs under ECPA and other
statutes, and should be similarly compensated under this bill.
Thank you for the opportunity to testify, and Verizon looks
forward to working with the Committee and the FTC on these
important issues.
[The prepared statement of Ms. Deutsch follows:]
Prepared Statement of Sarah Deutsch, Vice President and Associate
General Counsel, Verizon Communications
Thank you Mr. Chairman and members of the Committee for the
opportunity to testify on the issue of cross-border fraud contained in
the proposed Federal Trade Commission reauthorization legislation.
Verizon Communications is one of the world's leading providers of
wireline and wireless communications in the United States. Verizon also
has a significant presence in over 30 countries in the Americas,
Europe, Asia and the Pacific.
The issue of cross-border fraud is a serious and growing problem.
Verizon was pleased to participate this past February in the FTC's
Public/Private Partnership Workshop to combat cross-border fraud.
Verizon has had considerable experience working with law enforcement to
fight Internet fraud and to protect our customers and the public.
Internet fraud harms innocent consumers and communications providers.
If not addressed, Internet fraud ultimately undermines consumers'
confidence in the Internet as secure medium through which to
communicate and do business. As an Internet service provider, we have
most commonly encountered credit card fraud schemes, a host of Nigerian
fraud scams, and of course, a huge amount of unsolicited commercial
email or spam, including email that fraudulently contains ``spoofed''
domain names falsely addressed as originating from Verizon or another
service provider.
We have carefully studied the proposed legislation to expand the
FTC's authority in assisting foreign law enforcement agencies in
investigating or enforcing fraudulent, deceptive or unfair commercial
practices. We offer today a few suggestions on how to strengthen such
legislation. As an initial matter, however, we believe this particular
legislation would be more effective if it was introduced together with
an international agreement that binds foreign governments to provide
mutually corresponding assistance to the United States. A cross-border
fraud treaty, for example, could better clarify all signatories'
obligations to provide mutual legal assistance, create ground rules on
what is considered a ``fraud,'' set certain financial thresholds for
the investigation of such frauds and clarify the roles and obligations
of the parties.
Verizon believes that one critical, missing prerequisite in the
proposed legislation is a concept called ``dual illegality.'' Before
the FTC conducts investigations or assists in enforcement for any
foreign counterpart, the underlying activity must, at a minimum, be
considered illegal in both the foreign country requesting assistance
and in the United States. Section 4 of the proposed legislation,
however, permits the FTC to provide assistance to foreign law
enforcement agencies even if the underlying conduct is considered legal
in the United States. U.S. companies could be the targets of unintended
consequences if the concept of ``dual illegality'' is not included in
this legislation. For example, in many European countries, advertising
laws prohibit activities such as comparative advertising, money-back
guarantees (like that offered by the Lands End catalog), sales
promotions, giveaways or advertising particular professions such as
medicine or law. In France, a directory provider was found liable for
misleading advertising by inadvertently depicting the wrong brand in a
line drawing of a product for sale in its customer's advertisement.
The global reach of content on the Internet means that legal
activity originating from one country can result in liability in
another. Foreign courts have recently issued a number of troubling
international jurisdictional decisions affecting U.S. companies. Many
of these countries have tried to impose liability on U.S. companies
simply because the Internet sites they hosted in the United States
contained information that was ``accessible'' in another country. For
example, in Australia, Dow Jones was successfully sued for defamation
because a website it hosted in New Jersey contained an article that an
Australian citizen found offensive. Yahoo was found liable in France
for auctioning items on its U.S. auction site that were considered
illegal in France yet protected under the First Amendment here at home.
Common sense dictates that U.S. taxpayer dollars should not be spent
investigating legal activities that could be later used by foreign
governments to harm U.S. companies. The FTC, as the gatekeeper through
which requests for foreign assistance are channeled, should be
conducting an initial substantive review of each request to make sure
that the underlying activity is first considered illegal in the U.S.
The FTC should also validate the authenticity of a request for
foreign assistance to ensure that it originates from a legitimate
foreign counterpart to the FTC. We believe that the proposed
legislation should better define which entities qualify as a ``Foreign
Law Enforcement Agency.'' Section 2 of the proposed bill broadly
defines a foreign law enforcement agency to include multinational
organizations and even private organizations that can be vested with
authority by undefined ``political subdivisions'' of a foreign state.
``Private organizations'' might include (1) foreign collecting
societies, who currently seek to extort levies from U.S. companies in
Canada for the protected act of Internet ``caching''; or (2) the EU,
which has proposed a controversial new ``IPR enforcement directive,''
which could subject U.S. companies to broad injunctions and monetary
damages. In order to prevent the resources of the FTC and others
parties from being diverted or diluted by numerous entities seeking
assistance, a ``Foreign Law Enforcement Agency'' should be narrowly
defined as the foreign legal equivalent of the FTC. This should include
only those agencies that serve as an official instrumentality of the
state for the specific purpose of engaging in consumer protection.
Verizon has reservations about extending the obligation of the FTC to
assist ambiguously defined ``multinational organizations.'' Qualifying
multinational organizations should therefore be limited to those
organizations whose primary purpose is to protect consumers against
fraud and are explicitly authorized by their member states' law
enforcement agencies to do so.
Verizon looks forward to cooperating with the FTC, in its role as a
civil enforcement agency, in investigations under the Electronic
Communications Privacy Act in the same manner that we assist criminal
law enforcement agencies today. We are concerned that Section 6(d) of
the proposed legislation would allow the FTC to obtain, using its own
administrative subpoena, the text of email messages (or ``stored
communications'') without prior notice to the subscriber or customer,
as currently required by Section 2703(b)(1)(B). This provision is
inconsistent with the preceding provision in ECPA (Section
2703(b)(1)((A)), which does not permit criminal law enforcement
agencies (or any other ``governmental entity'') to obtain this same
information without notice to the customer in the absence of a
judicially-ordered search warrant. There is no reason why the FTC
should operate under different rules than that required for other law
enforcement agencies. As you may know, Verizon is currently defending
the due process and privacy rights of our Internet subscribers in a
highly publicized copyright lawsuit currently on an expedited appeal to
the DC Circuit Court of Appeals. This case also involves the issue of
when a judge must issue a subpoena. The RIAA sued Verizon arguing that
any private party claiming to be a copyright owner should be entitled
to the right to obtain an Internet user's identity without first filing
a lawsuit in court or obtaining a subpoena from a judge or magistrate.
RIAA argues that anyone who makes a mere allegation of infringement can
obtain a subpoena, not from a real judge or magistrate, but from the
clerk of a court, who has no discretion but to stamp a one page form.
The fallout from RIAA case, if not overturned on appeal, is that any
person armed with a user's Internet Protocol (``IP'') has an
unprecedented shortcut to learn any consumer's name, address and phone
number without notice to the subscriber. This process will certainly
result in instances of consumer fraud and privacy abuses, and many
complaints will ultimately wind up on the FTC's doorstep. We are
looking to Congress to offer a legislative fix to the RIAA case before
consumers suffer from misuses of this process. With respect to this
provision in the FTC legislation, we would strongly urge amending the
legislation to first require, if not a search warrant, at the very
least, an order issued by a judge before granting the FTC, alone of all
governmental entities, unprecedented new rights to obtain the contents
of email communications without prior notice to the subscriber.
Finally, third parties who cooperate in good faith with the FTC in
its cross-border fraud investigations should enjoy a broad exemption
against liability. Section 2703(e) of ECPA, for example, broadly
exempts providers from liability for providing information, facilities,
or assistance to law enforcement. Section 6(e) of the proposed
legislation could be misread as providing an exemption only when a
person has either provided information to the FTC or failed to provide
notice to another. Parties cooperating in good faith with the FTC
should benefit from the same broad exemption from liability whether
they provide assistance to a civil or criminal law enforcement agency.
We would also recommend that the legislation include specific language
providing for reimbursement of the provider's costs in assisting the
FTC in its investigations on behalf of foreign governments. Providers
are currently reimbursed for their costs under ECPA (and other
statutes) and should be similarly compensated under this bill.
Thank you for the opportunity to testify today. Verizon looks
forward to working with the Committee and the FTC on this important
issue.
Senator Smith. Thank you, Ms. Deutsch.
Regrettably, another vote has been called. I just wonder if
our remaining witnesses--if you have, sort of, a summation of
your testimony, we may be able to get it all completed before
this vote.
So, Mr. Sarjeant, your full testimony will be included in
the record, but I do not know if you--I do not want to
shortchange your time here, either.
STATEMENT OF LAWRENCE E. SARJEANT, VICE PRESIDENT LAW AND
GENERAL COUNSEL, UNITED STATES TELECOM ASSOCIATION (USTA)
Mr. Sarjeant. Well, thank you, Mr. Chairman, and I will try
and compress it as much as I can.
I want to try and focus on the point--the FTC's request for
concurrent jurisdiction over common carriers with the FCC. And
I just--I will take my limited time to focus on what I believe
the FCC is doing to demonstrate that there is no gap.
Ever since the Congress gave the FTC consumer-protection
jurisdiction, it recognized that the FTC should not duplicate
the authority of other Federal agencies. That is why several
industries are exempt from the FTC's otherwise broad Section 5
authority.
The exemption in Section 5 of the Federal Trade Commission
Act is not limited to telecommunications common carriers. It
currently extends to banks, savings and loans institutions, air
carriers, persons subject to the Packers and Stockyards Act of
1921, and other common carriers subject to the acts to regulate
commerce. These are all industries subject to less pervasive
regulation than telecommunication's industry providers,
particularly incumbent local exchange providers, who, under the
1996 act, are subject to unprecedented obligations to unbundle
their networks and share those networks with other providers.
Three years ago, the FCC established an enforcement bureau
to focus resources on compliance with the Communications Act in
implementing regulations. The enforcement bureau enforces FCC
rules, orders, and license authorizations. This bureau has a
telecommunications consumers division, which investigates the
practices of carriers that affect consumers. It also resolves
formal complaints brought by consumers and establishes
guidelines for companies in areas such as advertising.
The FCC also has a Consumer and Governmental Affairs
Bureau. Among other things, this bureau distributes information
to enable consumers to make wise choices in finding the best
rates for telecommunications products and services. It conducts
consumer-related rulemakings, handles informal wireless and
wireline carrier billing and service complaints, and provides
assistance to people with hearing, visual, speech, and other
disabilities to allow their participation in FCC actions and
ensure their opportunity to communicate.
Since November 1999, the FCC has issued proposed
forfeitures, fines, and entered into consent decrees amounting
to over $17 million for slamming violations. It has proposed a
$5.4 million fine against the company for telephone Consumer
Protection Act violations.
The FCC's enforcement bureau entered into a consent decree
with three common carriers for failing to provide required
consumer information that resulted in total contributions of
$311,000. Just since March of this year, FCC enforcement
activities have generated more than $15 million in fines and
contributions. Section 201 of the Communications Act gives the
FCC the authority to ensure that the practices of common
carriers, in connection with the provision of communications
services, are just and reasonable. The FCC has addressed areas
such as consumer privacy, slamming, the regulation of practices
of operator service providers and aggregators, truth in billing
for common carriers in order to reduce slamming, and other
telecommunications fraud.
The FCC, on the basis of authority conferred by Congress,
has already fully occupied the field, when it comes to the
practices of interstate telecommunication's common carriers.
With respect to intrastate carriers, the States continue to
have full authority to regulate carrier practices affecting
consumers and competitors, pursuant to existing laws.
USTA believes that the FCC has demonstrated a commitment to
enhancing its enforcement efforts, and it has held carriers and
others within its jurisdiction accountable when they have
violated laws or FCC regulations. When the FCC has concluded it
lacks jurisdiction to take enforcement, it has deferred to the
FTC. The FCC has referred over 2,000 complaints to the FTC for
disposition concerning the unauthorized placement of non-
common-carrier charges on telephone bills, or as to other
matters over which it has no jurisdiction.
In summation, Mr. Chairman, we see no gaps, and we see no
need for concurrent jurisdiction. Concurrent jurisdiction would
only add to confusion and duplication. And we ask the Committee
to not consider the extension of concurrent jurisdiction for
the FTC over common carriers.
[The prepared statement of Mr. Sarjeant follows:]
Prepared Statement of Lawrence E. Sarjeant, Vice President Law and
General Counsel, United States Telecom Association (USTA)
Thank you Mr. Chairman and members of the Committee for giving the
United States Telecom Association (USTA) the opportunity to testify and
present its views on The Federal Trade Commission Reauthorization Act
and the question and issues concerning whether the Federal Trade
Commission (FTC) should be authorized by Congress to have concurrent
jurisdiction with the Federal Communications Commission (FCC) over
telecommunications common carriers (hereafter ``carriers''). I am
Lawrence E. Sarjeant, and I serve as Vice President Law and General
Counsel of USTA. I appear at the hearing today on behalf of the entire
association. USTA is the nation's oldest trade organization for the
local telephone industry. USTA's carrier members provide a full array
of voice, data and video services over wireline and wireless networks.
I testified before this Committee on July 17, 2002, regarding this
very same jurisdictional issue. In that testimony, I advised the
Committee of USTA's strong objections to the Congress providing the FTC
with jurisdiction over carriers. USTA's views have not changed. It
remains in strong opposition to granting the FTC concurrent
jurisdiction with the FCC for the regulation of carriers.
A. The FCC and the States Already Subject Carriers to Comprehensive
Regulation
USTA is not opposed to regulatory accountability for carriers that
have breached the public's trust and engaged in unjust, unreasonable or
deceptive conduct. USTA is opposed to adding another regulatory agency
and another regulatory regime to manage the telecommunications
industry. The telecommunications industry, especially those carriers
classified under the Telecommunications Act of 1996 (1996 Act) as
incumbent local exchange carriers (ILECs) already operate under close
scrutiny by federal and state regulators. ILECs are pervasively
regulated. Notwithstanding Congress' 1996 Act policy goal of fostering
a deregulatory environment, ILECs are more regulated today than at
anytime in history, including when they were uniformly considered to be
natural monopolies by antitrust and telecommunications policymakers.
The FTC since its creation in 1914 has not regulated carriers.
There is a statutory exemption for ``common carriers'' from FTC
regulatory authority that has been recognized by the federal judiciary
(See, e.g., FTC v. Miller, 549 F.2d. 452, 7th Cir, 1977) and that has
been reaffirmed by the Congress. The reason for the exemption has been
and is now the same. There is no absence of regulation--there is no
regulatory void to fill. Common carriers, including telephone common
carriers, were in 1914 subject to regulation by the Interstate Commerce
Commission, and upon creation of the FCC by Congress in 1934, the
regulatory authority over telephone common carriers was transferred to
it. The exemption from FTC regulatory authority was continued.
B. The FCC Has Used Its Statutory Authority to Protect Consumers
The FCC has determined that Section 201(b) of the Communications
Act of 1934, as amended (Communications Act) ``requires that common
carriers''' ``practices . . . for and in connection with . . .
communication service, shall be just and reasonable and any such . . .
practice . . . that is unjust or unreasonable is hereby declared to be
unlawful . . .'' (FCC-FTC Joint Policy Statement, FCC 00-72, 2/29/2000,
para. 4).
The Congress has given the FCC specific statutory to address
telemarketing practices and unsolicited faxes in the Telecommunications
Consumer Protection Act (TCPA). The TCPA has been codified at Section
227 of the Communications Act. Additionally, the FCC has statutory
authority to: address unauthorized changes of customers' carriers
(slamming) (Communications Act at Section 258); protect the privacy of
customer information (Communications Act at Section 222); and regulate
certain business practices of operator services providers and
aggregators (Communications Act at Section 226). The FCC has
implemented Truth in Billing Requirements for Common Carriers in order
``to reduce slamming and other telecommunications fraud'' and ``to aid
customers in understanding their telecommunications bills, and to
provide them with the tools they need to make informed choices in the
market for telecommunications services.'' (47 C.F.R. Sec. 64.2400 et
seq.)
Just this year, the Congress passed the Do Not Call Implementation
Act (DNCA/P.L. 108-10), which President Bush signed into law on March
11,2003. The DNCA directs the FCC to issue, within 180 days from the
date of the DNCA enactment, a final rule pursuant to a rulemaking
proceeding that it had already commenced under its TCPA authority in
order to revise its rules on telemarketing and unsolicited faxes. The
FCC was also required by the DNCA to coordinate with the FTC to
``maximize consistency'' with the FTC's Do Not Call Rule.
The Report (H.R. Rep. 108-8, 108th Cong., 2003) that the House
Committee on Energy and Commerce filed with respect to H.R. 395, which
bill ultimately became the DNCA addressed this jurisdictional issue in
two instances. First, it reaffirmed that the FTC ``. . . does not have
jurisdiction over common carriers (such as telecommunications companies
and airlines) ,. . . or intrastate telemarketing.'' (H. Rep. at 3)
Second, it specified that no section of the DNCA ``. . . should be
construed by the FTC to confer any additional authority to regulate
common carriers . . . under the Federal Trade Commission Act.'' (H.
Rep. at 9)
The FCC has acted promptly to meet its DNCA rulemaking obligation.
On March 25, 2003, two weeks after the DNCA became law, the FCC issued
a request for comments and reply comments to determine how the FCC
could best fulfill its responsibilities under the DNCA. The comments
and reply comments were filed last month, putting the FCC in a position
to meet the DNCA's 180 days from enactment deadline for issuing revised
and final rules.
This is simply the latest example of the FCC aggressively
fulfilling its duty to ensure that carriers treat consumers fairly and
honestly or be held accountable for their failure to do so. The FCC, at
the direction of Congress, has already fully occupied the field when it
comes to the practices of interstate carriers. With respect to
intrastate carriers, the states continue to have full authority to
regulate practices affecting consumers and competitors pursuant to
existing state laws.
C. The FCC Has Pursued Enforcement Actions Against Telecommunications
Carriers
When I testified before the Committee last year, I presented to you
a chart that demonstrated that the FCC had in fact taken significant
enforcement actions against unfair and deceptive practices with respect
to telemarketing and the sending of faxes. The enforcement actions have
continued at an accelerated pace as demonstrated by the list of
enforcement actions and sanctions that follows this testimony and which
comes directly from the FCC's website.
USTA believes that the FCC has demonstrated a commitment to
enhancing its enforcement efforts, and it has held carriers and others
within its jurisdiction accountable when they have violated laws or FCC
regulations. There is, in USTA's judgment, no need to insert confusion
or duplication by conferring jurisdiction over carriers to another
independent regulatory agency, the FTC. If the FCC did not have the
requisite authority to protect consumers, or if it failed to fully
exercise its authority, there might be cause to accede to the request
of the FTC for concurrent jurisdiction. This, though, is not the case.
There is no regulatory failure that USTA has observed nor has USTA seen
evidence of a gap between the FCC's and FTC's jurisdiction that
requires rescission of the common carrier exemption to the FTC's
jurisdiction.
D. Conclusion
The FCC comprehensively regulates unjust, unreasonable and
deceptive consumer practices by carriers and their agents, and it is
fully engaged in effectuating the competition provisions of the 1996
Act. To add concurrent FTC jurisdiction is unnecessary and would
potentially produce conflicts with the comprehensive regulatory scheme
found in the Communications Act and administered by the FCC.
Extending concurrent jurisdiction to the FTC over
telecommunications common carriers would be counterproductive as it
would lead to carrier and consumer confusion. Carriers would not know
which agency to rely on for advice or which agency's compliance
standards to follow. Consumers would have to discern the differences
between FCC and FTC processes and standards. There being no compelling
demonstration of a failure by the FCC to ensure that consumers are
fully and fairly protected from unjust, unreasonable or deceptive
carrier practices, USTA asks that you not grant the FTC concurrent
jurisdiction with the FCC over carriers.
Thank you.
Marketing Enforcement Actions
Detailed Information
------------------------------------------------------------------------
------------------------------------------------------------------------
04-07-2003 Hearing ordered to determine whether to
revoke the common carrier operating
authority of affiliated long distance
companies NOS Communications, Inc.,
Affinity Network Incorporated, and NOSVA
Limited Partnership for apparently
engaging in deceptive and misleading
marketing practices
------------------------------------------------------------------------
12-26-2002 $1,000,000 Consent Decree with NOS
Communications, Inc. and Affinity Network
Incorporated for unfair and deceptive
marketing practices
------------------------------------------------------------------------
04-02-2001 $1,000,000 in total fines proposed in
Notice of Apparent Liability against NOS
Communications, Inc. (NOS) and Affinity
Network Incorporated (ANI) for apparent
unfair and deceptive marketing practices
------------------------------------------------------------------------
12-07-2000 Order On Reconsideration of 7/17/00 Order
imposing a forfeiture against Business
Discount Plan, Inc. (denied in part,
granted in part). Forfeiture adjusted to
$1,800,000
------------------------------------------------------------------------
07-17-2000 $2,400,000 forfeiture assessed against
Business Discount Plan, Inc. for slamming
violations and telemarketing abuse
------------------------------------------------------------------------
03-01-2000 FCC/FTC Policy Statement on Deceptive
Advertising of Long Distance Telephone
Services
------------------------------------------------------------------------
03-01-2000 $100,000 Consent Decree with MCI WORLDCOM
for marketing and advertising practices
------------------------------------------------------------------------
Telephone Solicitation
Detailed Information
------------------------------------------------------------------------
------------------------------------------------------------------------
06-03-2003 Citation issued to Bill Currie Ford, Inc.
(a.k.a. Bill Currie Pre Owned Centers),
Tampa and Brandon, Florida for violation
of the TCPA and Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
05-20-2003 Citation issued to Energy Windows Plus,
Inc., a.k.a. FLA. Patio Rooms, Inc.,
Waterford, Michigan for violation of the
TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
05-13-2003 Citation issued to Far Star Enterprises (d/
b/a/Nu-Cote Exteriors), San Diego and La
Jolla, California for violation of the
TCPA and Commission's rules regarding
honoring do not call requests
------------------------------------------------------------------------
04-29-2003 Citation issued to Warrior Custom Golf,
Inc., Irvine, Fullerton, and Lake Forest,
California for violation of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
04-22-2003 Citation issued to 1 Home Lending
Corporation, Calabasas, California for
violation of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
Telephone Solicitation--Continued
Detailed Information
------------------------------------------------------------------------
------------------------------------------------------------------------
04-08-2003 Citation issued to Bridge Capital
Corporation, Lake Forest and Mission
Viejo, California for violation of the
TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
04-01-2003 Citation issued to Dura-Plex, Inc. for
violation of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
03-11-2003 Citation issued to Express Consolidation,
Inc., Delray Beach, Florida for
violations of the Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
02-25-2003 Citation issued to National Cleaning
Service (d/b/a Albanez, Inc. and Jani-
King), Rockville, Maryland for violations
of the Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
02-19-2003 Citation issued to California Express
Funding, Ontario, California for
violations of the Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
02-12-2003 Citation issued to Spry Group, Hamilton,
Ohio for violations of the Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
01-28-2003 Citation issued to Lifetime Capital
Guarantee (dba/Rue Educational
Publishers), Clearwater, Florida, and
C.T. Corporation System, Indianapolis,
Indiana for violations of the
Commission's telephone solicitation
rules, by delivering prerecorded messages
to a cellular telephone line
------------------------------------------------------------------------
01-14-2003 Citation issued to Michigan Soft Water of
Central Michigan, Inc., East Lansing and
Grand Rapids, Michigan for violations of
the TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines and honoring do not call requests
------------------------------------------------------------------------
12-20-2002 Citation issued to Captain Clean Carpet
Care, Newark, California; and, Maharam
Fabric Corporation, Hauppauge and New
York, New York for violations of the TCPA
and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
12-17-2002 Citation issued to Chon-Ji Academy of
Martial Arts, Inc., Teaneck and Closter,
New Jersey for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
12-10-2002 Citation issued to Newgen Results Corp.,
San Diego, California and Lawrenceville,
Georgia; and, TeleTech Holdings, Inc.,
Englewood, Colorado for violations of the
TCPA and Commission's rules regarding
honoring do not call requests
------------------------------------------------------------------------
12-03-2002 Citation issued to Inbound Calls, Inc.
(dba/ICI, The Call Center, and Family
Travel), Carlsbad and San Diego,
California for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
11-26-2002 Citation issued to JZA Development
Corporation (dba/University Painters,
Inc.), Alexandria, Virginia, King of
Prussia, Pennsylvania, and Chevy Chase,
Maryland for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
11-12-2002 Citation issued to Executive Carpet &
Beyond, Inc., Stamford, Connecticut for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
11-05-2002 Citation issued to American Life and
Health Insurance, Arlington and Pasadena,
Texas for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
Telephone Solicitation--Continued
Detailed Information
------------------------------------------------------------------------
------------------------------------------------------------------------
10-29-2002 Citation issued to Silverleaf Resorts,
Inc., Dallas, Texas; and, P & M
Consulting, Inc., Grandview, Missouri and
Overland Park, Kansas for violations of
the TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
10-22-2002 Citation issued to Integrated Chiropractic
Clinic (d/b/a Grenda Chiropractic and
Grenda Family Chiropractic), Torrance and
Redondo Beach, California for violations
of the TCPA and Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
10-15-2002 Citation issued to A Friendly Carpet
Cleaning, Lodi, New Jersey for violations
of the TCPA and Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
10-08-2002 Citation issued to Accurate Collision
Repair, Inc., Columbus, Ohio for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
08-06-2002 Citation issued to Michael Miller
Insurance Agency (aka MMB Insurance,
et.al.), Worthington and Columbus, Ohio
for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
07-30-2002 Citation issued to Citywide Financial
Group, Inc., Long Beach, California for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
07-23-2002 Citation issued to Centerpointe Real
Estate, Inc., Norwalk, California for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
07-18-2002 Citation issued to Ad Resources, Inc. (dba/
Dining and Shopping Spree and Conroe
Dining and Shopping Spree), Houston,
Temple, and Austin, Texas and Specialized
Marketing Consultants, Houston, Texas for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines and honoring do not call
requests
------------------------------------------------------------------------
07-16-2002 Citation issued to Bolsa Financial, Inc.
(dba/Bolsa Financial and Country Knoll
Real Estate), Norwalk, California and Mr.
Steven Harmon, Pasadena, California for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
07-09-2002 Citation issued to Argo Futures Group,
Inc., Cleveland, Willoughby, and Chagrin
Falls, Ohio and Ms. Sandra L. Allen,
Willoughby, Ohio for violations of the
TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
06-25-2002 Citation issued to Network Traffic
Controllers, Inc., Richardson, Texas for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
06-18-2002 Citation issued to Ameriquest Mortgage
Company, Orange, California and Houston,
Texas for violations of the TCPA and
Commission's rules regarding transmitting
prerecorded unsolicited advertisements to
residential telephone lines
------------------------------------------------------------------------
06-11-2002 Citation issued to Wellness Chiropractic
(dba/AAA Chiropractic, LaGrange Wellness
Chiropractic and Carrollton Wellness
Chiropractic), Louisville, LaGrange and
Carrollton, Kentucky for violations of
the TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
06-04-2002 Citation issued to Insight Dynamics
Corporation, San Ramon, California for
violations of the TCPA and Commission's
rules regarding unsolicited fax
advertising
------------------------------------------------------------------------
05-28-2002 Citation issued to Direct Data USA (dba/
Auto Pro Finance, Dealer Information
Service, and Beyond Your Expectations),
Houston and Sugarland, Texas for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
Telephone Solicitation--Continued
Detailed Information
------------------------------------------------------------------------
------------------------------------------------------------------------
05-07-2002 Citation issued to Funeral and Cemetery
Finders Association, Pearland, Texas for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
04-30-2002 Citation issued to Legal Services Group
Automotive, d/b/a LSG Auto Finance and
LSG Auto Service, Missouri City, Stafford
and Houston, Texas for violations of the
TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
04-16-2002 Citation issued to Vital Living Products,
Inc., Matthews and Charlotte, NC for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
04-02-2002 Citation issued to Brentwood Capital
Corporation, Brentwood, Tennessee for
violations of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
03-19-2002 Citation issued to White Rock Wildcats,
Inc., Dallas, Texas for violations of the
TCPA and Commission's rules regarding
transmitting prerecorded unsolicited
advertisements to residential telephone
lines
------------------------------------------------------------------------
03-05-2002 Citation issued to American Marketing
Associates, Inc., Annapolis and
Brandywine, MD, and Vandergriff
Chevrolet, Arlington, TX for violations
of the TCPA and Commission's rules
regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
12-18-2001 Citation issued to Logistical Services,
Inc d/b/a Stones Gym and Stones Family
Fitness Center, Friendswood, TX for
violation of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
12-18-2001 Citation issued to Sunset Home
Improvements, Inc., El Segundo, CA for
violation of the TCPA and Commission's
rules regarding transmitting prerecorded
unsolicited advertisements to residential
telephone lines
------------------------------------------------------------------------
Senator Smith. Thank you.
Mr. Cooper, Mr. Schwartz, I do not want to be unfair to
you. We can recess, and I can go vote and come back, or--let's
take it, then.
STATEMENT OF SCOTT COOPER, MANAGER, TECHNOLOGY POLICY, HEWLETT-
PACKARD COMPANY
Mr. Cooper. I will try to make three points, very briefly.
One, HP thinks that the FTC is not only a leader in
consumer protection in this country; we also think it has been
a great role model for what other consumer-protection agencies
should do around the world. We think that it leads by example.
And I think that the cross-border fraud provision is an example
of that. We have some concerns, and we will get into it very
briefly.
We think that the fact that the FTC is leading this effort
to create a seamless network of enforcement on a worldwide
basis is extremely important. And the fact that the FCC does
this in partnership with business, with consumer groups, and
that it has been a very forthcoming effort to make this
ecumenical, I think, is an example of what works in the United
States that we wish would work in other places around the
world.
We certainly found, in other Nations, that they are doing
reviews of their consumer-protection laws. They are finding, in
many cases, that they are being too prescriptive, that they are
too detailed, and they do not work in the real world.
Unfortunately, we still find, in many places around the world,
that consumer-protection agencies do not see business, or even
consumer groups, as potential partners in this effort toward
creating a regulatory environment.
I think, in a lot of places in the world, that self-
regulation is seen, unfortunately--and, unfortunately, in many
cases, it has been proven true--as non-regulation. We do not
think that is true in the United States, where we have, through
groups like the Better Business Bureau, that handle 3 million
consumer disputes a year, a very good model of self-regulatory
dispute resolution that blends itself very nicely with the
legal enforcement that the FTC does. And we think that that
continuum that, when, say, the BBB discovers cases of potential
fraud or patterns of abuse, they feel they have an obligation
to pass that on to local law enforcement authorities with the
FTC. We wish that kind of model would be used other places
around the world.
The second point I would like to very quickly make is that
just last month, a group of business leaders called the Global
Business Dialogue in Electronic Commerce reached an agreement
with Consumers International on guidelines for what dispute
resolution should look like on a cross-border basis. Well, this
is important, in itself, for offering consumers opportunities
to resolve basic garden-variety disputes. Again, it is going to
help legal authorities, because when dispute providers discover
potential fraud on a global basis, they also will have the
obligation, under these guidelines, to pass that on to local
law enforcement authorities for them to handle.
So we think that there are a lot of things going on in this
field where there can be potential partnerships between legal
authorities on one side, and businesses and consumers on the
other.
The last point I would like to make is on the legislation,
itself, being considered. We agree wholeheartedly with the FTC.
We think we need cross-border fraud legislation. Where have
concerns is really in two areas. One is that where we think--
and this has been referenced before--what is being enforced
should, indeed, be illegal under the U.S. law. And the second
point is, is that when a foreign law enforcement agency brings
a case to the attention of the FTC, there should be a
compelling legal basis for the request for information sharing.
So we think that this legislation needs to be worked on,
but it is something that can be worked on. The devils are
always in the details. But we think it is very important to get
this legislation up and through the Congress, hopefully this
year.
Thank you very much.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Scott Cooper, Manager, Technology Policy,
Hewlett-Packard Company
Senator Smith and Members of the Committee, I am pleased to be here
this afternoon to discuss--and support--the re-authorization of the
FTC, as well as to talk about issues of consumer protection before the
FTC and this Committee. Hewlett-Packard has long been active with the
FTC in partnering on issues of global consumer confidence; HP has
served on two recent occasions as the business representative to the
U.S. delegation on Consumer Protection to the Organization for Economic
Cooperation and Development (OECD). HP also serves as the chair of the
Consumer Policy working group of the International Chamber of Commerce
(ICC), and the chair of the Consumer Confidence committee of the Global
Business Dialogue for electronic commerce (GBDe), an organization of 70
of the largest global businesses engaged in e-commerce.
HP believes that the re-authorization of the FTC is important not
only because of the key role that the FTC serves in our country's
consumer protection infrastructure, but also for the leadership role
that the FTC has played on global consumer protection issues as well.
The growing importance for world economies of the global marketplace
has been in a sense a ``forcing mechanism'' requiring both government
and business to react to rapid change that make old ways of doing
business--or regulating business--are no longer as effective.
Governments, businesses and consumers must all feel confident that
their interests are being protected in order for the global marketplace
to grow and flourish. And the opportunities are there; while developed
economies have been growing at a recent rate of 1.5 to 2.5 percent a
year, electronic commerce in those same countries is growing at a rate
of 30 to 40 percent a year. If approached in a collaborative manner,
the global marketplace can empower consumers, expand business
opportunities and act as a powerful driver for 21st century economic
growth, but consumers and legitimate businesses must be able to
confidently find each other in the global marketplace.
The FTC's global leadership is exemplified by the coordinating role
that the Agency has played in organizing legal efforts in developed
countries to combat global fraud. As well, the FTC has led by example,
by finding practicable, collaborative solutions to issues of consumer
protection. And part of that collaboration has been to reach out to
businesses and consumer groups to include them in the decision-making
process.
We have seen in recent years a number of cases where other
countries have reviewed their consumer protection laws and have
concluded that they may be too detailed, too proscriptive to keep pace
with the growth and challenges of the global marketplace. But
unfortunately, as well, many global consumer agencies still keep
business at arms-length rather than looking for opportunities to join
forces in combating `bad actors' in the marketplace.
This global leadership shown by the FTC is especially pertinent in
the area of combating cross-border fraud. In part, through its work in
the OECD, the FTC has created a clearinghouse for consumer protection
agencies in developed countries to share information about suspected
cases of cross-border fraud. This clearinghouse, ``econsumer.gov'' is a
necessary first step in creating a global response to a global problem;
joining together the legal resources in both countries where fraudulent
businesses reside, and where consumer victims live.
However, a problem that needs to be addressed in fighting global
consumer fraud is incenting consumers to report disputes where they may
have been victimized. This problem takes on many faces. First,
consumers may not be aware that they are victims of a fraud until so
much time has passed that redress becomes difficult. Second, consumers
may be discouraged, embarrassed and/or cynical about the ability of
legal authorities to resolve their dispute. And finally, consumers may
not be aware of whom to turn to when they are victims.
Businesses (as well as consumer organizations) have a vested
interest to help legal authorities combat cross-border fraud. If the
global marketplace is considered a risky venue to undertake
transactions, then neither businesses nor consumers will benefit from
opportunities to meet and transact business. A first step towards
creating confidence in the global marketplace is to create best
practices for merchants who will serve the global marketplace. A second
step is to create guidelines for the resolution of those consumer
disputes that do arise. I am pleased to say that consumer groups and
businesses have been meeting regularly over the past two years to
develop just such guidelines.
Last month, Consumers International, (representing over 160
consumer groups world-wide), and the Global Business Dialogue for
Electronic Commerce (representing 70 of the largest global businesses
engaged in electronic commerce), reached an agreement on guidelines for
the resolution of disputes that arise between merchants and consumers
in cross-border transactions. These 'rules of the road' also include
specific recommendations for the development of third-party dispute
settlement experts (called ADR for alternative dispute resolution), and
recommendations to governments for facilitating the growth of global
ADR settlement processes. This now-successful negotiation between
consumer groups and business of creating ADR mechanisms has also had
the strong support of the FTC, as well as the European Commission, METI
in Japan and other government groups.
While the resolution of ``normal'' consumer disputes may seem a far
cry from combating hard-core fraud, the development of a dispute
resolution infrastructure can help in two important ways:
(1) Consumers need to be made aware as quickly as possible when they
may be victims of fraud so that authorities can respond
effectively. In the United States, the Better Business Bureau
handles over 3 million consumer disputes a year. Some of these
disputes turn out to be cases of fraud, but could not
necessarily be identified as such until a pattern of abuse
could be identified by the BBB. Thus ADR providers such as the
BBB may hear of fraudulent scams before legal authorities are
aware of them.
(2) When patterns of abuse are identified, dispute resolution
providers must alert legal authorities. Legal authorities will
only uncover a fraction of the cases of fraud that may occur.
Adding dispute resolution providers as extra 'eyes and ears' to
uncover potential fraud can be of great value to law
enforcement.
Creating this continuum of enforcement--from simple consumer
dispute resolution to uncovering patterns of abuse--will create a
partnership of consumer groups, businesses and legal authorities in
combating cross-border fraud. I am therefore pleased that in the FTC's
draft legislation recognizes the usefulness of private entities that
``voluntarily provides material to the Commission that it reasonably
believes is relevant to a possible unfair or deceptive act or practice
as defined in Section 5(a) of [the FTC] Act.''
With the encouragement of the FTC, as well as commensurate legal
authorities in Europe, Japan, China, Chile and elsewhere, a number of
organizations such as the BBB are joining together to offer consumers
dispute resolution services in the global marketplace. And part of
their obligation to consumers will be to report suspected cases of
fraud or deception to the proper legal authorities. Governments also
need to encourage consumers to take advantage of ADR services; not only
because resolving consumer disputes with benefit their citizens, but
also because in doing so, cases of fraud can be quickly identified and
brought to the attention of legal authorities.
We have also appreciated the opportunity to review the draft
language provided by the FTC on cross-border fraud. Hewlett-Packard is
very supportive of the goals of this legislation, and would be pleased
to work with the FTC and the Committee in refining the actual language
of the proposed legislation. In particular, we are concerned about the
seeming wide range of enforcement that could be utilized by foreign
agencies against U.S. citizens. There must be a high level of
coordination between law enforcement in the U.S. and abroad if efforts
to combat global fraud are to be successful, but this collaboration
must be based upon two important concepts:
(1) That what is being enforced is indeed illegal under U.S. law;
and
(2) That the foreign law enforcement agency must set forth a
compelling legal basis for its request for information sharing.
Having said that, HP believes that this legislative proposal is an
important step in creating a seamless level of consumer protections in
the global marketplace. We look forward to working with the Committee
in this effort.
Alternative Dispute Resolution Guidelines--May 2003
Agreement reached between Consumers International and the Global
Business Dialogue on Electronic Commerce
Introduction
Electronic commerce, especially between consumers in one country
buying goods or services from businesses based in other countries, will
grow unabatedly only if consumers feel confident that their interests
are sufficiently protected in the case of disputes. At the same time,
there is also the concern that merchants--especially small and medium
sized enterprises (SMEs)--might be faced with unmanageable problems due
to difficulties related to consumer disputes resulting from Internet
transactions.
Recourse to courts in disputes resulting from international
Internet transactions is often complicated by the difficult questions
of which law applies, and which authorities have jurisdiction over such
disputes. Furthermore, international court proceedings can be
expensive, often exceeding the value of the goods or services in
dispute. If this were the only means to settle disputes, it would
certainly not enhance consumer confidence in international electronic
commerce and would strongly induce merchants to restrict the geographic
scope of their offers. This, in turn, would limit competition and
consumer choice.
There are widely differing views held among governments on the
right type and level of consumer protection, even at the regional level
of the European Union or the U.S. Complete international harmonization
of applicable laws and international agreements on competent
jurisdictions might be the ideal solution in theory, but it is unlikely
that this can be achieved satisfactorily in practice in the near
future.
The situation is at least as difficult with regard to the issue of
the competent forum. Business acknowledges that the application of the
``country of origin'' principle alone may not be sufficient to boost
trust in online transactions, since consumers are unlikely to resort to
the courts of other countries where merchants are resident. Conversely,
the application of the ``country of destination'' principle (the
residence country of the customer) is not the right answer either,
since merchants will be unenthusiastic about international transactions
that could subject them to a variety of differing country laws,
processes and legal reach of every country in which their online
customers may live. Moreover, for consumers this principle may only
provide illusory protection, as in many cases the cost and complexity
of cross-border enforcement stands in the way of effective redress.
Probably the best way out of this dilemma and an important catalyst
for consumer confidence in electronic commerce is that Internet
merchants offer their customers attractive extra-judicial procedures
for settling disputes as an alternative to the cumbersome and expensive
resort to courts.
In the offline world such alternative dispute resolution (ADR)
systems are being used quite successfully as an effective, quick and
efficient method for addressing consumer complaints that are not
resolved through a simple contact with the company (in the framework of
customer satisfaction systems) and there is already--at least in some
parts of this world--some limited but positive experience with ADR
related to business-to-consumer Internet transactions.
Through ADR, consumers' concerns can be addressed fairly and in a
timely manner. ADR allows both parties to avoid the delays and the
costs of appealing to either a government administrative agency or the
courts. In addition, the use of ADR avoids overburdening both
administrative and judicial systems (even when small claims courts
exist), while at the same time, in general, preserving the consumers'
right to seek legal redress should they be dissatisfied with the
results of the ADR process. Finally, ADR can be more flexible and
creative in finding solutions that satisfy both parties, while consumer
protection agencies and/or courts may offer only limited remedies in
resolving disputes, particularly where those remedies are prescribed by
law or regulations.
This GBDe paper has been written based on the practical experience
of a vast number of companies and business associations, including
private sector organizations offering online ADR systems, from all
parts of the globe. Its content has been discussed and developed with
contributions from governments and representatives of consumer
organizations as well.
This paper makes recommendations to Internet merchants, ADR service
providers and governments. Guidance is given for the use and
development of ADR systems, and recommendations are put forward for
government policy actions geared at meeting the requirements of
business for effective ADR and creating high levels of consumer
confidence in e-commerce.
Definitions
The term ``Alternative Dispute Resolution (ADR)'' in these
recommendations covers all methods of resolving disputes related to
obligations resulting from contracts concluded ``electronically''
(primarily over the Internet) between professional sellers of goods or
providers of services and final consumers (B2C), operated by impartial
bodies other than courts of law.
More specific distinctions within the ADR concept, such as
``arbitration'', ``mediation'' and ``conciliation/negotiation'', are
often used interchangeably and without much precision. Such
distinctions may, however, be of relevance with regard to the role of
the dispute settlement officer(s) in the process and the enforceability
of the results.
``Arbitration'' usually is a process whereby one or several
independent arbiters invite the parties to submit the facts and their
arguments (oral and/or written procedure) and finally decide on the
basis of equity or law. Arbitration, by definition, is normally final
and binding, and thus may not--in most cases--lend itself easily to the
non-jurisdictional world of trans-border business-to-consumer
transactions.
``Mediation'' normally is a process whereby a mediator simply
passes the proposal of settlement to the other party and the
counterproposal back to the first party until the two have reached
agreement. The mediator does not intervene in the negotiations but
registers only the final agreement. When agreed to by both parties, the
successful results of mediation are legally a contract and are
enforceable in this capacity.
``Conciliation/negotiation'' normally is a process whereby an
independent conciliator actively guides the parties towards a fair
compromise. This process does not develop in a legal vacuum, but need
not investigate in detail the applicable law. The parties'
understanding of the legal rights and obligations (which may be
conflicting) certainly plays a role, but equity might be the deciding
factor. If the (final) conciliation proposal meets the agreement of
both parties it becomes a contract and is enforceable in this capacity.
If the parties do not agree on any compromise, they are free to go to
court.
Purely internal dispute settlement services that are offered by
merchants as an after-sale service rooted in good commercial sense,
rather than as an alternative to court procedures, may not provide
sufficient guarantees of impartiality to assure consumers that they
will be able to obtain redress in the event of a disagreement over a
transaction. Of course, wherever possible, direct business/consumer
resolution is and will be the preferred instruments for solving
customer complaints in B2C Internet transactions. These services are
referred to here as ``customer satisfaction systems,'' and they may
become a step in the chain of redress, e.g., if customers wish to make
use of ADR offered by the merchant, they may be invited to submit their
complaint first to such a service (call centers, complaint services,
etc.) before filing it with the ADR officer.
Scope
These recommendations deal exclusively with business-to-consumer
(B2C) disputes in electronic commerce, where ADR is still relatively
little known and practiced. Settlements of disputes resulting from
business-to-business (B2B) transactions, both offline and online, will
follow their own rules with a very high degree of party autonomy,
mostly in the form of binding arbitration. The issues of consumer
protection and consumer confidence are of no relevance in this context.
Hence, there is neither a need to develop new recommendations for B2B
ADR, nor would it be appropriate to address any issues related to B2B
under the same parameters as B2C dispute settlements.
A survey of ADR systems for B2C Internet transactions already
functioning or in the process of being established shows that most of
them are established upon the initiative of groups of business
companies (including auditing firms, banks, insurance companies, law
firms), business associations, institutes (including universities), or
consumer organizations, often as independent businesses. They cover
their costs by sponsor and user fees, sponsors being normally those
merchants that offer the services of this specific ADR system to their
customers. In some instances they are also offered government funds,
notably to function as pilot projects. Although only theoretical today,
one should not preclude ADR systems being established by individual
merchants, if a sufficient degree of impartiality is guaranteed.
The recommendations to business contained in this paper are
addressed both to Internet merchants who signal to their customers that
they recommend submitting disputes to ADR, and to organizations that
provide ADR as a service.
Recommendations to Internet Merchants
Encourage the use of in-house customer satisfaction programs
As a first and preferred remedy in any dispute, Internet customers
should be offered access to in-house customer satisfaction systems.
Depending on the type of transaction and the nature of the system, such
approaches may serve as a valid alternative to ADR. For example, a
merchant involved in the sale of low-priced merchandise might choose to
offer an unconditional money-back guarantee to all customers rather
than establishing an ADR system. In any event, it appears advisable to
request that customers direct any complaint first to an in-house
customer satisfaction system prior to taking advantage of any ADR
mechanism.
Propose the possibility of ADR
Unless full customer satisfaction is guaranteed by in-house
systems, customers of merchant websites used for B2C transactions
should be notified that the merchant is ready to submit disputes
resulting from online transactions to one or more specified ADR
systems. Information about dispute resolution via ADR should be
provided as a part of the overall information, perhaps in the framework
of a reference to a code of conduct (Trustmark) or as a part of the
general sales conditions.
ADR should be presented as a voluntary option for consumers if a
dispute arises, not as a contractual obligation.
Binding Arbitration
Merchants should generally avoid using arbitration that is binding
on consumers because it may impair consumer confidence in electronic
commerce. Arbitration that is binding on merchants as an obligation of
membership in a trustmark program, on the other hand, serves to promote
consumer confidence in electronic commerce. Arbitration that is binding
on consumers should only be used in limited circumstances, and where it
clearly meets the criteria of impartiality, transparency and public
accountability. Consumer decisions to engage in binding arbitration
must be fully informed, voluntary, and made only after the dispute has
arisen.
Inform about conditions of ADR
Potential customers should be informed about the conditions of
access (online or other), the cost (free of charge, nominal fee, cost
borne by the merchant, etc.), the legal nature of the ADR (arbitration,
mediation, conciliation, negotiation, etc.) and of its outcome
(binding/not binding/binding for the merchant; enforceable), and
recourse to other instances, notably to law courts.
No Retaliation
Merchants should not take any retaliatory action against customers
because they have initiated contact with an ADR service concerning a
dispute.
Recommendations to ADR Service Providers
Impartiality
The ADR personnel must be impartial, in order to guarantee that
decisions are recognized as being made independently, thus
strengthening the reputation and credibility of the organization
providing ADR. Impartiality must be guaranteed by adequate
arrangements, which may include measures such as the establishment of
appropriately composed supervisory bodies or the appointment of dispute
resolution officers according to specific criteria. The governing
structure of the ADR service should be designed so as to ensure
neutrality in all respects.
Dispute resolution personnel must be insulated from pressure to
favor merchants or consumers in resolving disputes. When the amount in
dispute is important and/or when ADR is finally binding for both
parties, even higher standards of transparency should be respected,
including e.g., that the names of dispute resolution officers are made
known to the parties, who should have the right to challenge them for
cause. When a merchant uses a particular arbitration service
repeatedly, to the extent practicable, the ADR officers who handle the
disputes should be rotated to ensure their continued impartiality.
Qualification of ADR officers
Dispute resolution officers should have sufficient skills and
training to fulfill the function in a satisfactory manner. Formal
lawyer qualification and license should not be required.
Accessibility and Convenience
ADR systems must be easily accessible from each possible country.
Online access might be the preferred choice. Requirements about the
form of the submission of a case should be kept to the necessary
minimum. Customers should receive maximum guidance in filling in and
filing submissions. Appropriate solutions must also be found for any
problems that may result from different languages used by the merchant,
the ADR service provider and the customer.
Speed
To be effective, ADR systems must resolve disputes quickly if they
are to meet the needs of both consumers and businesses. In any case,
they must be speedier than courts in providing satisfactory results.
Low cost for the consumer
The ADR service should be provided to the consumer at no or only
moderate cost, while taking into account the need to avoid frivolous
claims. An impartial screening process provided by the ADR system could
do this. Prior submission of a complaint to a customer satisfaction
program will also permit an early assessment of the real nature of the
claim.
In fact, the cost of ADR will be significantly lower for both
consumers and businesses than formal administrative or legal actions.
This is particularly true when costs are calculated in terms of both
time and money and where formal actions involve time-consuming
depositions, hearings, legal representation, and personal appearances
requiring international travel.
Transparency
ADR systems should function according to published rules of
procedure that describe unambiguously all relevant elements necessary
to enable customers seeking redress to take fully informed decisions on
whether they wish to use the ADR offered or address themselves to a
court of law.
To ensure credibility and acceptance of an ADR system, information
should include:
the types of dispute which may be referred to the body
concerned, as well as any existing restrictions in regard to
territorial coverage and the value of the dispute;
the rules governing the referral of the matter to the body,
including any preliminary requirements that the consumer may
have to meet (e.g., to attempt first to get redress through a
customer satisfaction system offered by the merchant), as well
as other procedural rules, notably those concerning the written
or oral nature of the procedure, whether it is conducted
exclusively or partly online, whether oral hearings are
possible or required (separate of either party or jointly),
attendance in person or possibilities of representation, and
the languages of the procedure;
the decision-making arrangements within the body and its
governing structure public listing of its personnel, the
selection process of dispute resolution officers for individual
cases and the possibilities of challenging them by the parties;
the possible cost of the procedure for the parties,
including rules on the award of costs at the end of the
procedure;
the type of rules serving as the basis for the body's
decisions (legal provisions, considerations of equity, codes of
conduct, etc.);
the manner of proceeding, whether decisions are made
public, confidentiality of the handling of submissions and of
proceedings;
enforceability of agreed upon resolutions and any other
possibilities of recourse.
The ADR provider should publish an annual report enabling a
meaningful evaluation of all ADR cases and results, while respecting
the confidential nature of specific case information and data. Such
evaluation should include--at a minimum--an aggregated list of cases
received, cases settled prior to ADR resolution, cases settled by ADR
resolution and cases not resolved. To the degree possible, such report
should include information on whether cases settled prior to, and at
settlement, were to the advantage of the consumer or the merchant. In
cases where arbitration is binding on one or both of the parties,
information should be available to the public about the identity of the
merchant, the type of dispute, and to the degree possible, whether the
dispute was resolved in favor of the merchant or the consumer.
Principle of representation
The ADR procedure should not deprive the parties of the right to be
represented or assisted by a third party at all stages of the
procedure.
Applicable Rules
One of the principal reasons why business, consumers and
governments consider the development of ADR systems to be of such
strategic importance for the enhancement of consumer trust in
electronic commerce is that such systems can settle disputes in an
adequate fashion without necessarily engaging in cumbersome, costly,
and difficult research on the detailed legal rules that would have to
be applied in an official court procedure. Governments in particular,
must be confident that the rights of both consumers and businesses are
protected, while at the same time avoiding actions that could adversely
impact the growth of global electronic commerce.
ADR dispute resolution officers may decide in equity and/or on the
basis of codes of conduct. This flexibility as regards the grounds for
ADR decisions provides an opportunity for the development of high
standards of consumer protection worldwide.
Consumer Awareness
Except in special cases where both consumers and merchants find
special circumstances to agree to arbitration (see below), consumers
will not alienate their right to go to court by electing to use an ADR
mechanism.
ADR should be presented as a voluntary option for consumers if a
dispute arises, not as a contractual obligation. Thus, an arbitration
decision taken by the dispute resolution officer(s) may be binding on
the parties only if they were informed of its binding nature in advance
and accepted this. Equally, the merchant shall not seek a commitment
from the consumer to use binding arbitration prior to the
materialization of the dispute, where such commitment would have the
effect of depriving the consumer of the right to bring an action before
the courts.
Referrals to law enforcement
ADR service providers should refer disputes to the relevant law
enforcement authorities, with the consumer's permission, when they have
reason to believe that there may be fraud, deceit or patterns of abuse
on the part of the Internet merchant. In such cases, the merchant
should be informed that such an action has been taken.
Recommendations to Governments
Studies on the legal frameworks for ADR have demonstrated that they
are fragmented between international conventions and legal instruments
at several levels (federal/state, community/national, etc.). As a
consequence, ADR systems conceived for worldwide application must
respect a number of--not always compatible--conditions. Several of
these elements can be easily accommodated, like the requirement that a
valid agreement to submit a dispute to ADR would have to be entered
into only after the dispute has arisen. Other elements are more
problematic to accommodate, e.g., that certain national laws on
encryption or authentication inhibit the proper level of
confidentiality and security in online proceedings, or that some
national laws do not permit the conclusion of contracts online.
On the other hand, many governments are on record that they share
the GBDe position that ADR is an essential element for the proper
functioning of e-commerce and for the enhancement of consumer
confidence in this medium. Hence, the GBDe expects governments to adopt
policy stances in line with this goal.
International rules on competent forum and applicable law
Although ADR can provide appropriate solutions for many disputes,
it must be recognized that even in the most ideal of worlds a certain
number of disputes will still end up in court. Therefore, and also
because these questions may still be posed in some ADR systems, the
GBDe wishes to state clearly that questions of jurisdiction and
applicable law in electronic commerce still need to be dealt with
urgently and in a manner that encourages both business investment and
consumer trust in electronic commerce. The GBDe position on this was
expressed in the ``Paris Recommendations'' of the ``Jurisdiction''
Working Group in 1999.
Encourage the use of customer satisfaction systems and of ADR
Actively promote public awareness of ADR systems and their role in
resolving business-to-consumer commercial disputes. Acknowledge the
continuous efforts by companies to set up customer satisfaction
systems, which should be used first before starting either ADR or court
proceedings against a merchant. Likewise, policies should encourage
consumers to use available ADR systems instead of or before seeking
recourse to courts.
Education and Training
Support and promote educational activities of ADR officers by ADR
system providers.
Encourage effective ADR systems
It is our recommendation that governments encourage customer
satisfaction systems as a first step in the chain of redress prior to
resorting to ADR's. Governments should promote and facilitate the
development of high quality ADR services that are independent,
transparent cost-effective, flexible and accountable to the public,
without discriminating among impartial services solely on the basis of
who offers them. Achieving a sustainable level of competition among ADR
providers and achieving reciprocal agreements among these should be a
priority.
As with any decision to introduce regulation, the decision as to
whether and how to adopt government accreditation proposals should only
be pursued after careful consideration and balancing of interests. The
development of accreditation systems must take into account the
interests of consumers and businesses for fair, transparent and cost-
effective processes and the overall objective of the successful
development of electronic commerce.
Any government-backed assessment rules should be developed with
input from consumer groups, businesses and other stakeholders. To the
extent possible this should be coordinated with similar efforts in
other countries and regions to ensure a high degree of harmonization
between assessment efforts to promote the development of international
principles and rules including self-regulatory codes. Independent
assessment and ratings systems may also help promote consumer
empowerment.
ADR on the basis of equity or codes of conduct
Allow ADR systems to function on the basis of equity, or codes of
conduct. It should not be required that dispute resolution officers
necessarily have formal lawyer qualification and license. In some
countries, mediation/arbitration processes are legally regulated to be
conducted solely by licensed lawyers, but deregulation and an
appropriate legal framework should be aimed for.
Global access to and application of ADR
Promote the development of globally applicable ADR systems, and
take an international perspective on ADR by working with other
governments and international organizations.
Application of modern technologies in ADR
Refrain from creating obstacles for the innovative use of
technology to settle consumer disputes and eliminate obstacles,
resulting primarily from legislation on authentication and security, to
the application of an appropriate level of confidentiality and security
in online ADR.
Procedural and form requirements for ADR should be kept to a minimum
Eliminate requirements in some legislation that ADR must follow
nearly the same procedural requirements, as the court system. The same
applies to certain form requirements that may impede the use of ADR in
the online context. The parties to an ADR case should be free to
structure the proceedings, as they desire, as long as there is full
transparency and information about the consequences.
Adjust offline ADR requirements to the online context
Remove inhibitions in national legislation or international
conventions to conclude contracts--including dispute resolution
clauses--online and adjust existing legal and political frameworks for
offline ADR to online requirements.
Policy cooperation between public and private sector
Ensure close cooperation between the public and private sector to
maintain a balance in achieving a satisfactory variety of ADR systems,
which reflect consumer and business needs and are easily understood by
the customer.
Enforcement Actions
Take appropriate enforcement action when ADR services do not comply
with their stated policies and procedures.
Senator Smith. Thank you, Mr. Cooper. And thanks to Hewlett
Packard for your presence in the State of Oregon. You are very
welcome citizens there.
I am pleased to be joined by Senator Brownback, as a Member
of this Committee, and I am going to go vote.
And so, Mr. Schwartz, he is going to get the gavel, and you
take your time. I have a number of questions for several of
you. I will submit them in writing and thank you, in advance,
for your answers to those. And I appreciate very much the time
each of you have taken to be a part of this very important
hearing.
Mr. Schwartz? And then Senator Brownback.
STATEMENT OF ARI SCHWARTZ, ASSOCIATE DIRECTOR, CENTER FOR
DEMOCRACY AND TECHNOLOGY
Mr. Schwartz. Mr. Chairman, Senator Brownback, thank you
very much, and thank you for coming and rescuing the Chairman--
--
[Laughter.]
Mr. Schwartz.--so that I can go into a little bit more
detail.
In my written testimony, I go into detail in several
different areas, but I am going to focus specifically on
privacy, in the interest of time here.
We have been impressed with the Commission's commitment of
resources and intellectual capital on privacy. Most of the
Commission's privacy work has been tied directly to its mission
of preventing deceptive and fraudulent business practices. For
example, in the area of spam, the Commission has focused action
in the area of fraudulent e-mail scams. In their privacy
sweeps, they have conducted detailed reviews of privacy
notices. This has allowed them to convince companies to post
online privacy notices while helping to prevent vague and even
fraudulent practices.
While this work has been successful, the work of the
Commission in privacy areas, enabled by specific statute,
demonstrates that the FTC already has sufficient expertise to
take on more general privacy-protection responsibilities. The
Commission has demonstrated a thoughtful and patient, yet
innovative and ultimately workable approach to addressing
privacy issues that has transcended the Administrations. An
example of this is the Commission's work on the Children's
Online Privacy Protection Act, also the slow but steady
improvement of the complex area of financial privacy education
and enforcement.
In each of these cases, the Commission has brought a wide
range of players to the table to work out difficult issues
during an iterative and inclusive process, and then taken
action where the law has clearly been violated.
The Commission's work on the Do Not Call Telemarketing
Registry also shows this comprehensive approach to developing
sound privacy protection. The Commission has made it clear that
it has no intention to ban telemarketing; but, instead, to give
consumers more control over how and why calls come to their
house at dinnertime. CDT looks forward to helping promote the
registry when it goes in to effect next month.
To give the Commission broader authority in other consumer
privacy-related areas, Congress must now pass privacy
legislation. The full Commerce Committee has already taken this
step by voting in favor of the Online Privacy Protection Act
and the Spam Bill last year. We hope that you will move these
issues forward again this year, and that the rest of Congress
will follow your lead on this critical issue for the future of
a network economy.
Thank you, again, for this opportunity.
[The prepared statement of Mr. Schwartz follows:]
Prepared Statement of Ari Schwartz, Associate Director, Center for
Democracy and Technology
I. Summary
Chairman Smith and Members of the Subcommittee, the Center for
Democracy and Technology (CDT) is pleased to have this opportunity to
testify about the Federal Trade Commission (FTC) and its role in
consumer and privacy protection. We thank the Chairman for the
opportunity to participate in this hearing and look forward to working
with the Committee to develop policies supporting civil liberties and a
vibrant communications infrastructure.
Over the past eight years the FTC's activities in the area of
information privacy have expanded. The Commission has convened multiple
workshops to explore privacy, issued several reports, conducted
surveys, and brought several important enforcement actions in the area
of privacy. The Commission's work has played an important role in
bringing greater attention to privacy issues and pushing for the
adoption of better practices in the marketplace.
Three years ago, CDT testified that ``(t)he work of the Federal
Trade Commission--through its public workshops, hearings . . . provides
a model of how to vet issues and move toward consensus.''
Chairman Muris has successfully continued the consultation and
education process, working with public interest groups and industry on
key issues and taking enforcement actions or instituting rulemakings on
several important new fronts.
CDT and other public interest and consumer groups have been pleased
with the Commission's thoughtful approach to creating a National ``Do
Not Call Registry.'' The registry will provide consumers with an easy
way to cut down on unwanted telephone calls and will offer industry a
streamlined means of complying with the growing number of state and
self-regulatory ``Do Not Call'' lists.
CDT has also been pleased with the Commission's extensive
educational efforts with the public and industry on spam, privacy
technologies, privacy notices, ID theft, wireless privacy, and other
issues. It should be noted that each of these areas is clearly within
the FTC's jurisdiction to prevent deceptive trade practices.
However, CDT would like to see the Commission use its resources to
address unfair information practices as well as deceptive ones. These
unfair practices include: lack of meaningful notice and choice; the
ability to correct and amend personal information; and inadequate
security safeguards.
It has long been CDT's belief that unfair information practices are
already covered by the Commission's current authority. Yet, the long-
standing hesitancy of the Commission to proceed has made it necessary
for Congress to confirm this authority in law. Although Chairman Muris
has suggested that general Federal privacy legislation is unnecessary,
CDT sees an urgent need for legislation similar to the Online Privacy
Protection Act that was passed by the full Senate Commerce Committee
last year. Privacy protections in law--enforced by the FTC--are an
essential ingredient of building and maintaining consumer confidence in
the networked economy. We thank you, Chairman Smith, as well as Senator
Hollings and the other Senators who worked so hard to move the issue
forward in the Committee last year. CDT looks forward to continuing to
work with you to see such a measure passed again this Congress and
signed into law.
II. About CDT
CDT is a non-profit, public interest organization dedicated to
developing and implementing public policies to protect and advance
civil liberties and democratic values on the Internet. One of our core
goals is to enhance privacy protections for individuals in the
development and use of new communications technologies.
III. The Role of the FTC as the Federal Government's Leader on Consumer
Privacy Issues
The FTC has used its current jurisdiction to take basic steps to
protect the privacy of Americans in several innovative and balanced
ways. The Commission is the government's leader in consumer privacy
policy and should be commended for its current work in the area given
its limited view of its own jurisdiction.
In October 2001, Chairman Muris said that the Commission would
increase privacy enforcement by 50 percent. According to internal
figures, the Commission says it is on track to reach this goal. This
dramatic increase was on top of the new attention given to privacy
issues.
In particular, over the past two years, the Commission has worked
in ten areas of interest to CDT:
1. Unsolicited Commercial E-mail (Spam)
This year, the Commission held a three day-long workshop on spam
that addressed many of the key issues and focused attention on possible
solutions to a problem that has become a plague on Internet
communications. The Commission taken several useful steps:
The Commission has created an educational Website for
consumers and businesses. The site provides consumers with
helpful information on how spam works, why they get spam, and
how to decrease the amount of spam they receive. The site
advises businesses on how to comply with a user's unsubscribe
request.
The FTC has also conducted several studies to test whether
``unsubscribe'' or ``remove me'' requests were being honored.
The study reported that the majority of consumer requests were
not getting through. The Commission thereupon sent out warning
letters to spammers. These studies also helped to inspire a
wider range of research on this understudied issue, including
CDT's well-received report ``Why am I Getting All of this
Spam?'' \1\
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\1\ http://www.cdt.org/speech/spam/030319spamreport.shtml.
The FTC has taken action against several spammers who
allegedly sent out deceptive, unsolicited commercial e-mails
and participated in Web fraud, including a 2002 case where the
FTC joined several state law enforcement officials in the
United States as well as four Canadian law enforcement agencies
in bringing 63 different actions against various Web schemes
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and scams that targeted victims through spam.
While the Commission, given its limited view of its jurisdiction,
has taken these exemplary first steps in research, education and
enforcement regarding unsolicited commercial e-mail, CDT would like to
see it given more power to tackle fraudulent spam Further appropriate
steps could be taken under some of the provisions in the CAN SPAM Act
(S. 877), sponsored by Senators Burns and Wyden. CDT is hopeful that we
can begin to turn the tide on spam while still protecting the First
Amendment right of anonymous non-commercial/political speech online.\2\
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\2\ For more information on CDT's views on the CAN SPAM act, please
see our recent Policy Post http://www.cdt.org/publications/
pp_8.12.shtml.
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2. Telemarketing Sales Rule--``Do Not Call'' Registry
Under the 1994 Telemarketing and Consumer Fraud and Abuse
Prevention Act,\3\ the Commission was given the authority to regulate
telemarketing sales. The Commission's regulations, named the
Telecommunications Sales Rules (TSR), were put into effect in 1995.\4\
The TSR placed some basic time, place and manner restrictions on calls
and left the door open to revisiting the rule if it was not adequately
protecting consumers.
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\3\ 15 U.S.C. 6101-6108.
\4\ 16 CFR Part 310.
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Some have said that telemarketing is merely an annoyance and not a
privacy concern and therefore stronger rules are not necessary. CDT
disagrees. We define privacy as individual control over one's personal
information. Control over one's telephone number and other personal
information is central to privacy in the modern world.
The American public seems to agree with us. An AARP study of New
Jersey residents showed that 77 percent viewed telemarketing first and
foremost as an invasion of privacy; 10 percent a consumer rip-off, and
only 2 percent a consumer opportunity.\5\
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\5\ http://research.aarp.org/consume/nj_telemarketing.pdf.
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The Commission responded to the public concern about telemarketing
with the creation of a ``do not call'' registry, similar to those
already in existence in 15 states. On this proposal, by the way over
50,000 public comments were submitted to the Commission.\6\ Over 90
percent of them support the registry.
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\6\ CDT's comments, filed in coalition of other consumer groups,
can be found at: http://www.ftc.gov/os/comments/dncpapercomments/04/
consumerprivacyguide.pdf.
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CDT believes the ``do not call'' list offers the best, balanced
solution for unwanted telemarketing. Telemarketing in banned, but
consumers can decide what kind of marketing calls they want and when
they want to receive them.
In our comments supporting the FTC's ``Do-Not-Call'' initiative we
stressed that the list should not dilute or undercut the protections
afforded consumers by the states against invasive telemarketing.
Further, as we pointed out, it is critical that consumers are not
charged a fee to be placed on the ``Do-Not-Call'' list--consumers'
ability to protect the privacy of their personal information should not
be contingent upon their ability to pay a fee.
CDT has been pleased with how the public process on this important
issue has progressed. It has been a model example of how a complex but
important issue can be addressed through an open, public process.
The fact that the ``Do-Not-Call'' list will open in two weeks is a
testament to the Commission's commitment to this issue. We hope that
the Committee will continue to help monitor the roll out of the list in
its oversight role.
3. Privacy Education
The FTC has generally played a valuable role working with and
educating the business community about privacy best practices and
implementation of fair information practices.
This year the Commission has held two workshops on privacy
technologies--one aimed at consumer technologies and one at businesses.
CDT participated in both and used the first as a forum to introduce a
set of Authentication Privacy Principles developed in cooperation with
a large working group of companies and consumer groups.\7\
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\7\ The Interim Report of the Authentication Privacy Principles
Working Group can be found at: http://www.cdt.org/privacy/
authentication/030513interim.pdf.
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FTC Forums such as these are important tool in highlighting
specific privacy issues and encouraging efforts to address them. CDT is
encouraged by discussions with the Commission, which indicate that
these workshops will continue to tackle issues arising in the
marketplace, including the difficult issue of the future of identity
management in the networked economy.
4. Identity Theft and Identity Fraud
The FTC has been a leading agency in the prevention and prosecution
of identity theft through. The Commission's identity theft program
contains three key elements: the Identity Theft Data Clearinghouse;\8\
consumer education and assistance resources; and collaborative
enforcement efforts involving criminal law officers and private
industry.
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\8\ http://www.consumer.gov/idtheft/.
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The most recent reports indicate that the Identity Theft
Clearinghouse holds more than 170,000 victim complaints and serves as
an important tool for 46 Federal and 306 state and local law
enforcement agencies, including the U.S. Secret Service, the Department
of Justice, the U.S. Postal Inspection Service, and the International
Association of Chiefs of Police. The FTC has also been increasing
outreach programs to educate law enforcement officials on how the
Clearinghouse database can be used to enhance investigations and
prosecutions.
In regards to consumer education and assistance resources, the FTC
has held training seminars for law enforcement officials at all levels
in an attempt to give law enforcement the necessary tools they will
need to combat identity theft. The FTC has also implemented a
nationwide, toll-free hotline that consumers can call if they have
become a victim and a Website that consumers can access to file a
complaint and gain helpful prevention tips.
The Commission's efforts in this area show that it can be a leader
with other law enforcement agencies, serving as the main contact to the
public. We hope that the Commission's work can help to cut down on what
many believe to be the fastest growing crime in the country.
5. COPPA Compliance
In 1998, Congress passed the Children's Online Privacy Protection
Act (COPPA) \9\ in order to protect children's personal information in
interactions with commercial sites. The FTC was required to enact a
rule to implement COPPA and in doing so it clarified issues concerning
coverage and liability, modified several definitions that would have
interfered with children's ability to participate, speak and request
information online, and made every effort to create a predictable and
understandable environment for the protection of children's privacy
online.
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\9\ 15 U.S.C. 6501.
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Since issuing its final Rule implementing COPPA, the FTC has taken
several effective and necessary steps to enforce and enhance compliance
with COPPA. In February 2003, the FTC took its most aggressive action
yet to ensure children's privacy online by filing separate settlements
with Mrs. Field's Cookies and Hershey Food Corporation for violating
the law.
While there is still work to be done, we believe that COPPA has
been successful in improving protection of children's privacy online.
This experience demonstrates that the FTC can develop workable privacy
rules in complex and sensitive areas that go well beyond its
traditional arenas.
6. Gramm-Leach-Bliley Compliance
It is generally recognized that, across the financial service
industry, the privacy provisions of GLB have proven unsatisfactory in
scope and implementation--specifically on the issue of notice. A range
of institutions have provided consumer notice that is so detailed and
legalistic as to be largely worthless. If nothing else, the experience
offers a lesson to policymakers seeking to impose and enforce privacy
notice requirements.
Under GLB, the Commission has jurisdiction over important financial
institutions such as insurance and mortgage companies. In an August
2001 survey, CDT found that these companies were among the worst in
posting privacy notices on Websites. That month, we filed a complaint
with the FTC about several mortgage companies that were not posting
notices as required by the FTC's GLB regulations. While the Commission
has not officially closed the case, the five remaining Websites have
now posted privacy policies.
CDT believes that there is more basic, but important enforcement
work that the Commission could to do in the area of privacy notices for
insurance and mortgage companies. Especially, the Commission could play
a leadership role in moving the companies under its GLB jurisdiction
toward simple clear and more meaningful notices.
7. Computer Security Education
The FTC has taken several steps to educate consumers on computer
security. In addition to holding workshops, the FTC has created a
helpful guide for consumers on how to stay safe online using a high-
speed Internet connection. The guide details how users can protect
their computers from viruses and hackers by explaining security
features such as firewalls and updating virus protection software. The
FTC has worked diligently to make the report both understandable and
appealing to the average consumer through careful analysis and easy to
read text. Led by Commissioner Orson Swindle, the Commission has
continued to work with consumer groups to ensure that the guide is easy
to use and contains the necessary information.
8. Internet Privacy Sweeps
Last year, the Commission continued its ongoing assessment of the
state of Internet privacy which began five years ago and has been
repeated twice since. The Commission embraced a report \10\ organized
by the Progress and Freedom Foundation and conducted by the Ernst and
Young accounting firm. The results show significant improvement in the
number of privacy policies posted and the growth of the new privacy
protocol, the Platform for Privacy Preferences (P3P).\11\ This positive
growth is due, in part, to the educational work of the Commission.
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\10\ http://www.pff.org/pr/pr032702privacyonline.htm.
\11\ CDT was the originator of the P3P concept and has continued to
work on the specification and its adoption. More information about P3P
can be found at http://www.w3.org/p3p and http://www.p3ptoolbox.org.
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On the other hand, the study found that self-regulatory seal
programs have actually been shrinking. This is mainly due to the
bankruptcy of many dot com players, but it also indicates that we are
entering a time of a major privacy gap. Some companies are actively
involved in the privacy issue and are doing their best to build trust .
Meanwhile, a small number of free-rider companies are doing no work on
privacy. The marketplace has remained confusing to the average consumer
and many prefer to sit on the sidelines until baseline privacy is
assured.\12\
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\12\ Business Week has conducted a number of surveys showing that
privacy is the number one concern of both those who are not online and
those who are online, but do not shop online. The most recent is
available at http://businessweek.com/2000/00_12/b3673006.htm. Jupiter
Communications has estimated that $18 billion in consumer transactions
did not take place online because of privacy concerns (McCarthy, John,
``The Internet's Privacy Migrane,'' presentation, SafeNet2000, December
18, 2000].
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CDT hopes that Congress will continue to support and monitor the
FTC's privacy sweeps--and we urge the Commission to work with a wide
range of organizations and academics, including consumer groups, when
preparing the parameters and methodology for future sweeps.
9. Wireless Privacy
In December 2000, the Commission held a workshop entitled ``The
Mobile Wireless Web, Data Services and Beyond: Emerging Technologies
and Consumer Issues.'' \13\ As this subcommittee knows well, the
wireless privacy issues have been a growing concern for consumers due
to the emerging use of location tracking technologies to provide
consumers with enhanced services. It was clear from the workshop that
the staff and Commissioners have the understanding and skills necessary
to undertake a serious investigation of privacy and security in this
area. However, the Commission has taken little action in this area
since the workshop. CDT urges the Commission to follow-up with another
workshop in this area as wireless technologies and location
applications progress.
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\13\ A staff summary of the event was released in February 2002
http://www.ftc.gov/bcp/workshops/wireless/.
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10. Online Profiling and Data Mining
Online profiling is the practice of aggregating information about
consumers' preferences and interests, gathered primarily by tracking
their movements online. It remains one of the most complex and opaque
issues in privacy. Consumers are concerned because they know someone is
watching, but they don't know who, how or to what end.
In November 1999, FTC examined online profiling, focusing on the
use of the resulting profiles to create targeted advertising on
Websites.\14\ In July 2000, the FTC issued a two-part report on online
profiling and industry self-regulation.\15\ The Commissioners
unanimously commended the Network Advertising Initiative (NAI) for its
self-regulatory proposal that seeks to implement Fair Information
Practices for the major Internet advertisers' collection of online
consumer data. The July report also asked Congress to enact baseline
legislation to protect consumer privacy. In addition to its several
reports, the FTC has also held a series of public workshops on data
mining in an effort to educate consumers as well as it itself.\16\
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\14\ Public Workshop on ``On-Line Profiling''--http://www.ftc.gov/
bcp/profiling/index.htm.
\15\ http://www.ftc.gov/os/2000/06/
onlineprofilingreportjune2000.pdf and http://www.ftc.gov/os/2000/07/
index.htm#27.
\16\ http://www.ftc.gov/bcp/workshops/infomktplace/index.html.
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Especially important are the issues of government mining of
commercial databases in the name of national security or other
objectives. FTC examination of data quality issues could serve to be
extremely useful.
The reports and workshops that the FTC has undertaken in this area
have represented the best work done in this area internationally.
Unfortunately, since Chairman Muris has taken office, little public
work has been continued in this area. We hope that the Commission will
return to this area, one that causes concern to so many consumers.
III. The Future Role of the FTC in Privacy Issues
While the Commission's privacy work has been successful, it has
also been limited mainly to areas of deceptive or fraudulent practices.
CDT believes that this limited focus is preventing the Commission from
taking on urgently needed actions in the privacy area.
Proposed Privacy Legislation
CDT believes that a comprehensive, effective solution to the
privacy challenges posed by the information revolution must be built on
three components: best practices propagated through self-regulatory
mechanisms including nonprofit,\17\ commercial and governmental
education efforts; privacy as a design feature in products and
services; and some form of Federal legislation that incorporates Fair
Information Practices--long-accepted principles specifying that
individuals should be able to ``determine for themselves when, how, and
to what extent information about them is shared.'' \18\ Legislation
need not impose a one-size-fits-all solution. For broader consumer
privacy, there need to be baseline standards and fair information
practices to augment the self-regulatory efforts of leading Internet
companies, and to address the problems of bad actors and uninformed
companies. Finally, there is no way other than legislation to raise the
standards for government access to citizens' personal information
increasingly stored across the Internet, ensuring that the 4th
Amendment continues to protect Americans in the digital age.
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\17\ CDT has worked closely with the Internet Education Foundation
in the further development of GetNetWise--http://www.getnetwise.org--
which we hope will serve as part of an educational clearinghouse on
child protection, privacy and security issues and technologies. The FTC
has been the single most helpful government agency in the promotion of
GetNetWise.
\18\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967) 7.
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On May 17, 2002 the Senate Commerce Committee passed the Online
Privacy Protection Act. This important legislation would have set a
true baseline of privacy protection and would give the FTC the clear
authority to go after companies engaging in unfair information
practices.
During the Committee process, Senator McCain asked the FTC
Commissioners to give their views on the Online Privacy Protection Act.
In response, Chairman Muris gave five reasons that such a bill was not
necessary at that time.\19\ CDT disagrees respectfully but strongly
with the Chairman. While CDT continues to work with the FTC to help
advance self-regulatory efforts, privacy enhancing technologies and
public education, we believe that these efforts alone are not and
cannot be enough to protect privacy or instill consumer confidence on
their own.
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\19\ http://www.ftc.gov/os/2002/04/sb2201muris.htm.
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CDT commends the Senate Commerce Committee for its excellent work
on privacy issues. We hope that this Committee continues to push for
the FTC's expanded jurisdiction in this area.
Proposed Rescinding of Common Carrier Exemption
The Committee also asked CDT to address the issue of rescinding the
exemption that prevents the Commission from exercising general
jurisdiction over telecommunications ``common carriers.''
The idea of creating a level playing field is appealing,
particularly when some communications services fall within the
jurisdiction of the FTC. In particular, lifting the restriction in
certain areas--such as billing, advertising and telemarketing--could
ensure that the agency with the most expertise in these areas is taking
a leading role.
However, rescinding the exemption completely could lead to
duplication of government regulation and/or confusion for consumers in
certain areas. For example, telecommunications companies are already
subject to the Customer Proprietary Network Information (CPNI) rules
administered by the Federal Communications Commission, which limit
reuse and disclosure of information about individuals' use of the phone
system including whom they call, when they call, and other features of
their phone service. At this point, we are not sure it would be wise to
take this issue away from the FCC. Similar questions may arise with
other issues: Which agency would take the lead? By which rules would a
complaint about deceptive notice be addressed? How will these decisions
be made?
The Commission has been thoughtful in these areas in the past.
Before any jurisdictional proposal moves forward the Commission would
need to have a detailed examination of the issues and pan for dealing
with areas of overlap.
Conclusion
The FTC is to be commended for taking some very laudatory steps to
address the serious and widely shared concerns of the American public
about privacy. Indeed, as the foregoing review of issues demonstrates,
the FTC already has sufficient expertise to take on general privacy
protection responsibilities. However, the Commission has, in our view,
taken an unduly narrow view of its jurisdiction, such that
Congressional action is needed to establish a baseline of fair
information practices in law. We will continue to work with this
Committee and the Commission to find innovative, effective and balanced
solutions to the privacy problems posed by the digital age.
Senator Brownback [presiding]. Thank you very much for
testifying.
I want to thank the entire panel, and the earlier one. I,
unfortunately, had some other commitments, so I was not able to
be here for much of your testimony, nor of the FTC
Commissioners coming in.
I do have a couple of points that I would like to make and
some questions that I would like to raise, briefly. This is not
for any of the panel members, although it is an issue that I
worked with the FTC on closely. It is an investigation on
marketing practices of the entertainment industry toward
children--marketing violence to children by the entertainment
industry.
And I just wanted to compliment the FTC on what I thought
was an extraordinary study, and it had a real impact in the
marketplace, of entertainment companies that were rating
entertainment products for adults and then direct-target
marketing it to children. And they did two studies, the
original study and then a follow-on, that found this practice
widespread, blatant; that, in some movies, R-rated movies, that
they were recruiting children as young as nine in the screening
of it, in the early marketing phase. They would figure out,
``How do we get nine-, ten-, eleven-year-olds to go to this
mature movie, or R-rated movie?'' And it was a deplorable
practice.
But what it did is, it started to change the industry,
saying, ``OK, you caught us.'' And everybody--except the
recording industry, I would note, if anybody is here from the
recording industry, did not amend its practices, and still did
not in the follow-on study, either. But I really want to
compliment the FTC for taking that issue very seriously, and
seriously for the society, and having a major impact of the
change, overall.
Ms. Deutsch, I would like to ask you an issue that is
somewhat off the mark on FTC reauthorization but is a current
issue. And it is in the media now, so I want to get it--I would
like--and take advantage of your expertise and knowledge--is
the Verizon case with RIAA on privacy on the Internet. We
passed a law--oh, gosh, is that last year--Millennium Copyright
Act, and it has been interpreted by the courts. And this is one
of the first--I believe it is the first case, really, to
interpret this. There is a strong concern about the privacy
issues involved here.
And I realize you are representing Verizon, so you have a
particular point of view on it, but I would like for you to
identify what the issues are in that privacy case, because it
may be something that comes back up in front of this Committee
or in front of the Congress on a case that is between--of
trying to balance this issue between privacy and protection of
copyrights of intellectual property.
Could you give us a bit of a background and narrow in on
the issue involved in that case?
Ms. Deutsch. Yes, sure.
This case involves Section----
Senator Brownback. Pull that microphone up a little closer,
please.
Ms. Deutsch. Sorry.
The case involves Section 512(h) of the Digital Millennium
Copyright Act, which governs when can a copyright owner
subpoena someone's identity. And it was the service provider's
understanding, when we negotiated this law back in 1998, that
they could only use this process when the person's identity
they were seeking had material that actually resided on our
system or network, so we would have someplace to look. If we
saw that the material was there, it looked like it was
copyright infringement, the subpoena would be valid.
But with the growth of the Internet and peer-to-peer file
sharing, the copyright owners, in our view, have tried to
stretch an old law to fix a new business problem in a very
inappropriate manner. They want the right to use this subpoena
process to get access to anyone's identity for conduct that
does not occur on our network, but on the user's home computer.
All they need to do is fill out a one-page form. If the
form is filled out correctly, they give it to the clerk of the
court, who is just a ministerial employee, not a judge. There
is no requirement to file a lawsuit or prove you have a
registered copyright, or even prove the merits of your case. If
the one-page form is filled out correctly, the clerk of the
court will stamp that subpoena and then give it to the service
provider, and no one in the process has discretion. At that
point, we turn over the name of the Internet user.
And we are very worried that not only the recording
industry, but because anyone can be a copyright owner, there
will be a lot of misuses of the process--by copyright owners,
by people who just want your identity for purposes of identity
theft or to stalk you or to harm you in some manner. And we do
not want to wait until something terrible happens to consumers.
We want to fix the problem now, if possible.
Senator Brownback. How many--I am working on a bill on this
issue. I am really trying to hit the balance, which is tough to
do, to protect that copyright--protection of intellectual
property, but also privacy. How many of these subpoenas has
Verizon received? Do you know?
Ms. Deutsch. Before the recording industry suit, we really
only received a handful of subpoenas. No one was using it. But
they began a test case, and so we received four from the
recording industry for materials off our network.
In 2001, we did receive a subpoena from a copyright bounty
hunter, called Copyright.net. They sought, in a single
subpoena, the identities of nearly 240 of our subscribers, and
they sent the same subpoena to UUNET, seeking almost 3,000
subscribers' identities in a single subpoena. And at that time,
we wrote to them and said, ``This is invalid,'' and it went
away.
But our concern is that we will be receiving an avalanche
of subpoenas from, again, the entire population, seeking
people's identity, and we will have no way to know whether the
subpoenas are valid or not.
Senator Brownback. What do you mean a ``bounty''--you said
``bounty hunter''?
Ms. Deutsch. Yes, the copyright community hires--I guess
you could call them--we call them ``third-party bounty
hunters.'' They are companies who work for the copyright
community using Internet search bots that scour the Internet
for file names that match the names of the copyrighted works,
and they send, electronically, millions of notices to the
service providers. And because of the volume that we are
talking about, and the lack of due diligence, the bounty
hunters make mistakes.
Senator Brownback. I was not familiar with that practice.
I am hopeful this is an issue that the Congress can review,
again, to try to hit this balance, but also to protect the
privacy of legitimate uses, and not encourage, sort of, bounty-
hunter type of practices to take place, as well.
I want to thank the panel. As you were going through--I do
not know if anybody had a comment that they wanted to make in
response to any of the other panel members, but, just before we
close, I would like to open that opportunity up to any panel
members, if they did have one.
Ms. Grant?
Ms. Grant. I just want to say that the National Consumers
League has signed on to a brief in support of the Verizon issue
in that case. We think it is very important.
Senator Brownback. Thank you.
Mr. Rotenberg. Senator, I wanted to make to mention that I
was involved in the amendments to the Federal Wiretap Statute
to provide privacy protection for Internet users in the mid-
1980s. And I also testified in the House in the late 1990s,
when the Digital Millennium Copyright Act was then under
consideration. And I warned that Committee that that statute
was going to create some new privacy problems for users and
also create very difficult problems for the communications
industry.
So I just wanted to say that I think your efforts on this
issue are very important and also actually quite consistent
with the efforts of Congress to safeguard privacy in the
communications environment. Without that, without that
assurance of privacy protection, I think there are going to be
some real problems for all parties.
Senator Brownback. Mr. Rotenberg, where you have worked on
this previously, with the Verizon case going against the RIAA
case, versus Verizon going against Verizon, where do you see
this heading now, then, where there seems to be a court
declaration supporting this sort of process?
Mr. Rotenberg. Well, sir, actually I think your efforts
right here in the Senate are the critical next step. Because
while I disagree with the judge's determination in that case, I
think it has to be made clear to the courts that it really was
not the intent of the Congress that it would be so easy, under
the DMCA, to use a mere subpoena to get access to information
about millions of users. This was--you know, if you go back
through the legislative history and also through the Federal
Wiretap Amendments, it was clear that there were supposed to be
much higher standards.
As you said, sir, you clearly need to enforce copyright
laws. You do not want people to be able to escape prosecution
when that prosecution is appropriate. But in the structure of
the Federal Wiretap Statute, you want to be certain that, when
those prosecutions go forward, it is not on the mere whim of a
subpoena, as Ms. Deutsch described.
Senator Brownback. Well, I would hope that the industry,
that the intellectual-property industry, that is putting this
forward, much of it in the entertainment industry and other
places, would certainly understand the needs for privacy and
the really tough situation we put people in if you start
subjecting them to privacy concerns, and on hundreds and
thousands of inquiries over the Internet. I cannot think that
the entertainment industry would be very excited about a lot of
searches like that going out over the Internet to different
individuals.
Hopefully, we are going to be able to work together to try
to get this resolved, because I certainly do not think the
consumer is going to like the notice, or this notion, of these
being--hundreds and thousands of these inquiries and searches
going out, and bounty hunters in the process.
I want to thank the panel very much for coming in. And I
express my appreciation to past work that I have had with the
FTC.
The record will remain open for the requisite number of
days for the answering of questions that may be submitted.
We do appreciate your participation.
The hearing is adjourned.
[Whereupon, at 5:08 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
I thank the Chair for holding today's reauthorization hearing, as
the Federal Trade Commission has been the centerpiece of numerous
recent policy discussions. Given the heightened attention to the high
tech sector in particular, it is fitting that we examine the role that
the FTC plays today and may play in the future. This reauthorization
hearing will allow us to focus on several issues, but the most
important in my view are the requests by the FTC for common carrier
jurisdiction and a grant of rulemaking over ``abusive and deceptive''
practices concerning spam.
The request put forward by the FTC for common carrier jurisdiction
strikes me as misguided and over-reaching. I agree with the well-
reasoned, commonsense position of FCC Consumer Affairs Bureau Chief
Snowden, who in a recent letter to the FTC indicated that the FCC has
far greater resources available to deal with common carrier issues and
also a greater scope for enforcement. For example, if the FCC takes
action against a common carrier it may revoke licenses, unlike the FTC.
While the Commissions should work together for the benefit of the
consumer, I simply do not believe that having two Federal agencies
performing essentially the same core functions is effective. Rather, I
am supportive of the idea of a Memorandum of Understanding between the
Commissions that would clarify the role of each agency to prevent the
inefficiencies and duplication of work which inevitably arise from
overlapping jurisdictions.
I also want to discuss a topic which is of great concern to me, the
spiraling problem of spam. This volume of this ``digital dreck'' has
become so overwhelming that it is expected to overtake regular e-mail
this very summer. While I am pleased that the FTC has been addressing
spam, including holding a very productive Spam Forum recently, I am
troubled by the direction the Commission has taken in its testimony
today.
Rather than a broad grant of rulemaking over ``abusive and
deceptive'' practices as exists in the FTC's telemarketing authority, I
believe that the best way to proceed in this area is with specific
requirements set forth by the Congress. Senator Wyden and I have been
working on antispamming legislation for several years now and in fact
the CAN-SPAM bill is scheduled for the June 19 markup in the Committee.
We have been working to identify appropriate guidelines for legitimate
businesses and strong enforcement tools to combat bad actors and I am
confident that the right balance has been struck in the CAN-SPAM bill.
While focused rulemaking may provide assistance by following specific
provisions set forth by the Congress, I am extremely wary of wide
grants of vague additional authority.
I value the expertise of the Commission and look forward to working
with it on both technical and legal ways to resolve the increasingly
damaging problem of spam. Thank you.