[Senate Hearing 108-951]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 108-951

                        REAUTHORIZATION OF THE 
                     FEDERAL TRADE COMMISSION (FTC)



                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION


                             JUNE 11, 2003


    Printed for the use of the Committee on Commerce, Science, and 

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                      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
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


                   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

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


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


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 
        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.

                    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, 
    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.


    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.

                   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.

                    FEDERAL TRADE COMMISSION

    Mr. Muris. Thank you very much, Mr. Chairman. We certainly 
appreciate the opportunity to testify today about our 
    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 
    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. 

                        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 
    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 
    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 
    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 
    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.
    Senator Dorgan. I know that you may have taken it 
personally that you have driven most of the Members out of the 
room, but----
    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.


    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 
    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 
    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 
    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.


    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 
    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 
    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 

           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 
    \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.
    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.
    \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 .
    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.
    \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.
    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\
    \5\ FTC v. Access Resource Services, Inc., Civ. Action No. 02-
60226-CIV Gold/Simonton (S.D. Fla. Nov. 4, 2002).
    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\
    \6\ FTC v. SkyBiz.com, Inc., Civ. Action No. 01-CV-396-EA (M) (N.D. 
Okla. Jan. 28, 2003).
    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.
    \7\ FTC v. Mitchell Gold, Civ. Action No. SAcv 98-968 DOC (Rzx) 
(C.D. Cal. Mar. 7, 2003).
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\
    \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 .
    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\
    \9\ Eli Lilly & Co., Dkt. No. C-4047 (May 10, 2002).
    In December 2002, the FTC settled charges against Microsoft 
Corporation that, among other things, the company misrepresented the 
measures it used to maintain and protect the privacy and 
confidentiality of consumers' personal information collected through 
its Passport web services.\10\ Microsoft has agreed to implement a 
comprehensive information security program for Passport and similar 
services. The FTC will continue to bring actions involving claims 
deceptively touting the privacy and security features of products and 
services, as well as failures to maintain adequate security for 
personal information.
    \10\ Microsoft Corp., Dkt. No. C-4069 (Dec. 24, 2002).
    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\
    \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 
    \12\ FTC Facts for Businesses, Financial Institutions and Customer 
Data: Complying with the Safeguards Rule, available at .
    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.
    \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).
    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.
    \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.
    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\
    \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.
    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\
    \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 .
    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\
    \20\ FTC v. BTV Indus., Civ. Action No. CV-S-02-0437-LRH-PAL (D. 
Nev. Jan. 6, 2003).
    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.
    \21\ FTC v. Brian D. Westby, Civ. Action No. 03-C-2540 (N.D. Ill. 
filed Apr. 15, 2003).
    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.''
    \22\ Draft transcripts of the forum are available at .
    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 
    \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.
    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.
    \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 
    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.
    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\
    \25\ See .
    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.
    \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).
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\
    \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.
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.
    \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).
    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.
    \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 .
    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 
    \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.
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\
    \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 
        the private sector and the FTC.

   Providing technical assistance. The FTC wants to ensure that 
        no developing country becomes a haven for fraud. Therefore, it 
        is conducting U.S. AID-funded technical assistance on consumer 
        protection issues in various developing countries. Last year, 
        the FTC conducted technical assistance missions for consumer 
        protection authorities from 13 Eastern European countries, 
        including Hungary and Slovenia. This year, the FTC is planning 
        to conduct missions in Romania, Russia, and Peru.

   Recommending proposals for legislative amendments. Many of 
        the challenges the FTC faces in combating cross-border fraud 
        might best be addressed through legislative changes. The FTC's 
        proposals for legislative changes are described in Section IV 
        of this testimony.

F. Initiatives Designed to Reach Specific Consumer Groups
    The FTC has implemented a variety of initiatives that assist 
particular consumer groups, including children, Spanish-speaking 
consumers, and military personnel and their families.
    1. Protecting Children. The agency maintains an active program to 
monitor, report on, and provide educational materials about marketing 
activities affecting children. The FTC continues to monitor the 
marketing of violent entertainment products to children. Since 
September 2000, the agency has issued a series of reports on this 
issue.\42\ The FTC intends to issue a fourth follow-up report on the 
industries' practices. The staff also is working with retailer trade 
groups to devise a consumer education message for parents, and is 
preparing to hold a public workshop on these issues later this year.
    \42\ FTC, Marketing Violent Entertainment to Children: A Review of 
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 
    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\
    \43\ FTC Consumer Alert, Online Gambling and Kids: A Bad Bet (June 
26, 2002), available at .
    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\
    \44\ Conference Report on the Omnibus Appropriations Bill for FY 
2003, H. Rep. No. 108-10 (Feb. 13, 2003)
    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 
    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.
    \45\ United States v. United Recovery Systems, Inc., Civ. Action 
No. H-02-1410 (sl) (S.D. Tex. Apr. 22, 2002).
    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.
    \46\ FTC Facts for Consumers, Military Sentinel: Fact Sheet, 
available at .
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 
    \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.
    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
    \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\
    \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.
    \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).
    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.
    \52\ Pfizer Inc., Dkt. No. C-4075 (Apr. 14, 2003) (proposed consent 
agreement accepted for public comment).
    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.
    \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.
    \54\ Baxter International Inc. and Wyeth, Dkt. No. C-4068 (Feb. 3, 

   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.
    \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\
    \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 .
    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 
    \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).
    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.
    \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.
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\
    \61\ Conoco Inc. and Phillips Petroleum Company, Dkt. No. C-4058 
(Feb. 7, 2003) (consent order).
    2. Natural Gas Merger Investigations. The FTC also has investigated 
mergers in the natural gas industry and taken necessary action to 
preserve competition. Just two weeks ago, the Commission accepted for 
public comment a consent order designed to preserve competition in the 
market for the delivery of natural gas to the Kansas City area.\62\ The 
proposed order conditionally would allow Southern Union Company's $1.8 
billion purchase of the Panhandle pipeline from CMS Energy Corporation, 
while requiring Southern Union to terminate an agreement under which 
one of its subsidiaries managed the Central pipeline, which competes 
with Panhandle in the market for delivery of natural gas to the Kansas 
City area. Absent the settlement agreement, the transaction would have 
placed the two pipelines under common ownership or common management 
and control, eliminating direct competition between them, and likely 
resulting in consumers' paying higher prices for natural gas in the 
Kansas City area.
    \62\ Southern Union Co., File No. 031-0068 (May 29, 2003) 
(agreement accepted for public comment).
    3. Gasoline Monopolization Case. As highlighted above, the 
Commission recently issued an administrative complaint in an important 
nonmerger case involving the Union Oil Company of California 
(``Unocal'').\63\ The complaint alleges that Unocal violated Section 5 
of the FTC Act by subverting the California Air Resources Board's 
(``CARB'') regulatory standard-setting procedures of the late 1980s 
relating to low-emissions reformulated gasoline (``RFG''). According to 
the complaint, Unocal misrepresented to industry participants that some 
of its emissions research was non-proprietary and in the public domain, 
while at the same time pursuing a patent that would permit Unocal to 
charge royalties if CARB used such emissions information. The complaint 
alleged that Unocal did not disclose its pending patent claims and that 
it intentionally perpetuated the false and misleading impression that 
it would not enforce any proprietary interests in its emissions 
research results. The complaint states that Unocal's conduct has 
allowed it to acquire monopoly power for the technology to produce and 
supply California ``summer-time'' RFG, a low-emissions fuel mandated 
for sale in California from March through October, and could cost 
California consumers five cents per gallon in higher gasoline prices. 
This case is pending before an Administrative Law Judge.
    \63\ Union Oil Co. of California, Dkt. No. 9305 (complaint issued 
Mar. 4, 2003).
    4. Study of Refined Petroleum Product Prices. Building on its 
enforcement experience in the petroleum industry, the FTC is studying 
the causes of volatility in refined petroleum products prices. In two 
public conferences, held in August 2001 and May 2002,\64\ participants 
discussed key factors that affect product prices, including increased 
dependency on foreign crude sources, changes in industry business 
practices, and new governmental regulations. The information gathered 
through these public conferences will form the basis for a report to be 
issued later this year.
    \64\ FTC Press Release, FTC to Hold Public Conference/Opportunity 
for Comment on U.S. Gasoline Industry in Early August (July 12, 2001), 
available at ; FTC Press 
Release, FTC Chairman Opens Public Conference Citing New Model To 
Identify and Track Gasoline Price Spikes, Upcoming Reports (May 8, 
2002), available at .
    5. Gasoline Price Monitoring. In May 2002, the FTC announced a 
project to monitor wholesale and retail prices of gasoline in an effort 
to identify possible anticompetitive activities to determine if a law 
enforcement investigation would be warranted. This project tracks 
retail gasoline prices in approximately 360 cities nationwide and 
wholesale (terminal rack) prices in 20 major urban areas. The FTC 
Bureau of Economics staff receives daily data purchased from the Oil 
Price Information Service (``OPIS''), a private data collection 
company. The economics staff uses an econometric (statistical) model to 
determine whether current retail and wholesale prices each week are 
anomalous in comparison with historical data. This model relies on 
current and historical price relationships across cities, as well as 
other variables.
    As a complement to the analysis based on OPIS data, the FTC staff 
also regularly reviews reports from the Department of Energy's Consumer 
Gasoline Price Hotline, searching for prices significantly above the 
levels indicated by the FTC's econometric model or other indications of 
potential problems. Throughout most of the past two years, gasoline 
prices in U.S. markets have been within their predicted normal bounds. 
Of course, the major factor affecting U.S. gasoline prices is the 
substantial fluctuation in crude oil prices. Prices outside the normal 
bounds trigger further staff inquiry to determine what factors might be 
causing price anomalies in a given area. These factors could include 
supply disruptions such as refinery or pipeline outages, changes in 
taxes or fuel specifications, unusual changes in demand due to weather 
conditions and the like, and possible anticompetitive activity.
    To enhance the Gasoline Price Monitoring Project, the FTC has 
recently asked each state Attorney General to forward to the FTC's 
attention consumer complaints they receive about gasoline prices. The 
staff will incorporate these complaints into its ongoing analysis of 
gasoline prices around the country, using the complaints to help locate 
price anomalies outside of the 360 cities for which the staff already 
receives daily pricing data.
    The goal of the Monitoring Project is to alert the FTC to unusual 
changes in gasoline prices so that further inquiry can be undertaken 
expeditiously. When price increases do not appear to have market-driven 
causes, the FTC staff will consult with the Energy Information Agency 
of the Department of Energy. The FTC staff also will contact the 
offices of the appropriate state Attorneys General to discuss the 
anomaly and the appropriate course for any further inquiry, including 
the possible opening of a law enforcement investigation.

C. High Technology
    With its history of keeping pace with marketplace developments, the 
FTC is well-positioned to take a leading role in assessing the impact 
of technology on domestic and world markets. In addition to bringing 
enforcement actions in high tech areas, the FTC is studying the impact 
of the Internet and intellectual property on competition law and 
    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\
    \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.
    \68\ FTC Press Release, Muris Announces Plans for Intellectual 
Property Hearings (Nov. 15, 2001), available at .
    3. Internet Task Force. In 2001, the FTC's Internet Task Force 
began to evaluate potentially anticompetitive regulations and business 
practices that could impede e-commerce. The Task Force has discovered 
that some state regulations may have the effect of protecting existing 
bricks-and-mortar businesses from new Internet competitors. The Task 
Force also is considering whether private companies may be hindering e-
commerce through the use of potentially anticompetitive tactics. In 
October 2002, the Task Force held a public workshop to: (1) enhance the 
FTC's understanding of these issues; (2) educate policymakers about the 
potential anticompetitive effects of state regulations; and (3) educate 
private entities about the types of business practices that may be 
viewed as problematic.\69\
    \69\ FTC Press Release, FTC to Host Public Workshop to Explore 
Possible Anticompetitive Efforts to Restrict Competition on the 
Internet (July 17, 2002), available at .
D. International Competition
    Because competition increasingly takes place in a worldwide market, 
cooperation with competition agencies in the world's major economies is 
a key component of the FTC's enforcement program. Given differences in 
laws, cultures, and priorities, it is unlikely that there will be 
complete convergence of antitrust policy in the foreseeable future. 
Areas of agreement far exceed those of divergence, however, and 
instances in which differences will result in conflicting results are 
likely to remain rare. The agency has increased its cooperation with 
agencies around the world, both on individual cases and on policy 
issues, and is committed to addressing and minimizing policy 
    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\
    \70\ Bayer AG and Aventis S.A., Dkt. No. C-4049 (July 24, 2002) 
(consent order).
    Also, in October 2002, the Commission authorized the staff to seek 
a preliminary injunction in Federal court blocking the proposed 
acquisition of the Claussen Pickle Company by the owner of the Vlasic 
Pickle Company.\71\ If allowed to proceed, the combined firm would have 
had a monopoly share of the refrigerated pickle market in the United 
States. Following the FTC's decision, the parties abandoned the 
proposed acquisition.
    \71\ FTC v. Hicks, Muse, Tate & Furst Equity Fund V, LP, Civ. 
Action No. 1:02-cv-02070-RWR (D.D.C. filed Oct. 23, 2002). A notice of 
voluntary dismissal was filed on October 31, 2002.
    2. Mergers Not Reportable Under HSR. The FTC will continue to 
devote resources to monitoring merger activities that are not subject 
to premerger reporting requirements under HSR, but that could be 
anticompetitive. In 2000, Congress raised the HSR size-of-transaction 
filing threshold to eliminate the reporting requirement for smaller 
mergers, but of course it did not eliminate the substantive prohibition 
under Section 7 of the Clayton Act \72\ against smaller mergers that 
may substantially lessen competition. Consequently, the FTC must 
identify--through means such as the trade press and other news 
articles, consumer and competitor complaints, hearings, and economic 
studies--and remedy those unreported, usually consummated mergers that 
could harm consumers.
    \72\ 15 U.S.C. Sec. 18.
    One notable example is the case against MSC.Software 
Corporation.\73\ In this case, the company ultimately agreed to settle 
FTC allegations that MSC's 1999 acquisitions of Universal Analytics, 
Inc. and Computerized Structural Analysis & Research Corporation 
violated Federal antitrust laws by eliminating competition in, and 
monopolizing the market for, advanced versions of Nastran, an 
engineering simulation software program used throughout the aerospace 
and automotive industries. Under the terms of the settlement agreement, 
MSC must divest at least one clone copy of its current advanced Nastran 
software, including the source code. The divestiture will be through 
royalty-free, perpetual, non-exclusive licenses to one or two acquirers 
who must be approved by the FTC.
    \73\ MSC.Software Corp., Dkt. No. 9299 (Oct. 29, 2002).
    3. Enforcement of FTC Merger Orders. The FTC also will litigate, 
when necessary, to ensure compliance with Commission orders protecting 
competition. In March, a Federal judge fined Boston Scientific 
Corporation (``BSC'') for violating a licensing requirement in a merger 
settlement involving medical technology used to diagnose and treat 
heart disease.\74\ To preserve competition in the market for 
intravascular ultrasound catheters following its acquisition of two 
competitors, BSC had agreed to license its catheter technology to 
Hewlett-Packard Company. Finding that BSC ``acted in bad faith'' and 
took an ``obstreperous approach'' to its obligation, the court assessed 
a civil penalty of more than $7 million. This represents the largest 
civil penalty ever imposed for violation of an FTC order.
    \74\ United States v. Boston Scientific Corp., Civ. Action No. 00-
12247-PBS, Memorandum and Order (D. Mass. Mar. 28, 2003).
IV. Legislative Recommendations
    To improve the agency's ability to implement its mission and to 
serve consumers, the FTC makes the following recommendations for 
legislative changes. The FTC staff will be happy to work with 
Subcommittee staff on these recommendations.

A. Elimination of the FTC Act's Exemption for Communications Common 
    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 

B. Legislation to Improve the FTC's Ability to Combat Cross-Border 
    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 
    These proposals also would help the FTC fight deceptive spam. As 
the agency has learned from investigations and discussions at the 
recent FTC spam forum, spammers easily can hide their identity, forge 
the electronic path of their e-mail messages, or send their messages 
from anywhere in the world to anyone in the world. Also, a large 
percentage of spam comes from outside our borders. For these reasons, 
the spam forum participants emphasized that successful efforts to 
combat deceptive spam will require international enforcement 
cooperation. These legislative proposals can improve the FTC's ability 
to cooperate with international partners on this issue.
    The FTC staff has discussed these legislative proposals with other 
affected agencies, and these agencies generally support the goals of 
the proposals. The FTC staff is continuing to work with these agencies 
on the details of a few of the proposals.
    The FTC's cross-border proposal includes four main components. 
First, the FTC is seeking to strengthen, in a number of ways, its 
ability to cooperate with foreign counterparts, who are often 
investigating the same targets. Under current law, for example, the FTC 
is prohibited from sharing with foreign counterparts certain 
information that the FTC has obtained in its investigations. 
Legislation is necessary to allow the agency to share such information 
and provide other investigative assistance in appropriate cases.\75\
    \75\ The Securities Exchange Commission, the Commodity Futures 
Trading Commission, and the Federal financial regulators already have 
the authority to share information and cooperate with their foreign 
counterparts. See 15 U.S.C. Sec. 78x(c); 15 U.S.C. Sec. 78u(a)(2); 7 
U.S.C. Sec. 12(e); 7 U.S.C. Sec. 16(f); 12 U.S.C. Sec. 3109(a)-(b); and 
12 U.S.C. Sec. 1818(v)(2). The FTC's proposal is modeled after these 
    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 
    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 
    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 
    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. 
    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 
    \77\ The FTC has determined, in the Statement of Basis and Purpose 
for the Amended TSR, that the undefined term ``abusive'' used in the 
legislation authorizing that Rule will be interpreted to encompass 
``unfairness.'' 68 Fed. Reg. 4580, 4614 (2003).
    First, amendment of the statute would give the FTC general 
discretionary authority via rulemaking to address deceptive practices 
relating to spam. The rule would set out bright lines between 
acceptable and unacceptable practices for the business community. The 
list of deceptive practices could include: the use of false header or 
routing information; the use of false representations in the 
``subject'' line; the use of false claims that an unsolicited 
commercial e-mail message was solicited; and the use of false 
representations that an opt-out request will be honored. As with 
telemarketing, a rule also could prohibit assisting and facilitating 
any of the above, i.e., providing substantial assistance to another 
party engaged in any rule violation knowing or consciously avoiding 
knowing that such party is engaged in such violation.
    Second, amendment of the statute would give discretionary authority 
via rulemaking to address abusive practices relating to spam. Specific 
abusive practices might include: sending any recipient an unsolicited 
commercial e-mail message after such recipient has requested not to 
receive such commercial e-mail messages; failing to provide a 
reasonable means to ``opt out'' of receiving future e-mail messages; 
and sending unsolicited commercial e-mail to an address obtained 
through harvesting or a dictionary attack.
    Third, amendment of the TCFAPA would ensure that the Rule embodies 
the same standard of liability that is embodied in Section 5 of the FTC 
Act, without a general requirement to show intent or scienter. 
Imposition of intent or scienter requirements would unnecessarily 
complicate enforcement, and also would actually constrict the scope of 
the FTC's existing authority under Section 5 to attack spam.
    Fourth, the amended statute would provide that the Rule would be 
enforceable, like all FTC Rules, through FTC actions in Federal 
district court, and it further would provide that violators would be 
subject to preliminary and permanent injunctions and could be ordered 
to pay redress to consumers. In addition, in an action brought by DOJ 
on behalf of the FTC, violators would be liable to pay civil penalties 
of up to $11,000 per violation (the amount of civil penalties is 
governed by statutory factors, such as ability to pay, previous history 
of such conduct, egregiousness of the conduct, etc.).
    Like the existing statute, the amended TCFAPA would authorize 
states to enforce the FTC Rule in Federal court to obtain injunctions 
and redress for their citizens, but not civil penalties. The TCFAPA 
authorizes a private right of action for any person adversely affected 
by a violation of the FTC's Telemarketing Sales Rule if the amount in 
controversy exceeds $50,000 in actual damages for each person adversely 
affected by such action. The FTC, however, will need to assess whether 
the inclusion of an analogous provision in an amended TCFAPA that 
addresses spam would be appropriate, effective, and feasible.
    Finally, the rulemaking authority granted through this amendment 
could be adapted to new changes in technology without hindering 
technological innovation.
    An amended TCFAPA should seek to assure consistency between state 
and Federal laws. The scope of the Internet and of e-mail communication 
is global, transcending national boundaries. Congress should seek to 
minimize artificial barriers that would break up this market.
    In addition to the TCFAPA amendments, the possible criminalization 
of false header and routing information should be explored. There is 
some debate over whether the wire fraud statute covers fraud in the 
sending of e-mail communications. The FTC staff is discussing this 
issue with criminal authorities to determine whether a specific statute 
that criminalized this conduct would clear up any statutory confusion 
or encourage spam prosecutions. At this time, the FTC has no 
recommendations on whether changes in the criminal code are necessary 
or appropriate.\78\
    \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 
    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 
    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 
    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 
    Senator Wyden. Mr. Chairman, my time is up. I would like to 
make part of the record the study that Mr. Muris is talking 
    [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 

    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 
    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 
    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, 
    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.
    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.
    Senator Smith. All right, thank you.
    Mr. Muris. We will look. It would not surprise me.
    Senator Smith. Senator 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 
    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 
    Senator Lautenberg. Yes. No, I had enough spam when I was 
in the Army, and I am not looking for more.
    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 
    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 
    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 
    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 
    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 
    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.




    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 
    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 
    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 
    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 

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 
    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 
    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 

   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 
    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 
    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 
    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 

General Recommendations
    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.

    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.

    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.




    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 
    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 
    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 
    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=
    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 
    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.


    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 

    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.


    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 
    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 
    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 
    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 
    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 

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
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
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
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
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
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
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
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
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
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
06-04-2002                    Citation issued to Insight Dynamics
                               Corporation, San Ramon, California for
                               violations of the TCPA and Commission's
                               rules regarding unsolicited fax
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
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
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.

                        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 
    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 
    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 
    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 
    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 
    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 

    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; 

  (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

    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 
    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 
    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.

    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 
    ``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 
    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.

    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 

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 

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 

Recommendations to ADR Service Providers
    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.

    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 
    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.

    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 

    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 

    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 

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 
    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 
    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 

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 
    Mr. Schwartz? And then Senator Brownback.

                    DEMOCRACY AND TECHNOLOGY

    Mr. Schwartz. Mr. Chairman, Senator Brownback, thank you 
very much, and thank you for coming and rescuing the Chairman--
    Mr. Schwartz.--so that I can go into a little bit more 
    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 
    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 

    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\
    \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 
        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\
    \2\ For more information on CDT's views on the CAN SPAM act, please 
see our recent Policy Post http://www.cdt.org/publications/
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.
    \3\ 15 U.S.C. 6101-6108.
    \4\ 16 CFR Part 310.
    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\
    \5\ http://research.aarp.org/consume/nj_telemarketing.pdf.
    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.
    \6\ CDT's comments, filed in coalition of other consumer groups, 
can be found at: http://www.ftc.gov/os/comments/dncpapercomments/04/
    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\
    \7\ The Interim Report of the Authentication Privacy Principles 
Working Group can be found at: http://www.cdt.org/privacy/
    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 
    \8\ http://www.consumer.gov/idtheft/.
    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 
    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 
    \9\ 15 U.S.C. 6501.
    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.
    \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.
    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 
    \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].
    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.
    \13\ A staff summary of the event was released in February 2002 
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\
    \14\ Public Workshop on ``On-Line Profiling''--http://www.ftc.gov/
    \15\ http://www.ftc.gov/os/2000/06/
onlineprofilingreportjune2000.pdf and http://www.ftc.gov/os/2000/07/
    \16\ http://www.ftc.gov/bcp/workshops/infomktplace/index.html.
    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.
    \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 
    \18\ Alan Westin. Privacy and Freedom (New York: Atheneum, 1967) 7.
    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 
    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.
    \19\ http://www.ftc.gov/os/2002/04/sb2201muris.htm.
    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.

    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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.