[Senate Hearing 110-1148]
[From the U.S. Government Publishing Office]






                                                       S. Hrg. 110-1148

                FEDERAL TRADE COMMISSION REAUTHORIZATION

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 8, 2008

                               __________

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















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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         KAY BAILEY HUTCHISON, Texas
BYRON L. DORGAN, North Dakota        OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California            GORDON H. SMITH, Oregon
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
FRANK R. LAUTENBERG, New Jersey      JIM DeMINT, South Carolina
MARK PRYOR, Arkansas                 DAVID VITTER, Louisiana
THOMAS R. CARPER, Delaware           JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi
AMY KLOBUCHAR, Minnesota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
   Christine D. Kurth, Republican Staff Director and General Counsel
                  Paul Nagle, Republican Chief Counsel















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 8, 2008....................................     1
Statement of Senator Cantwell....................................    37
Statement of Senator Dorgan......................................     1
Statement of Senator Klobuchar...................................     9
Statement of Senator McCaskill...................................    34
Statement of Senator Snowe.......................................    39

                               Witnesses

Harbour, Hon. Pamela Jones, Commissioner, Federal Trade 
  Commission.....................................................    23
Kovacic, Hon. William E., Chairman, Federal Trade Commission.....    11
    The Federal Trade Commission, prepared statement.............    13
Leibowitz, Hon. Jonathan D., Commissioner, Federal Trade 
  Commission.....................................................    25
Rosch, Hon. J. Thomas, Commissioner, Federal Trade Commission....    26

                                Appendix

Response to written questions submitted to the Federal Trade 
  Commission by:
    Hon. John Ensign.............................................    62
    Hon. John D. Rockefeller IV..................................    55
    Hon. Olympia J. Snowe........................................    58

 
                FEDERAL TRADE COMMISSION REAUTHORIZATION

                              ----------                              


                         TUESDAY, APRIL 8, 2008

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10 a.m. in room 
SR-253, Russell Senate Office Building, Hon. Byron L. Dorgan, 
presiding.

          OPENING STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. We will call the hearing to order. This is 
the hearing of the full Senate Commerce Committee.
    The subject today is the Federal Trade Commission 
Reauthorization bill.
    The Federal Trade Commission is a very important Federal 
agency, perhaps more important now than ever, and despite that, 
the Federal Trade Commission has been one of those agencies 
that has shrunk in size, despite the fact that it has a broader 
agenda in many ways.
    It has been reduced from a pre-1980 high of roughly 1,700 
employees to now 1,100 employees. Its jurisdiction would have 
been or should be dealing with things like deceptive 
advertising and competition and subprime loans. All of us 
understand the nomenclature of subprime lending these days and 
what it has done to cause economic difficulties: oil pricing, 
consumer protection, mergers, trade.
    All of these are very, very important issues and they have 
become even more important at a time when the Federal Trade 
Commission has a third less people than it did 25 years ago to 
do its work.
    I want to put up a couple of posters, if I might, this 
morning. I especially want to talk about the importance of 
having a Federal Trade Commission that can establish a set of 
rules with respect to deceptive advertising, and I do this only 
because we have on the Floor of the Senate today the housing 
issue which relates to the subprime scandal and a lot of 
reasons and a lot of causes, but I want to describe some of 
them.
    This is an advertisement that most of us have been treated 
to here in this country. It's from a company called Zoom 
Credit. I don't know who Zoom Credit is, but here's what they 
were telling us in advertising. ``Credit approval is just 
seconds away. Get on the fast track at Zoom Credit . . . Even 
if your credit is in the tank, Zoom Credit's like money in the 
bank. We specialize in credit repair and debt consolidation. 
Bankruptcies, slow credit, no credit--who cares?'' That's an 
advertisement to the American people.



    Senator Dorgan. Next chart. Millennium Mortgage, ``Twelve 
months No Mortgage payment. That's right. We'll give you the 
money to make your first 12 payments if you call in the next 7 
days. We pay it for you. Our loan program may reduce your 
current monthly payments by as much as 50 percent and allow you 
no payments for the first 12 months.'' That's an advertisement 
to the American people by Millennium Mortgage. Didn't mention, 
of course, that the first 12 months goes in the back of the 
loan and actually increased the price of the house.



    Senator Dorgan. Countrywide, the largest lender in this 
country, said this in their ad. ``Do you have less than perfect 
credit? Do you have late mortgage payments? Have you been 
denied by other lenders? Call us.'' That's from the largest 
mortgage bank in this country.



    Senator Dorgan. And by the way, these are still on the 
Internet. We got some yesterday: 2,500 of a percent fixed loan. 
One-quarter of 1 percent rate for a fixed loan; $500,000, half 
a million loan, your payment's going to be a $104 a month. 
That's what they're advertising. They don't, of course, tell 
the person that there's much, much more here to this story than 
that.
    You want to get $200,000 to buy a house, your house payment 
will be $41 a month, according to this advertisement. Next one 
is credit.com. I'm just going to run through a couple of them 
just to describe for a moment the need I believe for expanded 
rulemaking authority by the Federal Trade Commission.



    Senator Dorgan. This is credit.com. Low documentation loans 
and no documentation loans and this advertisement says that we 
are doing this to protect your privacy. You want to apply for a 
mortgage, you can do it either with no documentation of your 
income or low documentation of your income.



    Senator Dorgan. This was on the Internet yesterday, still 
going. One year fixed payments as low as 1 percent. Five-year 
fixed payments as low as one and a quarter percent. You want a 
loan for your home and pay one and a quarter percent interest 
rate for five straight years. That's what this company's 
advertising. Pretty unbelievable when you think about it.



    Senator Dorgan. They say get a loan like this and control 
up to two to three times as much real estate versus 
conventional fixed rate mortgages. Here's another one that is 
one of the more deceptive, it seems to me. Thirty-year fixed 
loan from 2.75 percent.
    Does anybody in this room think you can get a 30-year fixed 
mortgage at 2.75 percent interest rate? Anybody believe that? 
By the way, this is on the Internet advertising to American 
people yesterday. I pulled that off the Internet yesterday. 
2.75 percent interest rate, fixed rate, for 30 years.


    Senator Dorgan. All right. The last one. This, too, was on 
the Internet yesterday, and it says these are perfect--this is 
a loan, perfect credit not required, no income verification 
loans. In fact, it says they are ideal for the self-employed.


    Senator Dorgan. Well, you get my point. My point is there 
has been unbelievably deceptive advertising out there and it 
exists today while we sit here in this room talking about 
consumer protection.
    Now I've introduced a piece of legislation with the 
Chairman of this Committee as a cosponsor and others to 
reauthorize the Federal Trade Commission. I welcome the 
Commissioners here today.
    I want to start by particularly paying notice that we have 
a new Chairman of the Commission, Mr. Bill Kovacic. The 
Chairman congratulates you for assuming the chairmanship. 
You've been with the FTC for many years but have just assumed 
these new responsibilities.
    The previous Chairman of the Commission, Chairman Majoras, 
was with us in September to testify as we considered drafting 
the FTC Reauthorization bill in 2008, and this morning I 
introduced that bill with Senator Inouye. We're pleased to be 
introducing a bill that we believe gives the Federal Trade 
Commission the needed opportunities to protect consumers from 
unfair or deceptive practices and unfair methods of 
competition.
    I want to briefly outline what the FTC Reauthorization Act 
does. First, it provides for a 7-year reauthorization, starting 
in 2009. We set the funding level at $264 million, increase it 
10 percent per year. We do that because, as I indicated 
earlier, we're at a near 30-year low. We're still almost 30 
percent below where we were two and a half decades ago at a 
time when we need much more muscle and capability in our 
Federal agency to regulate and investigate.
    We give the FTC independent litigating authority so they 
won't have to refer in every case, in the cases they now do to 
the Department of Justice. We give the FTC authority to give 
preference in the hiring process to administrative law judges 
who have some experience in the issues.
    We give the FTC the authority to commence a civil action to 
recover civil penalties in the district court for a violation 
of the FTC Act. We extend the jurisdiction to allow them to go 
after nonprofit entities as well, to investigate in cases where 
it is necessary, so that bad actors cannot hide behind a 
nonprofit status, and we allow them to go after those aiding 
and abetting an FTC violation.
    We give them the authority, by majority vote of the full 
Commission, to waive their current rulemaking requirements for 
any rule involving a consumer protection matter. We require the 
FTC conduct a rulemaking under the Administrative Procedures 
Act which is faster than their current Magnuson-Moss authority 
in the area of subprime loans.
    I know the Commission has sent 200 warning letters to 
mortgage advertisers and is conducting several investigations 
of mortgage advertisers and subprime lenders. In addition, 
they've brought 21 cases in the last decade, but they have not 
had the opportunity to review bad practices and create a rule 
on bad practices that would prevent their recurrence and that 
is absolutely essential.
    We also repeal the common carrier exemption which the FTC 
has long been requesting and which I have been trying to 
accomplish.
    I want to thank the FTC for its work in these many areas. 
As you know, here in the Congress, we have just passed a Do Not 
Call Registry piece of legislation that makes that list 
permanent. I want to thank you for your support of that. We 
don't want people having their mealtime interrupted by unwanted 
solicitation calls and we think we have accomplished that by 
permanently extending the list.
    You had six settlement cases in November 2007 against 
companies that violated that Do Not Call List. I congratulate 
you for that.
    Finally, I know you've hosted a workshop on behavioral 
advertising and you've released a set of proposed principles to 
guide the development of self-regulation in this area, and I 
believe you've been seeking comments on those principles and 
those comments are due April 11, and I'll be studying those 
comments and looking at legislation in this area as well.
    I just want to make one final point. I know that there are 
some who may look at these set of recommendations and say, 
well, this is once again giving a Federal agency some more 
authority and it's once again suggesting there should be some 
additional regulation.
    You know, I think it's very interesting that the Federal 
Reserve Board and the American taxpayers have ponied up $30 
billion to assume the risk of JPMorgan buying BearStearns. Why? 
Because we're told that BearStearns is too big to fail. If it 
is too big to fail, why is it not big enough to regulate? Why 
do we have--this is a different question, perhaps a different 
committee.
    But why, if we have institutions that are too big to fail, 
do we not have effective regulation of the kinds of things that 
can be very detrimental to this country? I believe that there 
are certain times and cases where someone ought to look over 
the shoulder of an organization that's too big to fail and take 
a look at what they're doing and make sure that we put them 
back on track.
    You, in the FTC, understand we've also asked a lot of 
questions about the price of gasoline and I would just say this 
to you as you take a new look at that. I believe that there's a 
lot happening in that area that bears watching. There's 
unbelievable speculation in the futures market for oil. We in 
the futures market buy and sell 20 times more oil every day 
than exists. There is just an unbelievable amount of 
speculation. Some believe that the price of gasoline and oil is 
about $20 or $30 a barrel for the price of oil above where it 
ought to be because of the unbelievable speculation in the 
futures market where you can operate on margins of five and 7 
percent as opposed to the stock market which requires a margin 
of 50 percent.
    All of this doesn't fall on your lap. My only point is that 
energy prices are a serious issue for the American people and I 
think there's a lot to investigate with respect to that as 
well.
    I'm going to recognize the Commission in a moment, but I 
will call on my colleague from Minnesota for an opening 
statement.

               STATEMENT OF HON. AMY KLOBUCHAR, 
                  U.S. SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Mr. Chairman. Thank 
you for holding this important hearing. Welcome to the 
Commissioners, and I know that this hearing is coming at a 
critical time for the FTC with the massive consumer protection 
challenges we are facing today. We certainly have seen it with 
the consumer issues with the toys in from China.
    We've seen it in Minnesota with the problems we've seen 
with cell phone service and advertisements about no dropped 
calls and then it turns out, when we actually had a hearing on 
this, there was a big billboard for one of the companies and we 
were able to take a picture of that billboard where they said 
one of the best networks with a picture of their phone where 
there were no bars, and certainly in the pharmaceutical area, 
and I'll talk about that in a minute, we've been seeing 
problems with what I consider problematic trade practices.
    Whether it be the subprime lending crisis, the record oil 
prices, the unsafe food and the products making their ways to 
our shelves, to the skyrocketing healthcare and pharmaceutical 
costs, American consumers are finding themselves under duress 
in an unprecedented way and at the same time, we are seeing a 
reduction from this Administration in the budgets for agencies. 
We certainly found that with the Consumer Product Safety 
Commission and it made what was already a problem worse.
    If we look at the major issues the Senate has addressed in 
recent weeks, we see that consumer protection is among the 
public's greatest concerns. I was pleased with the work that 
the Senate did in the Consumer Product Safety Commission Reform 
Act and we are currently debating how to improve Federal 
regulation, as you know, in the mortgage area.
    More and more Americans are worried about their economic 
future, about their ability to make ends meet, and they're 
outraged when they see companies engaging in deceptive or 
unreasonable pricing or sales schemes, and as we see a rockier 
picture for our economy, I can tell you, based on my experience 
as a prosecutor, whenever there are some difficult economic 
times, you see crime and fraudulent practices going up. People 
are used to a certain lifestyle. They want to keep it that way. 
So, they'll go across the line to be able to keep their own 
wallets full and what I'm concerned about here, as we've 
already seen because of all the imports coming in, more need 
for regulation of deceptive practices, and I think we're even 
going to see more going forward.
    Hardly a week goes by that we don't get another report of a 
pharmaceutical company grossly inflating the price of a vital 
drug or a wireless company charging customers for invented fees 
hidden in their monthly bill or a mortgage lender offering 
deceptive home loans to low-income families.
    The FTC's role in protecting against abuses of consumer 
trust and confidence has never been more important. Since the 
last reauthorization bill Congress passed in 1996, the 
Commission has done admirable work in responding to companies' 
unfair or deceptive actions and unfair methods of competition, 
but given the current climate and conditions, it is clear that 
the FTC must be granted enhanced and expanded authority and 
resources to carry out its mission and I appreciate that some 
of the Commissioners have highlighted areas in which your 
current ability to protect consumers is unnecessarily 
restricted and for continuing to push for greater authority.
    I want to commend Senator Dorgan for his outstanding work 
in drafting the FTC Reauthorization legislation we're 
discussing today and I believe that this bill makes several 
important improvements to strengthen the FTC's oversight 
authority. I just want to tell you when you're done with your 
opening remarks, one area that I'm very interested in is what's 
going on with the pharmaceutical companies.
    This year, I've heard from Children's Hospital in 
Minneapolis and consumers and other pediatric care providers 
regarding the drastic price increase of Indomethacin, which is 
a drug that's used to treat children's heart problems and it 
actually saves a lot of money because you don't need surgery.
    Two years ago, Ovation Pharmaceuticals acquired the rights 
to this drug from Merck and the company increased the price 
within a year by 18 times the amount without improving the drug 
in any way. We had a meeting with a number of doctors in 
Minnesota and the head of the hospital as well as patients, 
parents of little babies who were there who had been saved by 
this drug, and I know that the FTC has engaged in 
investigations of this type of activity in the past. One of my 
lines of questioning will be about how this could take place, 
if you need additional authority to go after practices like 
this, and what the history is for these kinds of 
investigations.
    Thank you very much, Mr. Chairman.
    Senator Dorgan. Senator Klobuchar, thank you very much.
    Mr. Chairman, we will hear from you first.

 STATEMENT OF HON. WILLIAM E. KOVACIC, CHAIRMAN, FEDERAL TRADE 
                           COMMISSION

    Mr. Kovacic. Thank you very much, Chairman Dorgan, Senator 
Klobuchar.
    I'm enormously grateful for the opportunity to serve as 
Chair of my agency and to appear today to discuss with you the 
reauthorization proposals that you've just described.
    I want to emphasize that the growth and success of this 
agency, if we take it over a span certainly of its modern 
history, has been largely attributable to a very successful 
partnership between the Congress, this Committee, and the 
Commission in getting needed adjustments in its authority and 
resources over time.
    It would be impossible to discuss the accomplishments both 
of you have alluded to without touching upon a number of 
instances, certainly dating back to 1970, in which this 
committee and the Congress have provided needed enhancements to 
authority.
    So, it's an enormous privilege for me today to continue 
that conversation and to continue that partnership that will 
put this agency in a position to be successful in the future.
    Let me take a moment to introduce my colleagues and to 
discuss the distribution of comments across us. I'll be talking 
a bit about resources and the common carrier exemption. My 
colleague, Commissioner Harbour will be discussing our recent 
experience in enforcement and policymaking. My colleague, 
Commissioner Leibowitz will be discussing the aiding and 
abetting and civil penalties elements of the reauthorization 
proposal, and my colleague, Commissioner Rosch will talk about 
independent litigating authority and rulemaking.
    As a general observation, we welcome and encourage your 
efforts to continue to see that this agency is put on a footing 
that permits it to deliver effective competition and consumer 
protection programs in the future. I can only say that without 
the partnership that I referred to before, it would have been 
impossible for us to achieve the success that we have in many 
areas of our consumer protection and competition programs.
    The reauthorization proposal today provides a wonderful 
occasion to continue that discussion.
    I want to turn to the topic of resources which Chairman 
Dorgan mentioned just a moment ago. I think that the framework 
that the Committee has established is a very sensible one from 
several directions. Whether or not the precise numbers come 
through the appropriations process over time, none of us can 
know. I think the basic framework is a sensible one, and in 
particular I like the fact that it takes a long-term focus.
    So rather than thinking about how the Commission and its 
resources might go from year to year, it puts us in the 
position of beginning to think, in a very intelligent way about 
what our needs ought to be over the horizon.
    Indeed, with my colleagues' approval, I've suggested 
internally, largely inspired by this approach, that we 
undertake our own basic self-assessment of our capacity of the 
position that we want to achieve, not simply in the short term, 
but when we reach our centennial, which is only 6 years away. 
Essentially, we now need to ask ourselves in a very careful way 
with consultations with others where the Commission should be 
at 100.
    Another thing I want to underscore that, I think is 
particularly useful in this set of proposals, is the separate 
dedication of what might be called a capital budget for 
information technology.
    If you look at the numbers Senator Dorgan mentioned before, 
you'll find that the trend from the late 1970s to the present 
basically has not affected the number of professionals we have. 
Those numbers have shrunk mainly because machines have replaced 
administrative support staff. That means, though, that the 
enhancement of our IT capability remains absolutely 
indispensable to what we do. We may not simply preserve its 
existing capacity; we must improve it over time.
    I think the focus in the reauthorization measure to look at 
information technology, equipment, and facilities as being key 
ingredients to improving productivity is a very sensible way to 
go ahead.
    Indeed, the only question I would have for you is that if 
the enhancements and authority that have been suggested take 
place, whether the numbers will be enough. I'm sure there will 
be occasions to revisit that in the future. I'd add again that 
with the encouragement of the Committee, if you look at the 
trend in our professionals, our lawyers and economists, going 
back basically over that 20-year period, your assistance has 
permitted us, going back to the early 1980s, to at least keep 
the number of lawyers and economists at the same level. Indeed, 
over the past decade we've seen modest increases to that 
capacity.
    I think that the proposals with respect to resources keep 
us on that path.
    I want to finish by saying that the common carrier 
adjustment is a necessary step. This was set in place when this 
agency was created in 1914. The exemption hasn't changed, but I 
think we all know that the industry has changed just a little.
    Who could have imagined in 1914 the array of adjustments in 
what we now call the telecommunications sector? What the 
failure to revisit that exemption has done is that we almost 
every day of the week bump into limitations in our capacity to 
do exactly the kind of work that both of you have referred to. 
Senator Klobuchar, in particular, mentioned cellular telephony. 
That's an area that in many respects we can't touch. We're like 
the old county policeman who has to drive up to the border and 
stop when we bump into the jurisdictional hurdle of the common 
carrier barrier, and I think that this, along with the not-for-
profit proposal, again puts us in a good position to begin to 
rethink what I believe to be anachronisms in our statute that 
were set in place long ago and severely need a rethink.
    I'll now turn to my colleague, Commissioner Harbour. I 
thank you, both.
    [The prepared statement of Mr. Kovacic follows:]

           Prepared Statement of The Federal Trade Commission
I. Introduction
    Chairman Dorgan, Vice Chairman Stevens, and Members of the 
Committee, the Federal Trade Commission (``Commission'' or ``FTC'') is 
pleased to appear before you today to testify about the FTC's work to 
protect consumers and promote competition,\1\ and S. ____, a bill to 
reauthorize the Commission. We look forward to continuing to work with 
you to further the interests of American consumers.
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    \1\ The written statement represents the views of the Federal Trade 
Commission. Our oral presentations and responses to questions are our 
own and do not necessarily reflect the views of the Commission or any 
other Commissioner.
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    The FTC is the only Federal agency with both consumer protection 
and competition jurisdiction in broad sectors of the economy.\2\ The 
agency enforces laws that prohibit anticompetitive mergers and 
acquisitions and business practices that are harmful to consumers 
because they are anticompetitive, deceptive, or unfair. The FTC also 
promotes informed consumer choice and understanding of the competitive 
process.
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    \2\ The FTC has broad law enforcement responsibilities under the 
Federal Trade Commission Act, 15 U.S.C.  41 et seq. With certain 
exceptions, the statute provides the agency with jurisdiction over 
nearly every economic sector. Certain entities, such as depository 
institutions and common carriers, as well as the business of insurance, 
are wholly or partly exempt from FTC jurisdiction. In addition to the 
FTC Act, the agency has enforcement responsibilities under more than 50 
other statutes and more than 30 rules governing specific industries and 
practices.
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    The FTC has pursued a vigorous and effective law enforcement 
program in a dynamic marketplace that is increasingly global and 
characterized by changing technologies. Through the efforts of a 
dedicated, professional staff, the FTC continues to handle a growing 
workload. This testimony highlights some of the FTC's accomplishments 
since the last FTC reauthorization hearing and provides some comments 
on the proposed ``Federal Trade Commission Reauthorization Act of 
2008.'' \3\ We thank you for your proposed legislation, which is 
designed to ensure that the FTC can effectively confront the challenges 
of the 21st century.
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    \3\ This testimony does not address very recent changes to the 
bill, particularly new sections 10 through 12, which were just made 
available to us. The Commission is examining these new provisions and 
how they intersect with other proposed provisions and indeed, the FTC 
Act as a whole. We look forward to working with you on these new 
provisions.
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II. FTC Accomplishments
    The Commission testified on FTC reauthorization in September 
2007.\4\ That testimony summarized recent FTC accomplishments in such 
areas as data security and identity theft, energy, real estate, 
technology, health, financial practices, telemarketing fraud and Do Not 
Call enforcement.
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    \4\ See Prepared Statement of the Federal Trade Commission Before 
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee 
on Commerce, Science, and Transportation, U.S. Senate (Sept. 12, 2007), 
available at http://www.ftc.gov/os/testimony/070912reauthorization
testimony.pdf.
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    Since September, the Commission has continued to be active on 
competition and consumer protection issues. In the competition area, we 
highlight a few recent enforcement developments. First, in the health 
care area, the Commission filed a case in February 2008, charging that 
Cephalon, a pharmaceutical manufacturer, engaged in illegal conduct to 
prevent competition for its branded drug, Provigil,\5\ by paying four 
competing firms to refrain from selling generic versions of the drug 
until 2012.\6\ The Commission's complaint alleges that Cephalon's 
conduct constituted an abuse of monopoly power that is unlawful under 
Section 5 of the FTC Act. We have several other exclusion payment 
(``pay-for-delay settlement'') investigations ongoing.
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    \5\ Provigil is used to treat excessive sleepiness in patients with 
sleep apnea, narcolepsy, and shift-work sleep disorder.
    \6\ Federal Trade Commission v. Cephalon, Inc., No.: 1:08-cv-00244 
(D.D.C. filed Feb. 13, 2008), available at http://www.ftc.gov/os/
caselist/0610182/080213complaint.pdf.
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    Second, in the energy area, in January 2008, the parties abandoned 
Equitable Resources' proposed acquisition of the Peoples Natural Gas 
Company, a subsidiary of Dominion Resources, as an FTC challenge to the 
acquisition was on appeal.\7\ Although the Federal district court in 
Pittsburgh denied the FTC's motion for a preliminary injunction and 
dismissed the complaint last year on state action grounds, in June 
2007, the Third Circuit took the rare step of granting the Commission's 
motion for an injunction pending appeal. In February 2008, the Third 
Circuit granted a motion by the Commission to vacate the district 
court's ruling that had dismissed the complaint.\8\ The Commission is 
continuing to examine and address a wide range of issues in the energy 
markets, including its new authority regarding manipulation of 
wholesale crude oil, gasoline, or petroleum distillate markets.
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    \7\ See Federal Trade Commission v. Equitable Resources, Inc., No. 
07-2499 (3rd Cir. 2008), available at http://www.ftc.gov/os/caselist/
0610140/080204ftcmovacateequitabledecision.pdf.
    \8\ See id. (order granted Feb. 5, 2008), available at http://
www.ftc.gov/os/caselist/0610140/080303order.pdf.
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    Finally, in January 2008, the U.S. Court of Appeals for the Fifth 
Circuit upheld a Commission order requiring Chicago Bridge & Iron Co., 
N.V. and its United States subsidiary (CB&I) to divest assets acquired 
from Pitt-Des Moines, Inc. used in the business of designing, 
engineering, and building field-erected cryogenic storage tanks.\9\ In 
its 2005 order, the Commission had ruled that CB&I's acquisition of 
these assets in 2001, during a pending FTC investigation, would likely 
result in a substantial lessening of competition or tend to create a 
monopoly in four markets for industrial storage tanks in the United 
States, in violation of Section 7 of the Clayton Act and Section 5 of 
the FTC Act. The court endorsed the Commission's findings, based on an 
extensive review of many years of bidding data, that the merged firms 
controlled over 70 percent of the market, and that new entry was 
unlikely given the high entry barriers based on the incumbents' 
reputation and control of skilled crews.\10\
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    \9\ Federal Trade Commission v. Chicago Bridge & Iron Co., No. 05-
60192 (5th Cir. 2008) available at http://www.ftc.gov/os/adjpro/d9300/
080125opinion.pdf.
    \10\ The Commission continues to appeal its case against Whole 
Foods Market, Inc.'s acquisition of its chief rival, Wild Oats Markets, 
Inc., on the grounds that the district court failed to apply the proper 
legal standard that governs preliminary injunction applications by the 
Commission in Section 7 cases. The Court of Appeals for the District of 
Columbia Circuit will hear oral arguments on this case on April 23, 
2008.
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    In the consumer protection area, we highlight five key FTC 
initiatives since the September reauthorization testimony. First, the 
Commission is grateful for Congress' swift legislative action to make 
participation in the Do Not Call Registry permanent so that consumers 
will continue to enjoy its benefits without having to re-register. In 
November 2007, the Commission announced six new settlements and one new 
Federal court action against companies that violated the Do Not Call 
provisions of the Telemarketing Sales Rule. The six settlements 
resulted in $7.7 million dollars in civil penalties for Do Not Call 
violations.\11\
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    \11\ See Press Release, ``FTC Announces Law Enforcement Crackdown 
On Do Not Call Violators,'' Nov. 7, 2007, available at http://
www.ftc.gov/opa/2007/11/dncpress.shtm.
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    Second, in the privacy and data security area, the Commission 
announced five new data security cases; \12\ released a new online, 
interactive tutorial to educate businesses on sound data security 
practices; \13\ and hosted workshops on the private sector use of 
Social Security Numbers \14\ and behavioral advertising.\15\ Following 
the workshop on behavioral advertising, the Commission staff released a 
set of proposed principles to guide the development of self-regulation 
in this area and is seeking comment on these principles.\16\
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    \12\ United States v. American United Mortgage Company, No: 07C 
7064 (N.D. Ill. filed Dec. 17, 2007), available at http://www.ftc.gov/
opa/2007/12/aumort.shtm; In the Matter of Life is Good, Inc., File No. 
072-3046, available at http://www.ftc.gov/os/caselist/0723046/
index.shtm; In the Matter of Goal Financial, LLC., File No. 072-3013, 
available at http://www.ftc.gov/os/caselist/0723013/
080304agreement.pdf; In the Matter of TJX, File No. 072-3055, available 
at http://www.ftc.gov/os/caselist/0723055/index.shtm; In the Matter of 
Reed Elsevier, Inc. and Seisint, Inc., File No. 052-3094, available at 
http://www.ftc.gov/os/caselist/0523094/index.shtm.
    \13\ See www.ftc.gov/infosecurity.
    \14\ See http://www.ftc.gov/bcp/workshops/ssn/index.shtml.
    \15\ See http://www.ftc.gov/bcp/workshops/ehavioral/index.shtml.
    \16\ See Press Release, ``FTC Staff Proposes Online Behavioral 
Advertising Privacy Principles,'' December 20, 2007, available at 
http://www.ftc.gov/opa/2007/12/principles.shtml.
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    Third, in the area of financial practices, the Commission sent over 
200 warning letters to mortgage advertisers and the media outlets that 
carried their advertisements for home mortgages. These letters stated 
that the mortgage advertisements identified may be deceptive, in 
violation of Section 5 of the FTC Act, or may violate the Truth-In-
Lending Act. The Commission currently is conducting several 
investigations of mortgage advertisers and subprime lenders and will 
continue to monitor claims made in mortgage advertising. The Commission 
also announced three cases targeting mortgage foreclosure rescue 
scams,\17\ and three settlements against ``payday lenders'' who failed 
to provide consumers with annual percentage rate information, as 
required by law.\18\ Fourth, as part of a review of its environmental 
marketing guidelines, also known as the Green Guides,\19\ the 
Commission is holding a series of public workshops on a number of 
emerging green marketing topics. The first such workshop took place on 
January 8, 2008, and addressed carbon offsets and renewable energy 
certificates. The second workshop, on green packaging, will take place 
on April 30, 2008. Finally, this fall, the Commission used its U.S. 
SAFE WEB Act authority to cooperate with foreign partners in two key 
matters; one involved a Canadian-based bogus lottery and prize-
promotion scam,\20\ and the other involved an international spam 
enterprise.\21\ Since passage of the Act in 2006 and the promulgation 
of rules in May 2007, the SAFE WEB Act has enhanced the FTC's ability 
to cooperate with foreign law enforcement authorities on consumer 
protection enforcement matters that cross international borders.
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    \17\ FTC v. Safe Harbour Foundation, No. 08 C 1185 (N.D. Ill., 
filed Feb. 25, 2008), available at http://www.ftc.gov/os/caselist/
0823028/index.shtm; FTC v. Mortgage Foreclosure Solutions, Inc., (M.D. 
Fla., filed Feb. 26, 2008) available at http://www.ftc.gov/os/caselist/
0823021/index.shtm; FTC v. National Hometeam Solutions, Inc., (E.D. 
Tex., filed Feb. 26, 2008), available at http://www.ftc.gov/os/
caselist/0823076/index.shtm.
    \18\ In the Matter of CashPro, No. 072-3203 (February 2008); In the 
Matter of American Cash Market, Inc., No. 072-3210 (Feb. 2008); In the 
Matter of Anderson Payday Loans, No. 072-3212 (Feb. 2008), available at 
http://www.ftc.gov/opa/2008/02/amercash.shtm.
    \19\ See Press Release, ``FTC Reviews Environmental Marketing 
Guides, Announces Public Meetings,'' Nov. 26, 2007, available at http:/
/www.ftc.gov/opa/2007/11/enviro.shtm.
    \20\ See Press Release, ``Court Halts Bogus Check Scam Targeting 
`Lottery Winners;' Money Transfers Used to Defraud Consumers,'' Nov. 
19, 2007, available at http://www.ftc.gov/opa/2007/11/cashcorner.shtm.
    \21\ See Press Release, ``FTC Stops International Spamming 
Enterprise that Sold Bogus Hoodia and Human Growth Hormone Pills,'' 
Oct. 10, 2007, available at http://www.ftc.gov/opa/2007/10/hoodia.shtm.
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III. Reauthorization Legislation
    The remainder of this testimony addresses S. ____, the proposed 
``Federal Trade Commission Reauthorization Act of 2008.'' The 
Commission provides its views on the individual sections of the 
proposed bill below.
A. Section 2: Authorization of Appropriations
    The Commission supports efforts to increase the agency's resources 
to meet its anticipated needs. For the past several years, the 
Commission has sought an increase in funds. We are grateful to Congress 
for increasing our funding over time.
    The Commission's staff has worked hard over the past several years 
to fulfill its mandate, address new and emerging problems in the 
marketplace, enforce newly enacted laws, and complete the tasks 
Congress has entrusted us to address. In the last few years, Congress 
has passed a variety of significant new laws that the FTC is charged, 
at least in part, with implementing and enforcing, such as the CAN-SPAM 
Act, the Fair and Accurate Credit Transactions Act, the Children's 
Online Privacy Protection Act, the Gramm-Leach-Bliley Act, and the U.S. 
SAFE WEB Act.
    Yet it is uncertain whether agency resources have grown apace with 
our enforcement obligations. To meet its growing challenges, the 
Commission anticipates needing additional resources, which might 
include, among other things, more staff, money to hire experts and 
consultants, additional office space, and improved infrastructure. The 
Commission understands the draft bill would authorize an additional $20 
million for technology funding for 2009 through 2015, over and above 
the reauthorization amount set forth in Section 2(a) of the bill. We 
thank the Committee for specifically recognizing the Commission's needs 
for funding to improve its technology. We also appreciate the seven-
year plan for resources which, if appropriated, would allow us to plan 
for the years ahead.
B. Section 3 and Section 5. Independent Litigating Authority and Civil 
        Penalties for Violation of the Federal Trade Commission Act
    Sections 3 and 5 of the proposed FTC reauthorization bill address 
two substantially intertwined aspects of the Commission's litigation: 
the availability of civil penalties in court actions, and independent 
agency litigating authority. This section of the Commission's testimony 
first provides an overview of the Commission's current authority to 
obtain monetary remedies, including civil penalties. Second, it 
discusses the proposed extension of the Commission's civil penalty 
authority. Third, it addresses the bill's proposal regarding 
independent litigating authority to obtain civil penalties. Fourth, it 
discusses Commission litigation before the Supreme Court.
1. Overview of Commission's Authority to Obtain Monetary Remedies
    Although the Commission has authority to seek civil penalties in 
some instances,\22\ for many violations--including violations of 
Section 5 of the FTC Act that involve fraudulent conduct--the 
Commission currently lacks general authority to seek civil 
penalties.\23\ In the past year, the Commission has sought civil 
penalties in approximately 22 percent of the consumer protection cases 
it has brought; it has had the option of seeking civil penalties in 
approximately 21 percent of additional consumer protection cases.\24\
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    \22\ Primarily, the FTC can seek civil penalties against any entity 
that knowingly violates a trade regulation rule promulgated by the FTC 
or that violates a pre-existing final FTC order to which it is subject. 
Moreover, recognizing the importance of civil penalties, Congress has 
specifically authorized the FTC to seek civil penalties for violations 
of certain statutes, e.g., the CAN-SPAM Act, 15 U.S.C.  7701 et seq.
    \23\ It is unclear whether the proposed reauthorization language in 
the earlier draft of the bill is intended to provide civil penalty 
authority for consumer protection cases only or for both competition 
and consumer protection cases. Although civil penalty authority in 
competition cases might provide a similar deterrent effect, the 
discussion in Sections 1 and 2 is limited to civil penalty authority in 
consumer protection cases.
    \24\ Generally, as discussed below, the Commission cannot bring 
civil penalty cases in its own right without first presenting them to 
the Department of Justice (``DOJ'') to bring on behalf of the 
Commission. Almost invariably, DOJ accepts the referral, but if it were 
to decline, in most instances, the Commission could bring the action in 
its own name. With one exception, the Commission cannot assess civil 
penalties in administrative proceedings. The exception is set forth in 
a provision of the Energy Policy and Conservation Act (``EPCA''), 42 
U.S.C.  6303(a). This provision (as adjusted pursuant to the Debt 
Collection Improvement Act of 1996, see FTC Rules of Practice, 16 
C.F.R.  1.97, 1.98) authorizes the Commission to assess 
administratively a civil penalty of not more than $110 for each 
violation of the Appliance Labeling Rule.
    In some cases, we could obtain civil penalties, but we do not 
because our paramount goal is to return money back to consumers, and 
defendants do not have enough money to pay consumer redress and civil 
penalties. In other cases, as described on page 13, we are trading 
civil penalties for quicker relief.
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    The Commission can seek other types of monetary relief, including 
consumer redress and other equitable remedies such as disgorgement of 
ill-gotten gains, from defendants, under Section 13(b) or under Section 
19(b) of the FTC Act in certain circumstances, by filing Federal 
district court actions in its own name, without referral to DOJ.\25\ 
The Commission has often used Section 13(b) of the FTC Act, 
particularly, to obtain restitution for consumers in consumer 
protection cases. In the past decade, the Commission has brought over 
600 consumer protection law enforcement actions using Section 13(b) 
under the FTC Act, through which courts have ordered approximately $3 
billion in redress for injured consumers.
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    \25\ See 15 U.S.C.  53(b); see also 15 U.S.C.  57b.
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2. Additional Civil Penalty Authority
    Section 5 of S. XXXX would give the Commission authority 
to seek civil penalties for knowing violations of Section 5 of the FTC 
Act. As explained above, currently the FTC has authority to seek 
restitution on behalf of consumers and disgorgement of ill-gotten 
gains, but can obtain civil penalties only for certain categories of 
violations.\26\
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    \26\ When the Federal Trade Commission was established in 1914, it 
did not have the authority to seek civil penalties. Federal Trade 
Commission Act of 1914, Pub. L. No. 63-203, 38 Stat. 717-24 (1914). In 
1938, the Commission was given the authority to seek civil penalties in 
Federal district court through the Attorney General against a party for 
violations of a Commission order to which that party was subject. 
Wheeler-Lea Act, Pub. L. No. 75-447, 52 Stat. 114-15 (1938). When the 
Commission started promulgating rules in the 1960s, it did not have the 
authority to seek civil penalties for violations of such rules.
    On February 4, 1970, the Commission testified before Congress in 
favor of allowing the FTC to assess civil penalties administratively 
against respondents who knowingly committed consumer protection 
violations. See Hearings on H.R. 14931 and Related Bills before the 
Subcomm. on Commerce and Finance of the H. Comm. on Interstate and 
Foreign Commerce, 91st Cong. 53, 54 (1970) (statement of FTC Chairman 
Caspar Weinberger). The Senate passed legislation to permit the FTC to 
seek civil penalties for such violations in Federal court proceedings, 
but it was dropped in conference. Ultimately, in 1975, Congress adopted 
legislation that authorized civil penalties for acts or practices 
previously determined by the Commission to be unfair or deceptive, 
through either a rulemaking proceeding or an administrative proceeding, 
and committed with actual or (for rule violations) constructive 
knowledge of the determination. See 15 U.S.C.  45(m)(1).
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    In bringing consumer protection law enforcement actions, the 
Commission's paramount goal is to stop unlawful practices and obtain 
restitution for injured consumers. It achieves this goal primarily by 
filing actions directly in Federal district court under Section 13(b) 
of the FTC Act. In many consumer protection cases, and most cases 
involving fraud, the Commission finds that the current equitable 
remedies of restitution and disgorgement give it the power to reach all 
of a defendant's available assets. In fact, in many of these cases, 
defendants do not have enough assets to cover consumer losses, and in 
such cases, the Commission usually takes the available assets and 
enters a suspended judgment for the remaining amount of consumer 
injury.
    As the Commission has previously testified, however, in certain 
categories of cases restitution or disgorgement may not be appropriate 
or sufficient remedies. These categories of cases, where civil 
penalties could enable the Commission to better achieve the law 
enforcement goal of deterrence, include malware (spyware), data 
security, and telephone records pretexting.\27\ In these cases, 
consumers have not simply bought a product or service from the 
defendants following defendant's misrepresentations, and it is often 
difficult to calculate consumer losses or connect those losses to the 
violation for the purpose of determining a restitution amount. 
Disgorgement may also be problematic. In data security cases, 
defendants may not have actually profited from their unlawful acts. For 
example, in a case arising from a data security breach enabled by lax 
storage methods, the entity responsible for the weak security may not 
have profited from its failure to protect the information; rather, the 
identity thief who stole the information likely profited.\28\ In 
pretexting and spyware cases, the Commission has found that defendants' 
profits are often slim; thus, disgorgement may be an inadequate 
deterrent. Also in pretexting and spyware cases, lawful acts and 
unlawful acts may be intermixed; thus, it may be difficult to determine 
an appropriate disgorgement amount.\29\ And in a whole host of cases 
brought under Section 5, when we are challenging hard-core fraud that 
could otherwise be prosecuted criminally, we should be able to seek 
fines against these wrongdoers.
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    \27\ See, e.g., Prepared Statement of the Federal Trade Commission, 
``Federal Trade Commission Reauthorization,'' Before the Subcommittee 
on Interstate Commerce, Trade, and Tourism of the Senate Commerce, 
Science, and Transportation Committee, 110th Cong., September 12, 2007, 
available at http://www.ftc.gov/os/testimony/
070912reauthorizationtestimony.pdf (``To enhance consumer protection in 
cases involving spyware, as well as those involving data security, the 
Commission continues to support provisions in pending bills that give 
the FTC civil penalty authority.''); Prepared Statement of the Federal 
Trade Commission, ``Federal Trade Commission Reauthorization,'' Before 
the Senate Commerce, Science, and Transportation Committee, 110th 
Cong., April 10, 2007, available at http://www.ftc.gov/os/testimony/
P040101FY2008Budgetand
OngoingConsumerProtectionandCompetitionProgramsTestimonySenate04102007.p
df (``We believe the Commission's ability to protect consumers from 
unfair or deceptive acts or practices would be substantially improved 
by legislation, all of which is currently under consideration by 
Congress, to provide the Commission with civil penalty authority in the 
areas of data security, telephone pretexting and spyware.'').
    \28\ Defendants likely do save some money from not complying with 
legal mandates. However, the cost savings of not instituting reasonable 
data security measures are, in many cases, small and not commensurate 
with the injury that resulted from the failure.
    \29\ Most state statutes provide for civil penalties for certain 
violations of state consumer protection laws. See, e.g., Ala. Code  8-
19-11; Ark. Code  4-88-13.
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3. Independent Litigating Authority for Civil Penalty Actions
    As noted above, before bringing a civil penalty action, the 
Commission generally must notify the DOJ of the proposed action.\30\ If 
the Department declines to participate in the name of the United States 
or otherwise fails to act within 45 days on such a referral, the 
Commission may file the case in its own name.\31\ Section 3(1) of the 
proposed legislation would expand the agency's independent litigating 
authority to allow the FTC to bring actions for civil penalties in 
Federal court ``in its own name by any of its attorneys,'' without 
mandating that DOJ have the option to litigate on the FTC's behalf, as 
is currently required in most cases. Section 3(1) would require the 
Commission to ``notify the Attorney General of any such action'' and 
would permit the Commission to ``request the Attorney General on behalf 
of the Commission to commence, defend, or intervene in any such 
action.'' The Commission supports this provision.
---------------------------------------------------------------------------
    \30\ See supra note 24. DOJ acts in a timely manner, filing cases 
on behalf of the Commission and working cooperatively with the 
Commission and its staff.
    \31\ See supra note 24.
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    Giving the FTC independent litigating authority when it seeks civil 
penalties would allow the agency with the greatest expertise in the FTC 
Act to litigate some of its own civil penalty cases, while retaining 
the option of referring appropriate matters to DOJ. Under current law, 
agency staff--who have both general expertise in FTC law and specific 
knowledge of cases they investigate and recommend for litigation--turn 
over such cases to the DOJ's Office of Consumer Litigation (OCL). While 
the FTC has an excellent working relationship with OCL on these 
matters, OCL also has responsibility for enforcement matters relating 
to the Food and Drug Administration, the Consumer Product Safety 
Commission, and the Department of Transportation's National Highway 
Traffic Safety Administration. In contrast, other independent Federal 
agencies are able to maximize the benefits of their own expertise by 
independently prosecuting administrative or judicial actions for civil 
penalties. For example, the Securities and Exchange Commission has 
independent authority to seek judicial civil penalties for any 
violation of the securities laws \32\ or even to assess administrative 
civil penalties against registered entities.\33\ Similarly, the 
Commodity Futures Trading Commission has independent authority to seek 
judicial civil penalties or assess administrative civil penalties.\34\ 
Bringing the FTC's authority more in line with comparable agencies 
would ensure that civil penalty prosecutions fully benefit from the 
agency's expertise.\35\
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    \32\ 15 U.S.C.  77t.
    \33\ 15 U.S.C.  78u-2.
    \34\ 7 U.S.C.  9; 7 U.S.C.  13a; 7 U.S.C.  13a-1.
    \35\ The proposed legislation would not authorize the agency to 
assess administrative penalties, which would give an agency more 
discretion to set policies for obtaining penalties than does the 
ability to seek penalties from a Federal district court.
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    Moreover, currently, there are instances in which the Commission 
confronts ongoing and injurious conduct that violates a rule or statute 
that provides for civil penalties, such as the Telemarketing Sales Rule 
or the CAN-SPAM Act. In such cases, the Commission can bring an action 
under Section 13(b) to obtain preliminary injunctive relief that halts 
the ongoing injury to consumers, or it can refer an action seeking 
civil penalties and other injunctive relief to DOJ. The Commission 
cannot, however, do both. In those instances where there is a need to 
bring ongoing deception or other economically-injurious conduct to a 
swift halt, and where justice requires both full equitable relief and 
appropriate civil penalties, the Commission should have the option of 
directly filing an action seeking both equitable and civil penalty 
relief. The proposed provision would give the Commission this option.
    The proposed provision would also increase efficiency. Currently, 
once the FTC makes a referral, DOJ has 45 days to commence a civil 
penalty action. This process requires extra time and delay, even under 
the best of circumstances, and extra paperwork. Moreover, once DOJ 
accepts a referral, the FTC normally assigns one or more of its own 
staff attorneys, at DOJ's request, to assist in litigating the case. 
Despite excellent relations and coordination between staff at DOJ and 
the FTC, the use of personnel at two agencies inevitably creates delay 
and inefficiencies. This is particularly true in cases where the FTC is 
simply referring to DOJ a settlement to be filed.
4. Independent Litigating Authority Before the Supreme Court
    Section 3(2) of the proposed legislation would allow the FTC to 
represent itself before the Supreme Court in the appeal of any 
litigation to which the FTC was a party. The Commission supports this 
provision. Currently, in any matter in which the Commission represented 
itself in the lower courts, the Commission may request that the 
Solicitor General of the DOJ petition for certiorari and represent the 
Commission before the Supreme Court.\36\ If the Solicitor General 
agrees to represent the FTC, under the FTC Act, he may not compromise a 
Commission position or settle the case without Commission consent.\37\ 
If the Solicitor General declines to represent the FTC, the Commission 
may petition the Court and represent itself.\38\ Of course, in any 
matter the Court may request that the Solicitor General file a brief, 
or the Solicitor General may file an amicus brief without a Court 
request.\39\
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    \36\ 15 U.S.C.  56(a)(3)(A).
    \37\ 15 U.S.C.  56(a)(3)(B).
    \38\ 15 U.S.C.  56(a)(3)(A).
    \39\ Supreme Court Rules of Practice, 28 U.S.C. App. Rule 37.
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C. Section 4. Specialized Administrative Law Judges
    Section 4 would assist in providing the FTC with ALJs experienced 
in handling complex antitrust, trade regulation, and economic issues in 
adjudications that primarily involve uncharted circumstances or 
otherwise particularly call upon the agency's expertise. The FTC 
endorses the Committee's efforts to ensure that the agency's ALJs are 
equal to the highly complex task they face.
    The Commission was created to develop and apply specialized 
expertise to matters concerning unfair methods of competition, and 
later unfair or deceptive acts or practices. The Commission may 
delegate its powers to ALJs (previously hearing examiners) to handle 
administrative trials, but ALJ findings and conclusions both of fact 
and law are subject to full Commission review, either on appeal or 
pursuant to its own decision to review a matter.\40\
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    \40\ 5 U.S.C. App. Reorganization Plan No. 4 of 1961; 16 C.F.R.  
3.54.
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    The issues raised in antitrust matters in particular, the very 
substantial body of law in this area, and the nature of economic 
evidence, are often sufficiently complex to require a person familiar 
with the law and experienced in handling economic evidence offered in 
trials. Not every ALJ or aspirant to an ALJ appointment has such 
experience, and the current process for appointments excludes such 
experience as a factor in making applicants available to the agency. 
The ability to hire ALJs with that experience would help the FTC 
fulfill its role as a specialized, expert agency.
D. Repeal of FTC Act Exemptions
    This section discusses proposed Section 6 and Section 13 of the 
proposed FTC reauthorization bill, both of which would repeal certain 
exemptions to the FTC Act. Section 6 would repeal the FTC Act's 
exemption for certain non-profit entities, and Section 13 would repeal 
the common carrier exemption. The Commission generally supports 
repealing these exemptions. In addition, Congress should examine other 
exemptions to the FTC Act to more broadly protect consumers and 
competition and to ensure consistent application of laws across 
economic sectors.
1. Section 6. Non-Profit Exemption
    Section 6 of the proposed reauthorization legislation would subject 
charitable, religious, educational and other ``section 501(c)(3)'' 
organizations to the FTC Act. Currently, the FTC's jurisdiction over 
non-profits is limited. The FTC Act applies to ``persons, partnerships, 
or corporations,'' \41\ and the Act defines ``corporation'' as an 
entity that ``is organized to carry on business for its own profit or 
that of its members.'' \42\ Under this framework, the agency can reach 
``sham'' non-profits, such as shell non-profit corporations that 
actually operate for profit.\43\ It can also reach entities falsely 
claiming to be affiliated with charitable organizations and entities 
who affirmatively misrepresent that ``donations'' collected will go to 
charity.\44\ Further, the Commission has jurisdiction over 
organizations such as trade associations that engage in activities that 
``provide[] substantial economic benefit to its for-profit members,'' 
for example, by providing advice and other arrangements on insurance 
and business matters, or engaging in lobbying activities.\45\ The 
Commission also has jurisdiction over most non-profits in several 
discrete areas, for example, under certain consumer financial statutes, 
such as the Truth in Lending Act and the Equal Credit Opportunity 
Act.\46\ In addition, the Commission has jurisdiction over non-profit 
entities for purposes of the Clayton Act,\47\ most notably Section 7, 
which prohibits mergers or acquisitions where ``the effect of such 
acquisition may be substantially to lessen competition, or to tend to 
create a monopoly.'' \48\ The current definition of ``corporation'' in 
the FTC Act places substantial limits on the Commission's jurisdiction 
over non-profit entities. While such organizations pursue many worthy 
activities that advance important public purposes, on occasion they 
engage in business activities that harm consumers.
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    \41\ 15 U.S.C.  45(a)(2).
    \42\ 15 U.S.C.  44.
    \43\ See, e.g., FTC v. Gill, 183 F. Supp. 2d 1171 (C.D. Cal. 2001) 
(``[W]hile certain nonprofit corporations are exempt from liability for 
violations of section 5(a)(1) of the FTC Act, the exemption does not 
apply to sham corporations that are the mere alter ego of the 
[defendant].'') (citing Community Blood Bank of Kansas City Area, Inc. 
v. FTC, 405 F.2d 1011, 1022 (8th Cir. 1969)); FTC v. Ameridebt, Inc., 
343 F.Supp. 2d 451, 460-62 (D. Md. 2004) (denying motion to dismiss 
where FTC complaint alleged that purported credit counseling 
organization incorporated as a non-profit entity was a ``de facto for-
profit organization'').
    \44\ See, e.g., cases announced as part of ``Operation Phoney 
Philanthropy,'' (May 2003), available at http://www.ftc.gov/opa/2003/
05/opp.shtm.
    \45\ See, e.g., California Dental Ass'n v. FTC, 526 U.S. 756, 759, 
765-69 (1999) (holding that FTC Act applies to anticompetitive conduct 
by non-profit dental association whose activities provide substantial 
economic benefits to for-profit members); American Medical Ass'n v. 
FTC, 638 F.2d 443, 447-448 (1980) (finding FTC jurisdiction over non-
profit medical societies whose activities ``serve both the business and 
non-business interests of their member physicians'').
    \46\ 15 U.S.C.  1607(c); 15 U.S.C.  1691c(c).
    \47\ See United States v. Rockford Mem. Hosp., 898 F.2d 1278, 1280-
81 (7th Cir. 1990).
    \48\ 15 U.S.C.  18.
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    The Commission supports extension of its jurisdiction to certain 
non-profit entities.\49\ In healthcare, an area in which the Commission 
takes the lead to maintain competition, the agency's inability to reach 
conduct by various non-profit entities has prevented the Commission 
from taking action against potentially anticompetitive conduct of non-
profits engaged in business. For example, the Commission generally 
cannot challenge price-fixing, boycotts, and other anticompetitive 
conduct by non-profit hospitals. Nearly forty years ago, a Commission 
order against an association of non-profit hospitals and a non-profit 
blood bank found to have unlawfully hindered the development of two 
commercial blood banks was vacated on the ground that the non-profit 
entities were beyond the FTC's jurisdiction.\50\ In three recent 
enforcement actions, the Commission alleged that groups of physicians 
and hospitals had participated in unlawful price-fixing arrangements, 
but sued only the physicians and a for-profit hospital.\51\ The 
healthcare sector includes a variety of other types of nonprofit 
entities, such as nonprofit health maintenance organizations (HMOs), 
health plans, and standard-setting organizations, whose activities can 
also raise significant competitive concerns.
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    \49\ The Commission would be pleased to work with Congressional 
staff on crafting appropriate language. The Commission notes that, as 
drafted, Section 6 would reach only those non-profit entities that have 
tax-exempt status under section 501(c)(3) of the Internal Revenue Code. 
The Commission would benefit from broadening this provision to cover 
certain other nonprofits, such as Section 501(c)(6) trade associations. 
The Commission has previously engaged in protracted litigation battles 
to determine whether such entities are currently covered under the FTC 
Act. See, e.g., California Dental Ass'n v. FTC, 526 U.S. 756, 765-69 
(1999) (holding that FTC Act applies to anticompetitive conduct by non-
profit dental association whose activities provide substantial economic 
benefits to for-profit members); American Medical Ass'n v. FTC, 638 
F.2d 443, 447-448 (1980) (finding FTC jurisdiction over non-profit 
medical societies whose activities ``serve both the business and non-
business interests of their member physicians'').
    \50\ Community Blood Bank v. FTC, 405 F.2d 1011 (8th Cir. 1969).
    \51\ See Piedmont Health Alliance, 138 F.T.C. 675 (2004) (consent 
order), available at http://www.ftc.gov/os/adjpro/d9314/index.shtm; 
Tenet Healthcare Corp./Frye Regional Medical Center, Inc., 137 F.T.C. 
219 (2004) (consent order), available at http://www.ftc.gov/os/
caselist/0210119/0210119tenet.shtm; Maine Health Alliance, 136 F.T.C. 
616 (2003) (consent order), available at http://www.ftc.gov/os/
caselist/0210017.shtm.
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    The proposed legislation would also help increase certainty and 
reduce litigation costs in this area. Although the FTC has been 
successful in asserting jurisdiction against ``sham'' nonprofits and 
against non-profit trade associations, the proposed legislation would 
help avoid protracted factual inquiries and litigation battles to 
establish jurisdiction over such entities.\52\
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    \52\ The Commission notes that, just as the First Amendment limits 
the FTC's ability to address certain practices of for-profit entities, 
it would also restrict certain FTC action concerning non-profits. For 
example, in Riley v. National Federation of the Blind of North 
Carolina, Inc., 487 U.S. 781 (1988), the Supreme Court struck down a 
North Carolina law that required fundraisers engaged in telemarketing 
on behalf of charities to disclose, during the call, the percentage of 
charitable contributions actually used for charitable purposes. The 
Supreme Court held that the for-profit fundraisers, like charities 
soliciting on their own behalf, were engaging in ``fully protected 
expression'' under the First Amendment, and the Court rejected the 
argument that these activities were less-protected ``commercial 
speech.'' Id. at 796. The Supreme Court found the law to be an ``unduly 
burdensome'' prophylactic rule that violated the First Amendment. Id. 
at 800.
    In 2003, the Court held that the First Amendment does allow a state 
to assert a fraud claim against a charity fundraiser for affirmatively 
misrepresenting to consumers where their money will go. See Madigan v. 
Telemarketing Associates, Inc., 538 U.S. 600 (2003). The Court noted, 
though, that a fraud claim would be dismissed on First Amendment 
grounds if it were based simply on a fundraiser's failure to disclose 
fee arrangements or the percentage of donated funds that were retained 
by the telefunder. Id. at 617.
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2. Section 13. Common Carrier Exception
    Section 13 would strike the telecommunications common carrier 
exemption from the FTC Act. This exemption bars the agency from 
reaching certain conduct by telecommunications companies. The 
Commission has testified in favor of the repeal of the common carrier 
exemption on several occasions,\53\ continues to endorse its repeal, 
and thanks the Chairman for his continued support in this area.
---------------------------------------------------------------------------
    \53\ See Prepared Statement of the Federal Trade Commission, Before 
the Subcommittee on Interstate Commerce, Trade, and Tourism Committee 
on Commerce, Science, and Transportation U.S. Senate (Sept. 12, 2007), 
available at http://www.ftc.gov/os/testimony/070912
reauthorizationtestimony.pdf; Prepared Statement of the Federal Trade 
Commission On FTC Jurisdiction Over Broadband Internet Access Services, 
Before the Committee on the Judiciary, U.S. Senate (Jun. 14, 2006), 
available at http://www.ftc.gov/opa/2006/06/broadband.shtm; The 
Reauthorization of the Federal Trade Commission: Positioning the 
Commission for the Twenty-First Century: Hearing Before the Subcomm. on 
Commerce, Trade and Consumer Protection of the H. Comm. on Energy and 
Commerce, 108th Cong. (2003) (``FTC 2003 Reauthorization Hearing'') 
(statement of the FTC), available at http://www.ftc.gov/os/2003/06/
030611reauthhr.htm; see also FTC 2003 Reauthorization Hearing 
(statement of Thomas B. Leary, FTC Commissioner), available at http://
www.ftc.gov/os/2003/06/030611learyhr.htm; FTC Reauthorization Hearing: 
Before the Subcomm. on Consumer Affairs, Foreign Commerce and Tourism 
of the S. Comm. on Commerce, Science, and Transportation, 107th Cong. 
(2002) (statement of Sheila F. Anthony, FTC Commissioner), available at 
http://www.ftc.gov/os/2002/07/sfareauthtest.htm.
---------------------------------------------------------------------------
    The FTC Act exempts common carriers subject to the Communications 
Act from its prohibitions on unfair and deceptive acts or practices and 
unfair methods of competition.\54\ This exemption dates from a period 
when telecommunications were provided by 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 dismantled much of the 
economic regulatory apparatus formerly applicable to the industry. 
Removing the exemption from the FTC Act would not alter the 
jurisdiction of the FCC, but would give the FTC the authority to 
protect against unfair and deceptive practices by common carriers in 
the same way that it can protect against unfair and deceptive practices 
by non-common carriers engaged in the provision of the same services.
---------------------------------------------------------------------------
    \54\ 15 U.S.C.  45(a)(2) exempts from the FTC Act ``common 
carriers subject to the Acts to Regulate Commerce.'' 15 U.S.C.  44 
defines the ``Acts to regulate commerce'' as ``Subtitle IV of Title 49 
(interstate transportation) and the Communications Act of 1934'' and 
all amendments thereto.
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    Technological advances have blurred the traditional boundaries 
between telecommunications, entertainment, and high technology.\55\ As 
the telecommunications and Internet industries continue to converge, 
the common carrier exemption is likely to frustrate the FTC's ability 
to stop deceptive and unfair acts and practices and unfair methods of 
competition with respect to interconnected communications, information, 
entertainment, and payment services.
---------------------------------------------------------------------------
    \55\ See Letter from the Federal Trade Commission to John 
Villafranco and Lewis Rose re Sprint Corporation, http://www.ftc.gov/
os/closings/staff/070808sprintnextelclosingltr.pdf. (FTC letter closing 
investigation into non-common carrier activities of Sprint, a 
traditional provider of common carrier services, related to claims of 
unlimited web usage via mobile device).
---------------------------------------------------------------------------
    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.
E. Section 7. Aiding and Abetting a Violation
    The Commission believes that proposed Section 7, which would give 
the FTC the ability to challenge practices that aid or abet violations 
of the FTC Act, could be beneficial to the Commission's consumer 
protection law enforcement program. Implicit in this proposed provision 
is an understanding that effective law enforcement often requires 
reaching not only the direct participants in unfair or deceptive 
practices, but also those who support and enable the direct 
participants to violate the law. Since the Supreme Court's ruling in 
Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 
(1994), however, the Commission's ability to pursue those who assist 
and facilitate unfair or deceptive acts and practices has been 
compromised. The Supreme Court's broad reasoning in that case cast 
doubt on the argument that Section 5 of the FTC Act could reach 
``aiding and abetting'' another person's violation. Although the 
Commission has developed alternative theories to reach secondary 
actors, these theories may make liability more difficult to prove than 
if the FTC had specific statutory authority in this area.\56\ Indeed, 
in some cases, staff has decided not to name potential defendants 
because the conduct at issue did not fit neatly under one of the 
alternative ``assistance'' theories.\57\
---------------------------------------------------------------------------
    \56\ For example, the FTC has used the well-established doctrine 
that providing the means and instrumentalities by which unfair or 
deceptive practices occur is itself an unfair or deceptive practice in 
violation of the FTC Act. See, e.g., FTC v. Winstead Hosiery Co., 258 
U.S. 483, 494 (1922).
    \57\ One statute specifically gives the FTC express authority to 
pursue aiders and abetters. The Telemarketing and Consumer Fraud and 
Abuse Prevention Act allowed the Commission to promulgate rules to 
include within the definition of deceptive telemarketing those who 
``assist or facilitate'' such telemarketing. 15 U.S.C.  6102(a)(2). 
The Commission's Telemarketing Sales Rule (``TSR'') in turn prohibits 
providing ``substantial assistance or support to any seller or 
telemarketer when that person knows or consciously avoids knowing that 
the seller or telemarketer'' is engaged in certain practices that 
violate the Rule. The Commission has included an ``assisting and 
facilitating'' allegation in at least 2 dozen cases since the TSR was 
adopted. See, e.g., Federal Trade Commission v. Assail, Inc., No. 
W03CA007 (W.D. Tex. final orders entered Jan. 2005); U.S. v. DirectV, 
Inc., No. SACV05 1211 (C.D. Cal. final order entered Dec. 2005); U.S. 
v. Entrepreneurial Strategies, Ltd., No. 2:06-CV-15 (WCO) (N.D. Ga. 
final order entered Jan. 2006).
---------------------------------------------------------------------------
    The need for this authority has become particularly clear in the 
Internet era. Section 5 of the FTC Act's broad prohibition on unfair or 
deceptive acts and practices generally has given the agency ample 
authority to bring law enforcement action against those who engage in 
online fraud. Many of the new business models that are emerging on the 
Internet, however, involve numerous actors with murky and varying roles 
in complicated channels of distribution. Spyware distributors, for 
example, often use a complex system of affiliates and sub-affiliates to 
distribute harmful software to consumers, with each of these entities 
receiving a financial benefit from their role in its distribution. In 
addition, some online businesses located abroad who engage in unfair or 
deceptive acts and practices that harm American consumers rely on 
support from entities located in the United States. An FTC prosecution 
of the domestic entity supporting the foreign online business may be 
the most effective means of preventing harm to American consumers. 
Making it easier for the Commission to challenge those who provide 
assistance to others who are violating Section 5 of the FTC Act could 
help the agency attack the infrastructure that supports Internet fraud, 
such as in the circumstances described above.\58\
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    \58\ The Commission notes that Section 7 is drafted to include 
aiding and abetting ``any provision of the Act or any other Act 
enforceable by the Commission,'' which would include aiding and 
abetting unfair methods of competition. It is unclear how this is 
intended to apply to competition cases, or whether application to 
competition cases is necessary.
---------------------------------------------------------------------------
F. Sections 8 and 9. Rulemaking Procedure For Consumer Protection, 
        Subprime Lending, and Nontraditional Mortgage Loans
    Section 8 of the proposed FTC reauthorization legislation would 
allow the FTC to conduct rulemaking on any consumer protection issue 
(other than subprime lending and nontraditional mortgage loans) under 
the streamlined rulemaking procedures of Section 553 of the 
Administrative Procedures Act (``APA'') that are generally available to 
Federal agencies. Congress has heretofore authorized the Commission to 
conduct general rulemaking only under the rigorous, complicated, and 
time-consuming procedures of Section 18 of the FTC Act. Section 18 
includes requirements that the FTC must publish an advance notice of 
proposed rulemaking and seek public comment before publishing its 
notice of proposed rulemaking; it must provide an opportunity for a 
hearing before a presiding officer at which interested persons are 
accorded certain cross-examination rights; and where there are numerous 
interested persons, the FTC must determine which have similar 
interests, have each group of persons with similar interests choose a 
representative, and make further determinations about representation 
for those interests in the cross-examination process. These 
requirements are not ordinarily applicable to other Federal agencies 
for comparable rulemaking.
    In addition, over the past 15 years, there have been a number of 
occasions where Congress has identified specific consumer protection 
issues requiring legislative and regulatory action. In these specific 
instances, Congress has given the FTC authority to issue rules using 
APA rulemaking procedures, and the Commission has supported this 
approach.
    Section 9 would provide for the Commission to conduct rulemaking 
under the APA with respect to subprime mortgage lending and 
nontraditional mortgage loans. The Commission previously has supported 
proposals to permit all responsible agencies to promulgate consistent 
and comparable rules in the financial services area.\59\ Current 
differences in rulemaking procedures may result in different regulatory 
requirements for financial service providers selling the same goods. To 
avoid the application of inconsistent standards, to improve interagency 
coordination on rulemakings, and to ensure that any FTC rulemaking does 
not lag years behind other financial regulators, the FTC believes that 
it should have the authority to use APA procedures to promulgate rules 
whenever the banking agencies and National Credit Union Administration 
commence rulemaking under the FTC Act.
---------------------------------------------------------------------------
    \59\ See Prepared Statement of the Federal Trade Commission, 
``Enhancing FTC Consumer Protection in Financial Dealings, with 
Telemarketers, and on the Internet,'' Before the House Committee on 
Energy and Commerce Subcommittee on Commerce, Trade, and Consumer 
Protection (Oct. 23, 2007), available at http://www.ftc.gov/os/
testimony/071023ReDoNotCallRuleEnforce
mentHouseP034412.pdf.
---------------------------------------------------------------------------
Conclusion
    Thank you for giving the Commission the opportunity to provide its 
views on the proposed FTC Reauthorization bill. We are grateful for 
Congress' confidence in the FTC's ability to protect consumers, and, 
through our enforcement and education efforts, we will continue to make 
sure that your confidence is well-placed. We look forward to working 
with the Committee as the bill moves forward.

    Senator Dorgan. Thank you very much, Mr. Chairman.
    Commissioner Harbour, you may proceed.

 STATEMENT OF HON. PAMELA JONES HARBOUR, COMMISSIONER, FEDERAL 
                        TRADE COMMISSION

    Ms. Harbour. Thank you, Chairman Dorgan and Senator 
Klobuchar.
    I'm pleased to appear before you today. In particular, I 
would like to highlight recent efforts and accomplishments of 
the Commission in both the competition and consumer protection 
areas.
    Merger investigations are always a high priority at the 
Commission. This past January, the Commission enjoyed a 
resounding win on the merger front when the U.S. Court of 
Appeals for the 5th Circuit upheld a Commission Order in the 
Chicago Bridge & Iron Matter.
    In 2005, the Commission had ruled that Chicago Bridge & 
Iron's acquisition of assets from a competitor was likely to 
substantially lessen competition or tend to create a monopoly 
in markets for cryogenic storage tanks used in a variety of 
industrial applications.
    The Commission had ordered divestitures to undo the deal 
and restore competition. The 5th Circuit's recent opinion fully 
endorsed the Commission's findings.
    Pharmaceutical markets have long been a critical area of 
focus for the Commission and we continue to be vigilant in 
protecting pharmaceutical competition. For example, this past 
February, the Commission filed a case charging that Cephalon, a 
pharmaceutical manufacturer, unlawfully blocked competition for 
a branded drug by paying four generic firms to stay off the 
market until the year 2012.
    We are investigating similar exclusion payments involving 
other pharmaceutical firms as well.
    Of course, we also pay close attention to a wide range of 
issues in energy markets. We are considering how best to use 
our new enforcement authority regarding the manipulation of 
wholesale crude oil, gasoline and petroleum distillate markets.
    It is also worth noting the Commission's recent challenge 
of the proposed acquisition by Equitable Resources of the 
People's Natural Gas Company, a subsidiary of Dominion 
Resources. This transaction was abandoned by the parties in 
January of 2008.
    In April of last year, we unsuccessfully attempted to keep 
gasoline prices from going up in Albuquerque, New Mexico. We 
sought a preliminary injunction in Federal court in New Mexico 
to stop Western Refining, Inc.'s, acquisition of Giant 
Industries, but unfortunately the district court did not 
believe the merger would cause gasoline prices to increase.
    On the competition front, the Commission just announced 
settlements with retailer TJX and data broker, Reed, Elsevier 
and Seisint, settling charges that the companies failed to 
provide reasonable and appropriate security for sensitive 
personal information. These cases bring the total number of 
data security enforcement actions to 20, but rather than 
celebrate this milestone, we will use it to remind ourselves 
and the larger business community how much more work awaits us 
in this important area.
    Our data security cases typically allege multiple and 
systemic security vulnerabilities that were easily and 
inexpensively avoidable. This suggests that companies must do 
more to protect sensitive consumer information.
    The Commission will continue to educate consumers and 
businesses about protecting personal information and we will 
continue to hold companies accountable for their information 
security practices.
    We are tremendously gratified that Congress expanded the 
Commission's ability to cooperate with our foreign counterparts 
through the U.S. SAFE WEB Act. The law added new enforcement-
sharing tools into the Commission's law enforcement arsenal and 
allows us to pursue a wider range of cross-border enforcement 
matters. Since the rules went into effect in May 2007, the 
Commission has shared information 17 times with foreign 
agencies in cross-border consumer protection matters involving 
fraudulent telemarketing scams, deceptive mail schemes and spam 
cases.
    The Commission has also used its new authority to provide 
investigative assistance to foreign agencies in multiple 
Internet-related investigations. In short, the increasing use 
of the FTC's new authority is removing some of the key 
roadblocks to effective international enforcement cooperation 
and the Commission will continue to focus on U.S. SAFE WEB in 
2008.
    Let me end with mortgage lending. It has long been a 
Commission priority. In the past decade, the agency, as you 
have correctly noted, Chairman Dorgan, brought 21 actions 
focused on the mortgage lending industry, alleging that 
mortgage brokers, lenders and servicers have engaged in unfair 
or deceptive acts and practices and these cases have 
collectively returned more than $320 million to consumers.
    In February, the Commission announced three actions against 
companies that allegedly made false guarantees to homeowners 
that they would save their homes from foreclosure. In one case, 
the Commission charged that the company enticed consumers into 
a second mortgage or home equity line of credit on unfavorable 
terms without fully disclosing the risks, the costs and 
consequences of doing so.
    In conjunction with these cases, the Commission launched a 
related consumer education effort which included a fact sheet 
on how to avoid foreclosure rescue scams, a series of radio 
PSAs in English and in Spanish, and warnings about foreclosure 
rescue schemes which we will place in the classified ad 
sections of English and Spanish language community newspapers.
    And finally, the Commission likewise has been active in its 
efforts to protect consumers of non-mortgage financial 
services. The agency announced in February consent agreements 
with three Internet pay day lenders who advertised the cost of 
their loans without disclosing the annual percentage rate in 
violation of the Truth in Lending Act. This violation makes it 
far more difficult for consumers to comparison shop between pay 
day loans and other short-term forms of credit.
    And the Commission has also, as you correctly mentioned, 
sent out warning letters to over 200 mortgage brokers and 
lenders and the media that carry their ads that their 
advertising claims may violate Federal law. As a follow up to 
the mortgage advertising sweep, the Commission is investigating 
a number of these mortgage advertisers and we will continue to 
monitor these claims and if the Chairman desires, we can give 
you a private briefing at a later date.
    I thank you very much, and I look forward to your 
questions.
    Senator Dorgan. Commissioner Harbour, thank you very much.
    Commissioner Leibowitz?

           STATEMENT OF HON. JONATHAN D. LEIBOWITZ, 
             COMMISSIONER, FEDERAL TRADE COMMISSION

    Mr. Leibowitz. Thank you very much, Senator Dorgan, Senator 
Klobuchar.
    Let me begin by underscoring how much we appreciate your 
very ambitious legislation to reauthorize the Federal Trade 
Commission. My colleagues have asked me to focus on two 
provisions today: authority to bring civil enforcement actions 
against those who aid or abet illegal acts, and authority to 
seek civil penalties for violations of the FTC Act. Both 
provisions are designed to provide strong deterrence to would-
be lawbreakers.
    First, aiding and abetting. The Commission unequivocally 
supports Section 7 of the bill to the extent it would prohibit 
aiding or abetting a violation of any consumer protection 
statute enforced by the Commission.
    For many years, our agency relied on Section 5 of the FTC 
Act to pursue not only direct violators but also those who 
assisted violations. The Supreme Court's ruling in Central Bank 
of Denver in 1994, however, compromised our ability to reach 
such aiders and abettors.
    Since then, we have developed alternative theories to 
prosecute secondary actors, but as both of you are aware, 
sometimes it can be very difficult to prove liability. Indeed, 
in some cases, we have been unable to bring actions against 
potential defendants who enabled illegal behavior. Clear 
enforcement authority would certainly help.
    In fact, we already have this authority for telemarketing 
fraud. Pursuant to a 1994 law, the FTC's Telemarketing Sales 
Rule prohibits assisting and facilitating violations. It has 
enabled us to successfully prosecute, for example, brokers who 
knowingly provided lead lists to scammers so they could easily 
find victims, and payment processors who electronically debited 
consumers' accounts on behalf of obviously fraudulent 
enterprises. But the rule is limited to telemarketing 
violations.
    Now, why give a pass to facilitators of unlawful schemes 
that use the Internet or the mail--but not to those that use 
the telephone? To ask the question is to answer it. Authority 
to prosecute aiders and abettors would be an effective law 
enforcement tool, as well as a strong deterrent for malefactors 
and their accomplices.
    Second, civil penalties. Section 5 of the FTC Act, which 
prohibits unfair or deceptive acts or practices, as well as 
unfair methods of competition, is the ``bread and butter'' of 
our law enforcement program. The FTC may seek equitable 
remedies for violations, including restitution for injured 
consumers and disgorgement of profits from violators. We use 
these remedial tools often and generally very successfully. But 
the Commission doesn't have authority to obtain fines for 
Section 5 violations.
    The FTC's civil penalty authority is effectively restricted 
to three circumstances: violations of statutes that authorize 
civil penalties, like COPPA or CAN-SPAM; knowing violations of 
FTC rules; and violations of administrative cease and desist 
orders, that is, when we have you under order already. Thus, a 
wide range of deceptive or unfair conduct, including outright 
fraud, may not be subject to this sanction.
    Your bill, Senator Dorgan, would authorize the Commission 
to seek fines for knowing violations of Section 5 of the FTC 
Act. The Commissioners all agree that we need additional civil 
penalty authority in certain categories of cases where the 
usual FTC monetary remedies, restitution and disgorgement, are 
inadequate. In recent years, we've testified in support of 
authorizing fines for spyware, for data security breaches and 
for telephone record pretexting. These are all instances in 
which it can be difficult to quantify consumer harm or in which 
the defendant's ill-gotten gains are often slim, non-existent 
or difficult to determine.
    Admittedly, there is some debate about how far our civil 
penalty authority should extend. Some believe that Congress 
should authorize civil penalties piecemeal, in discreet areas, 
as problems arise, or that the broad liability for unfair or 
deceptive practices under the FTC Act should only be coupled 
with narrow remedies.
    Others, however, support your bill's approach of permitting 
civil fines for a wide range of deceptive and unfair acts, as 
well as for antitrust violations. The authority you would give 
us would be tempered by allowing only Federal judges to impose 
the penalties and only for knowing violations.
    In the early 1970s, the Commission, under former FTC 
Chairman Caspar Weinberger, recommended that Congress give the 
agency authority to assess civil penalties administratively for 
consumer protection violations. In testimony before this 
Committee, Chairman Weinberger called for, and I quote, 
``stronger and more comprehensive tools to make the threat of a 
Commission proceeding a real deterrent to a lawbreaker.''
    In response, this Committee and the Senate passed 
legislation authorizing the FTC to seek fines in Federal court, 
which is what your bill would do, but this provision was 
dropped in conference with the House.
    We are all pleased that you are revisiting this issue today 
and, speaking for myself, I strongly support the proposed 
reauthorization, including the additional civil penalty 
authority. Your bill, I believe, will help give us the critical 
tools we need to successfully confront the antitrust and 
consumer protection challenges of the 21st century.
    Thank you for letting me participate in this hearing, and 
I'd be happy to answer questions after my colleague speaks.
    Senator Dorgan. Mr. Leibowitz, thank you very much.
    Finally, we'll hear from Commissioner Rosch.

STATEMENT OF HON. J. THOMAS ROSCH, COMMISSIONER, FEDERAL TRADE 
                           COMMISSION

    Mr. Rosch. Chairman Dorgan, Senator Klobuchar, thank you 
very much for the opportunity to be before you today and 
testify about the proposed bill that would reauthorize the FTC.
    I'd like to focus on two aspects of the bill that are of 
special interest to me. The first is granting the Commission 
independent litigating authority for civil penalties in matters 
before the Supreme Court, and the second is the agency's 
rulemaking procedures.
    Commissioner Leibowitz has just described the agency's need 
for civil penalties. Speaking for myself, I favor the proposed 
legislation and along with my colleagues, I strongly favor 
granting the Commission's civil penalty authority in specific 
areas we've identified today and in prior testimony, like data 
security and spyware and pretexting.
    But whatever the ultimate scope of civil penalty authority 
that Congress grants to the Commission, my fellow Commissioners 
and I believe that giving the agency the ability to 
independently litigate civil penalty actions is necessary for 
the agency to fully protect consumers.
    Now I don't want to leave the impression that there's been 
a conflict with DOJ in litigating these cases. In fact, we've 
collaborated successfully on many civil penalty cases over the 
years, but there are two primary reasons why the current 
process in our opinion doesn't serve consumers well.
    First, the Commission invests significant resources 
investigating and sometimes settling civil penalty matters 
before filing an action, and even after referral to DOJ, 
Commission staff are assigned to the case to assist in 
litigating the matter. So the referral process doesn't free up 
significant Commission resources, particularly in settlements, 
and in fact, sometimes leads to the duplication of efforts.
    Second, the Commission's often faced with ongoing consumer 
harm in cases that violate both Section 5 of the FTC Act and 
one or more specific civil penalty statutes.
    When the Commission exercises its independent litigating 
authority under Section 13(b), we can file an action 
immediately and seek a temporary restraining order and other 
immediate remedies to stop the violative conduct. In these 
types of cases, though, we must forego civil penalties all 
together and file the case seeking only redress and injunctive 
relief under Section 13(b) in order to get to court quickly.
    I frankly have been appalled at the large sums of money 
that defendants take in from deceptive or unfair practices. So, 
I find it especially frustrating that at the end of a case, we 
may be unable to achieve the fullest possible measure of 
deterrence.
    A related provision in the reauthorization bill gives the 
Commission authority to independently litigate its actions 
before the Supreme Court. I fully support the proposed 
legislation in this regard.
    At the end of the day, I think the issue of litigation 
authority determines whether the Commission is truly an 
independent law enforcement agency.
    Both in my prior tenure at the Commission and in my current 
tenure, I've understood that is what you, the Congress, wanted 
us to be. Giving the Commission independent authority to 
litigate civil penalty actions and to pursue our own appeals 
before the Supreme Court would help solidify the Commission's 
independent status.
    Finally, I turn to the proposal to give the Commission 
authority to conduct rulemaking on a notice and comment basis. 
I was at the agency when Magnuson-Moss was passed. At that 
time, none of us fully appreciated what a burdensome process 
Mag-Moss rulemaking would turn out to be as compared to the 
rulemaking procedures under Section 553 of the Administrative 
Procedure Act which are applicable to a whole host of other 
agencies.
    We did understand that, given the breadth of Section 5 of 
the FTC Act, there may be a need to give some notice to 
industry of some of the practices that would trigger civil 
penalties, but we didn't envisage that the process would in 
effect make it difficult or impossible to enact rules in a 
timely manner to respond to consumer protection challenges.
    I know there are differing opinions among the Commissioners 
on this point, but speaking for myself alone, I think that APA 
rulemaking authority for consumer protection matters would 
greatly increase the Commission's effectiveness in dealing with 
certain types of practices.
    The subprime mortgage lending area, which is specifically 
mentioned in the reauthorization bill, is one prime example. 
Now to be clear, I'm not advocating wholesale and burdensome 
regulation of industries. I know the agency has learned from 
the past, particularly the Kid Vid controversy in the 1970s, 
but in this day and age, the ability to conduct streamlined APA 
rulemaking would be a valuable tool in our arsenal to respond 
more quickly to some difficult consumer protection problems.
    Thank you for all of your time and your support of this 
agency and its mission, and I'm happy to answer any questions 
you might have.
    Senator Dorgan. Commissioner Rosch, thank you very much.
    I don't think we should worry too much about someone 
thinking we might want to impose some additional regulations. 
The fact is that we now see, as I said earlier, $30 billion of 
taxpayers' money ponied up to bail out an investment bank that 
was unregulated because it was too big to fail. Well, if it's 
too big to fail, it ought to be big enough to be regulated so 
that we could take a look at what they're doing and try to 
bring some of their practices back into some sensibility.
    I want to ask a couple of questions about subprime and 
deceptive advertising especially. You have such a wide agenda, 
but I want to focus on this just for a moment.
    The three charts that I showed previously, let me show them 
again quickly, and I'm going to ask you a couple questions 
because I pulled this one off the Internet yesterday. This is 
advertising as of yesterday on the Internet. It's April 7, 
2008. You can get a 30-year fixed rate mortgage, two and three-
quarters percent.
    Does anybody believe that you can get a 30-year fixed 
mortgage for two and three-quarters percent? That's what was 
advertised on the Internet yesterday. It seems to me like 
that's clearly deceptive advertising.
    Second one. Yes. Well, they also advertised that one of the 
wonderful things is you don't have to document your income. No 
doc and low doc. This is 5-year fixed payments for one and a 
quarter percent interest rate.
    Now, why is this deceptive? Because anything you don't pay 
in the front end is put on the back end of this mortgage and 
will increase the cost of purchasing that home. But, that's not 
there. That is nowhere in the advertisement. They say use these 
low rates to control up to two to three times as much real 
estate versus conventional fixed-rate mortgages.
    What they're saying is come in and get a teaser rate and 
speculate. Deceptive advertising? Seems to me it probably is. 
Finally----
    Mr. Leibowitz. Well, let me just add, it may also be 
violative of the FTC Act because in fact they are telling you 
that you don't need to provide financial documents, right? 
That's also very troubling.
    Senator Dorgan. They're not only telling you that, that's 
the way many of these subprime mortgages were given.
    I mean, I was surprised to hear that----
    Mr. Leibowitz. That's right.
    Senator Dorgan.--no doc and low doc means you can get a 
loan without having to document your income to the mortgage 
lender. I mean, obviously that sounds like a bunch of drunks 
out there playing a joke on somebody, but it's the way this 
system was working.
    You pay a slightly higher interest rate for a no doc or a 
low doc, but let me just go with the last chart. This is one 
quarter of 1 percent interest only rate. That's for 5 years. 
So, they're saying a $200,000 loan for your house, you have a 
house payment of $41.66 a month. Now that's on the Internet 
today.
    Now, I'm asking the question because everybody talks about, 
well, who's at fault here? These folks have got these 
mortgages. They're not victims. They knew what they were doing. 
But in many cases, brokers were cold calling people that were 
already in a home, saying we'll put you in a better mortgage. 
One-half of the new mortgages, subprime mortgages went to 
people who qualified for a prime mortgage, one-half went to 
people who qualified for a prime mortgage, and yet they were 
stuck in the subprime and stuck in a subprime in most cases 
with prepayment penalties and so on.
    The point is this. In my judgment, there was massive 
deception going on, massive deception with respect to this 
question of mortgage advertising and they're all involved. I 
mean, I showed you Countrywide was the biggest. I showed you 
what they were advertising. They were saying to consumers, you 
have bad credit, you have credit problems, you've been 
bankrupt, come to us, let us loan you some money because this 
was very profitable and at the top, they were all grunting and 
shoving and, you know, like hogs in a trough and making lots 
and lots and lots of money.
    So, how did this happen that all of this occurs without the 
Federal Trade Commission being able to step in and write a rule 
that relates to what is required with respect to this 
advertising? Tell me what the deficiency is with respect to 
your ability to have stepped in several years ago and see 
what's going on and say, wait a second, you've got to stop it 
or face substantial penalties if you don't.
    Mr. Rosch?
    Mr. Rosch. I guess I have rulemaking. I would say that I 
draw a distinction between deception on the one hand and 
unfairness on the other. Both are covered by the FTC Act.
    When you're talking about some of the ads that you've shown 
us today, you're talking about outright deception. We don't 
need a rule to go after that, and in fact we may be going after 
some of those companies already.
    Where we do need a rule is where we're talking about 
unfairness. As you said before, some of these companies were 
actually delivering on what they said. They were loaning 
without any requirement whatever with respect to income, et. 
cetera.
    Now that is arguably unfair, but what a rule would do is to 
prohibit companies from making those kinds of promises and 
granting loans on those conditions. What that does is it puts 
them on notice that we will consider this to be an unfair 
practice.
    Now why is your bill so important? It's important because 
our Mag-Moss authority right now, which is the only rulemaking 
authority we've got, takes us anywhere from three to 9 years to 
make a rule. It's just impossible for us to be ahead of the 
curve on something like this.
    With APA rulemaking, we can get a rule in place very 
quickly.
    Senator Dorgan. I'm a little lost with respect to deceptive 
and unfair, and I suppose that those are terms of art, but it 
seems to me if you're advertising in a deceptive way, it's also 
unfair to the person that is receiving the message.
    But what you're saying is as the subprime activity ramped 
up, and it happened in a big hurry over a period of three, 
five, six years, all of a sudden we saw this unbelievable 
mountain of subprime lending: no doc, low doc, interest only, 
partial interest only, defer some of the interest and the 
principal, all of these things. It seems to me almost all of 
the advertising I saw was deceptive. Nobody ever said and, oh, 
by the way, we'll stick all of this extra cost on the end of 
your mortgage and your house is going to cost more.
    So, did you not have much authority? I know you've gone 
after some individually, but did you not have authority to 
write a rule in this process to say here's the rule that you've 
got to follow, here's the process you've got follow?
    Mr. Rosch. We did, but here's the beauty of your 
legislation, Senator. It is that the rulemaking authority that 
we had to make a rule required us to spend anywhere from three 
to 9 years making that rule.
    What your authority would do, by giving us the authority to 
proceed under APA rulemaking, like most other agencies, it 
would allow us to shorten that rulemaking time very 
substantially.
    Mr. Leibowitz. So that we can help consumers and just 
following up on Commissioner Rosch's point, we have had 
discussions internally about whether to do a rule and it always 
ended with us determining that Mag-Moss rulemaking procedures 
will take us so long, it won't be worthwhile. For example, 
under Mag-Moss, which is an almost Medieval form of 
rulemaking--one that turns rulemaking on its head--opponents of 
the rule can ask for a referee. They have rights of cross 
examination.
    When you're looking at a 9-year rule, an 11-year rule, with 
opposition from the entire industry, and you could be sure 
they'd be in opposition to what we wanted to accomplish. That's 
why I like your general grant of APA rulemaking authority when 
we see a major problem like this, and that's why specifically 
with respect to the subprime mortgage crisis, that provision of 
your bill will be enormously helpful to us.
    Senator Dorgan. I should make the point that, you know, 
there are some mortgage lenders out there that are doing it the 
right way. They've got good brokers. They're doing the right 
thing. Nobody can come up and say I'm going to buy a home and, 
by the way, here's the cash. You need home loans. You need 
mortgages. It's a very important industry to allow for 
homeownership.
    But it is the case that if you look very deep into this 
system, in the last few years, four or 5 years especially, this 
thing spun way out of control with deception, with unfairness, 
a whole series of things, and it seems to me that you all 
didn't have the capability which is why we made a change in 
this law or proposed law. You didn't have the capability to 
write a rule to prevent this. You can go after them after the 
fact perhaps, but it seems to me you've got to be ahead of this 
to prevent the activity.
    Ms. Harbour?
    Ms. Harbour. Chairman, yes, I agree with that, and just 
stepping back a bit and looking at this in the historical 
context, the housing sector at one point was booming. We used 
to call this sort of behavior predatory lending and then it was 
changed to subprime lending.
    Many consumers who were not able to buy homes were able to 
purchase them. However, because we didn't have the rulemaking 
capability under the APA, we were bringing these cases under 
our traditional Section 5 authority--we brought 21 cases over 
the past 10 years and returned $320 million to consumers.
    But this new rulemaking ability will give us enforcement 
tools which we will be able to use to be more vigilant in this 
area.
    Senator Dorgan. The 21 cases doesn't sound like much to me 
when I see what was out there.
    Ms. Harbour. But you know what, Senator? These cases are 
very, very resource-intensive. So, in addition to the APA 
rulemaking authority that hopefully will be granted, also the 
funding and the monies to bring on extra attorneys to 
investigate and bring cases would be very helpful to the 
Commission.
    Mr. Kovacic. Senator, could I add that as these phenomena 
developed, I suspect it's largely recognized now that if the 
bubble had not burst and if the boom had continued, many of the 
problems would not have manifest themselves.
    As a number of the practices came to our attention, in 
addition to bringing the cases that my colleague has just 
mentioned, we started programs to learn about what was taking 
place as this wave unfolded.
    This was the purpose of the many workshops that we've 
spoken about in previous appearances. It's the reason that our 
Bureau of Economics turned their attention as dramatically as 
they did to doing empirical work and studies about mortgage 
lending. It's why for the agency, by my rough count of the 300 
attorneys we now have working in the consumer protection part 
of our agency, roughly 50 of them now are spending their time 
on financial practices, financial services.
    So, I would just add that, in addition to the litigation 
program, we're trying to learn as fast as we can about what was 
transpiring and to reposition the agency to deal with this.
    Senator Dorgan. I understand. I'm just saying the lack of 
regulations, however, are costing this country hundreds of 
billions of dollars and if we can get this legislation passed, 
we're going to give you a new authority.
    It's very important that the Federal agency like yours not 
be a potted plant. Giving you the authority is one thing, using 
it is quite another, and it's very important that it be used in 
the right way and used aggressively.
    Mr. Kovacic. And Senator, could I suggest that there's a 
model that you mentioned before that might be followed here?
    The Do Not Call rule in many ways evolved in roughly the 
same way. The life cycle of our work was extensive litigation 
under the Telemarketing Sales Act, reflection, workshops, data-
gathering, and then the time came where the Congress said go to 
it, here's a rule, proceed; I think a similar pattern could 
well unfold here with the authority you mentioned.
    Senator Dorgan. All right. Senator Klobuchar?
    Senator Klobuchar. Thank you very much, Senator Dorgan. 
Hopefully there will be a second round here. I want to ask 
about the drug enforcement, but I first want to talk about one 
of the areas that this legislation would expand your authority 
in and you mentioned it, Commissioner Kovacic, and that would 
be in the area of the common carrier exemption.
    This is something we've been talking about on this 
Committee. We held a hearing on the cell phone industry, about 
the fact that it started in its infancy with, you know, like 
the movie Wall Street with the big phone in a briefcase and now 
200 million people have them, yet essentially there are not 
many rules that the cell phone companies have to follow. The 
two main things that we've identified as issues are the 
prorating of the early termination fees and how that works and 
some of the advertisements that are done to entice people to 
buy and then they find they're locked into a contract.
    Then, the second thing is the, as I mentioned, 
advertisements of cell phone service working, fewest dropped 
calls, all those kinds of things, without really any back-up.
    Could you first talk about how many complaints--do you get 
complaints on this, even though you don't have authority? Is 
this an area that you're interested in expanding into?
    Mr. Kovacic. It is, Senator. We do receive some complaints. 
I don't have a rough count in my mind, but we'll certainly 
supply that to you.
    We also see in a variety of other forms of work we do the 
concern about advertising in the telecommunications sector. I 
would say one of the most important applications of the 
adjustment that is contemplated in the Reauthorization Act with 
respect to common carriers is that we could bring the large 
body of experience and enforcement capability that we have to 
bear on advertising issues in this area and it's not to slight 
other public agencies that have had a hand in this area. It's 
simply that we feel in the area of national advertising, and 
regional advertising, we handle these issues well. I think it's 
fair to say when we observe the possibilities that might come 
about from the application of our authority in this area, we 
think there would be large benefits to be had in establishing 
broader national principles that we have applied in other 
sectors to overseeing this sector, too.
    Senator Klobuchar. Well, and I suppose one of the arguments 
that's made is the FTC has jurisdiction over this.
    Could you just give me some examples of other areas where 
you have joint jurisdiction with other agencies where you focus 
on the advertising and they focus on the substance of the 
regulation?
    Mr. Kovacic. We share responsibility with the FCC in the 
area of pretexting; that is, we have overlapping 
responsibility. We cooperate very intensively on the Do Not 
Call List.
    I realize, and you probably see them more than I do, there 
are inherent tensions that arise at any time that two Federal 
institutions have overlapping responsibility. At the same time, 
we've worked very hard with the FCC and with other institutions 
in which that circumstance exists to develop liaison 
arrangements to minimize tensions and to assure that we're not 
tripping over each other when we're operating in the same 
policy domain.
    So, I would have a great deal of confidence that those 
types of cooperative relationships would continue, they'd be 
intensified, and we'd still be able to do the kind of work that 
we think we do particularly well.
    Senator Klobuchar. Commissioner Harbour, are you concerned 
about some of the advertising going on in this area and what 
you've heard?
    I mean, everyone I know in my state has a cell phone story. 
So, go ahead.
    Ms. Harbour. I'm glad you asked that, Senator, because the 
Federal Trade Commission will be hosting a town hall meeting on 
May 6 and 7 of this year called Beyond Voice: Mapping the 
Mobile Marketplace, where we will explore the evolving mobile 
commerce marketplace--it's called mCommerce these days, and see 
how that impacts consumer policy.
    So, we'll have parties from all sides discussing this issue 
and we will likely issue a report thereafter.
    Senator Klobuchar. Very good.
    Mr. Leibowitz. Let me just add that we have some 
overlapping jurisdiction with the bank regulators. We have 
overlapping jurisdiction with the Antitrust Division, and we 
sometimes allocate industry areas with them.
    But getting back to the common carrier issue, one area, and 
it's one we're going to be addressing at our workshop, that 
we're becoming concerned about is cell phone spam and we 
believe we have jurisdiction either under the CAN-SPAM Act or 
under the FTC Act to go after any malefactors there. But you 
can be sure that if we bring a case, the first defense they're 
going to raise is the common carrier defense.
    They'll say, ``we're a common carrier,'' and it will take 
us 6 months to get through the litigation and it will consume a 
lot of resources for us to prove that they aren't.
    Senator Klobuchar. Right now, we have a big blown-up 
picture of an ad saying we can connect you to the world and the 
cell phone service doesn't work there or people are told, hey, 
on this map you're going to be--don't worry, you're going to 
get cell phone service there and then they don't and then they 
can't even terminate their contract without having to pay 200 
bucks and so their frustration is that there's really no one 
minding the store when it comes to this right now.
    Is this something where, if Senator Dorgan's exemption 
passed and the lifting of the exemption and we were able to get 
this done, that the FTC could look at?
    Mr. Leibowitz. Yes.
    Senator Klobuchar. Thank you.
    Senator Dorgan. Senator McCaskill?

              STATEMENT OF HON. CLAIRE McCASKILL, 
                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. Thank you, Mr. Chairman. I'd like to 
talk a little bit about credit cards.
    I firmly believe that credit cards are the next frontier of 
disaster as it relates to America's economy and some of the 
abuses going on and I understand Section 5 and the authority, 
and I know that you have done a lengthy study on consumer 
protections in the mortgage industry and have made 
recommendations to other financial services regulators and HUD 
about better consumer protections.
    We have had a number of hearings on credit cards. We've had 
in the Permanent Subcommittee on Investigations, which I serve 
on, and we've some incredible factual information that's come 
to light about the credit card industry, and I think all of us 
have personal experiences that just make you want to wring 
someone's neck in terms of some of the practices.
    I mean, one of my favorites is, Mr. Chairman, that some of 
these credit cards want you to get at your credit limit so they 
can raise your interest rate and that's one of the rationales 
they use for raising your interest rate, is that you're using 
credit at or near the limit they have set for you.
    So, someone in my office had a personal experience with 
this and the irony is, is that the credit card company sent him 
a check made out for the amount it would take to get him to his 
credit limit. All he had to do was sign the check, bingo, he's 
there and they can raise the interest rate.
    I am curious if you have considered doing a similar study 
to the study you have done for the credit card industry because 
I think the abuses that are in the credit card industry and the 
practices that are being used. I just came back from China 
where my jaw dropped when I learned the savings rate in China 
was 50 percent and the savings rate in our country is now net 
negative and a large amount of that is debt load. As we look at 
this subprime crisis and we look what the reality is of 
consumers and what they're doing out there, that the vast 
majority of this debt is being held in very expensive credit 
card debt and these are holes that the American consumers are 
not going to dig out of if they are doing what the credit card 
industry encourages them to do, which is minimum payment only.
    Could you all speak to whether or not you've considered 
doing a long-term study about the effects of the credit card 
industry on the American consumer and what could be done within 
your aegis in terms of looking at those abuses?
    Uh-oh. I'm worried. Everybody's looking at somebody else.
    Mr. Kovacic. We had a rough division of labor by topic 
before, Senator. So, we wanted to make sure that, much like the 
infielders racing for the fly ball, that we didn't run over 
each other.
    I would say we don't have a specific plan in place to do 
this at the moment. We're doing quite a bit of research on 
financial services and lending, but I would be happy to speak 
with your staff and I'd be happy to meet with you to talk about 
what a research agenda in this area might look like.
    A second observation is that this is an area and maybe a 
topic for a fuller discussion another day where we do bump into 
some substantial jurisdictional limits.
    The credit card issuers, we can examine, and those whom we 
prosecute are very much a function of the financial services 
statutory framework that we have. The basic distinction is 
whether the issuer is a bank or is not a bank, I know that the 
Congress is paying keen attention now to deciding how to retool 
and reconfigure the remarkable legacy-based financial services 
regulatory scheme that was put in place 50-60-90 years ago and 
in many ways hasn't been revisited.
    So that's a potential limitation on what we do here as 
well, but I'd be delighted to meet with you----
    Senator McCaskill. That would be terrific.
    Mr. Kovacic.--to discuss this.
    Senator McCaskill. I think it's all hands-on deck time when 
it comes to the credit card industry and what's going on.
    Mr. Leibowitz. Yes, and let me just add to what the 
Chairman said, too.
    We do have a major investigation going on of a subprime 
credit card issuer, it's a company called CompuCredit. I'm 
allowed to make that public because the company made it public 
in its SEC filings. If the Committee would like a briefing on 
that, we're happy to provide it for you.
    Senator McCaskill. Mr. Chairman, if you would allow me one 
more question because I have to run back to the Armed Services 
hearing and I can't stay for the second round. Do you mind? Do 
my colleagues mind? OK. Thank you very much.
    For a number of years, we have encountered problems in 
terms of marketing to seniors. I have sent you all a letter 
about the Craftmatic organization. I've not received a response 
from that yet, but there is incredible video footage of 
training going on in the area of marketing these beds to 
seniors, the adjustable beds. There is footage of the trainers 
teaching the salesmen, for gosh sakes, try to get them to cry 
and for God's sakes, don't let them talk to their loved ones, 
close the sale. It is incredibly--you know, it's just sickening 
this footage, and I'm anxious to get a response from you about 
the investigation. This company has now changed names and 
problems.
    There's three areas I want to address and then I'll get to 
my question. Then there's reverse mortgages which hopefully 
we're going to get an amendment on the bill we're considering 
right now on the Floor as it relates to the marketing of 
reverse mortgages to seniors. These are complicated and 
expensive financial tools and we have many instances--we had a 
hearing on this in the Aging Committee. Many instances where 
these companies are marketing deferred annuities in tandem with 
reverse mortgage. Now that, you know, takes chutzpah. That 
takes a lot of nerve.
    Then we've got the New York Times article that was 
published in May 2007 where they documented the selling of 
lists to companies, saying these guys are suckers, these are 
old people that are lonely, you know, these are people who are 
buying lottery tickets and marketing these sales lists. In 
other words, you know, we've got a good hot list of elderly 
people you can prey upon.
    What this all brings to mind is that I think we need a 
senior protection/senior advocate within the FTC that will 
corral the many different examples of where the elderly are 
particularly being victimized by unfair and fraudulent trade 
practices and I would want to work closely with your agency in 
working on legislation that might create this position because 
I do think that there is a body of work that needs to be 
focused.
    If we going to prioritize our resources and prioritize what 
the FTC is doing, I could make a strong argument that that 
prioritization should begin with the bilking of the elderly and 
practices that are used against a vulnerable population where 
people are aware that these sometimes are people that don't 
have a lot of family around and want someone to talk to and if 
you can gain their confidence on one front, then you can do 
some things that are pretty outrageous.
    I would appreciate your comments on your willingness to 
work with us in trying to create a senior protection/senior 
advocate within the FTC as part of this FTC reauthorization.
    Mr. Leibowitz. Well, I think we need to take a look at your 
proposal, but we're absolutely willing to work with you, 
Members of this Committee, Senator Kohl, Members of the Aging 
Committee. Absolutely. We're aware of the legislation that's 
pending on the Floor.
    Just going back to Craftmatic, which was the first topic 
you raised, we are well aware of Craftmatic. Craftmatic is very 
well aware of us because we fined them over a million dollars 
for Do Not Call violations last year; $4.5 million, actually. 
It was a substantial fine and so we're aware of your letter. We 
will get back to you on that.
    Senator McCaskill. Yes. Because this goes way farther than 
a phone call. I mean, this man couldn't read. I mean, he can't 
see and he signed--she guided his hand on the paper and this is 
all documented. They sent in a hidden camera into this training 
session. I mean, it is--as a former prosecutor, it looks like 
to me it's a slam dunk.
    Mr. Kovacic. Well, Senator, could I offer one additional 
possibility that I think matches some of your own concerns 
here? One thing that we've spent a great deal of time doing in 
our Fraud Program is to identify specific patterns and this 
often involves working with criminal prosecutors and with our 
state counterparts to identify the specific patterns of 
behavior that you mentioned, especially the development among 
the serious, in many instances, serious criminals who use these 
techniques to develop lists and sell lists of individuals who 
might be particularly vulnerable.
    One thing I would like to do in cooperation with my 
colleagues is to take a number of the things that we do that 
deal with the economically disadvantaged and deal with specific 
vulnerabilities that often are the consequence either of 
language asymmetries, poverty, other conditions, where we have 
programs now and to provide perhaps a more specific focus on 
them. I would like to take what we've learned in selected areas 
and apply them perhaps here as well.
    This is another topic I would be glad to speak with you and 
your staff about.
    Senator McCaskill. Thank you, Mr. Chairman, very much.
    Senator Dorgan. Thank you. Senator Cantwell.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Mr. Chairman. It's great to 
see the Commissioners here to talk about what I think is a very 
important issue impacting our economy today and that's the high 
price of fuel.
    In my state, both gasoline and diesel are in some parts 
already over $4 per gallon and I know that you made mention in 
your testimony to the new authority that has been given to the 
FTC, but I kind of sense it was passing focus, and what I 
really want to get at today in my questions is the point to 
which work will move much--I mean that the FTC will move much 
more quickly on an expedited rulemaking.
    The reason I say this is because this is authority to help 
basically protect consumers from market manipulation and it is 
new authority, but we have been very successful with the SEC 
having this kind of authority to help on markets and in the 
2005 Energy bill, we gave FERC similar authority to what we are 
giving to the FTC.
    It took them 6 months to get the rulemaking for that rule 
and to date, FERC has used that expanded authority for 64 
investigations, 14 of which have resulted in settlements. This 
is basically just on their technical and existing authority, 
and they basically were settlements for over $48 million in 
various civil penalties.
    In addition, within 18 months of their rulemaking, FERC 
brought two major enforcement cases for market manipulation 
under their new authority which may total over $458 million in 
civil penalties.
    So, my question is, is the FTC going to act as 
expeditiously as FERC did in taking this new authority to 
protect consumers in the area of market manipulation of gas 
prices and come up with a new rule?
    In fact, what I'm really asking is whether you are going to 
be able to complete that rulemaking by the end of this year?
    Mr. Kovacic. Could I take a try at the question, Senator, 
and lay out for you what we see to be a way ahead on this 
issue?
    The first thing we're doing, we do have an internal working 
group that's working on precisely this issue. Among the things 
we're trying to do and have been working on is to make sure 
that we learn from precisely the experiences of the other 
authorities whom you've mentioned, CFTC, FERC, all of the 
others who've been dealing with manipulation-like authority in 
the energy area. That's going to inform our discussions.
    We're also contemplating a process of public consultation 
because there are a number of thoughtful experts on the outside 
who have some very useful views, I think, about how this 
authority could be applied to help us make sure that in 
developing our authority that we don't simply take an off-the-
rack solution from FERC or the CFTC that might not fit our own 
needs well. We want to consider making what adaptations they 
think are appropriate.
    We have people who spend a lot of time looking on the 
outside at exactly the experience you've mentioned, so we think 
we can do a bit of learning about how that's gone, and my 
prediction would be that there will be an advanced notice of a 
rulemaking this year. I don't have a specific time table for 
you, but we are developing this and we're working on this quite 
quickly. This is a high priority for us. This is something that 
I would be quite willing, in addition to this hearing, to 
discuss with you.
    Senator Cantwell. I don't understand what you mean by if 
it's a high priority. Can you commit to having a rule done by 
the end of the year? If it's a high priority and consumers are 
obviously anxious--we just had a hearing, Mr. Chairman, that 
you attended in another Committee on looking at the lack of 
transparency in investments, particularly from the various 
financial institutions in these markets, and we came to the 
conclusion that nobody could predict anything about prices 
because there wasn't enough information that's readily 
available.
    So, the authority given to FERC--to FTC, sorry, FERC 
already has this authority, but to FTC is critically important 
to be the regulator in the market, and if your analogy--I'm a 
big baseball fan. You know, your analogy about running into 
each other, I don't think you've fielded a team. We need you to 
field a team of investigators that are going to go after this 
issue of market manipulation and we can't wait until $4.50, at 
least in my area.
    Ms. Harbour. I guess the tension here, Senator, is that a 
poorly drafted rule could have adverse effects on gas prices 
and consumers. So, if it's done, it has to be done correctly 
and so----
    Senator Cantwell. That's why I'm giving you what FERC has 
done. FERC did it in 6 months and their authority so far has 
stopped basically settlement cases in the millions and in some 
cases civil penalties might be in the hundreds of millions.
    So, this is about saying that you will have a policeman on 
the beat, that somebody in the Federal Government is taking the 
oil markets and making sure that consumers are protected 
against market manipulation.
    We've already done that in the natural gas markets and 
electricity markets post-Enron and guess what? The new 
authority that FERC is using seems to be producing good 
results. So, I'd be more than thrilled if you'd beat FERC with 
coming up with a new rule within 6 months.
    Mr. Kovacic. Senator, let me----
    Senator Cantwell. But I'll give you 6 months as well. I 
agree, you need to do it right, but the urgency, I think, would 
be to say that that's your intention, to try to get it 
completed by the end of the year, given the extreme nature of 
what's happening in the markets today.
    Mr. Kovacic. Senator, I'd say we have a good team, a great 
team, none better. I'd add that, in addition to the new 
authority, they're on the field every day with respect to the 
existing authority we have to identify misconduct that would 
violate the antitrust laws and they're very busy on that front, 
too.
    Senator Cantwell. These are not antitrust issues. That's 
the whole problem. The new authority was given to you because 
it doesn't have anything to do with antitrust. It is not people 
coming together colluding about prices. It is about 
transparency in the market and moving supply.
    I'm just again bringing it up, Mr. Chairman, because our 
state has asked the FTC for a longer investigation. Spokane, 
Washington, had the highest gas prices in the Nation and no one 
could say why. In fact, your initial investigation showed an 
anomaly in the marketplace but still couldn't understand what 
the anomaly was about and that's why you're doing a larger 
investigation.
    Mr. Kovacic. Yes.
    Senator Cantwell. So, my point is that this is new 
authority to get around what has been years and years of saying 
that this issue is about antitrust. It is not. It is about 
whether someone is manipulating supply, not shortage of supply 
for natural reasons but manipulation of supply, and we had a 
101 case in this as it related to electricity in the West Coast 
and we certainly don't want to have another one of these cases 
as it relates to oil.
    Mr. Leibowitz. Senator Cantwell, if I can just add, as 
someone who supported your provision, including the price 
gouging provision that I think was removed in conference, we 
start many of our rulemakings with an ANPR, advance notice of 
proposed rulemaking, so I actually think this is a pretty 
meaningful commitment to start the ball rolling here and to 
look at the manipulation provision and move it toward a rule.
    Senator Cantwell. I thank you for that statement. I'm 
bringing this up because you didn't ask for this authority. 
This Committee initiated the legislation and passed it as part 
of the Energy bill.
    So, we want to make sure you are going to implement the 
rule and that you're going to do it aggressively.
    Mr. Kovacic. Senator, I'm delighted, in addition to this 
hearing, to consult with you and all you need do is ask me----
    Senator Cantwell. Great.
    Mr. Kovacic.--about what we're doing.
    Senator Cantwell. Well, I will be sending a letter along 
with my colleague, Senator Dorgan, today asking you to expedite 
the rule and have it completed by the end of the year.
    Thank you, Mr. Chairman.
    Senator Dorgan. Thank you. Senator Snowe.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman. Thank you for 
holding this timely hearing on an array of issues that 
certainly affect consumers, from subprime lending and the 
deceptive practices by non-bank lenders, of course, to energy 
speculation as well as to identity theft, and so the FTC 
certainly is on the frontline in so many issues that are 
crucial and central to the consumers in America.
    Mr. Chairman, Chairman Kovacic, I want to follow up on some 
of the questions regarding energy speculation and futures 
speculation within the energy market because certainly that has 
been a fundamental underpinning of some of the reasons as to 
why increases in energy prices have skyrocketed.
    Why hasn't the FTC issued regulations since you've had the 
requirement to do so since December when this legislation 
became law? Even in your FTC report of 2007, it doesn't even 
acknowledge that futures speculation could be a contributing 
factor to the rising prices in energy, and frankly, you know, 
this is not just hearsay or hypothetical.
    There have been two different studies that have been issued 
by the Permanent Subcommittee on Investigations of the Homeland 
Security and Governmental Affairs Committee that underscored 
this last year, that it can add $20 to $25 per barrel of oil in 
terms of futures speculation.
    So, why hasn't the FTC pursued an aggressive approach and 
strategy with respect to this issue that seemingly can have a 
profound impact? I mean, the prices have increased since 
December with respect to oil and gasoline more than 20 percent 
and as we know, trucking companies and independent truckers are 
at a standstill across America. I mean diesel has gone beyond 
$4 a gallon.
    In my State of Maine, $3.78 for a gallon of oil, I mean, is 
just absolutely prohibitive and so we've got to take every 
stance possible and pursue every measure possible as to what 
could be possibly contributing to these price increases and the 
fact is, many have indicated it's just not supply and demand 
that's been the instigator driving up these prices, but in fact 
it is futures speculation that has risen by more than 850 
percent since 2001.
    So, can you tell me, you know, exactly what the FTC is 
doing because I'm not sure that I was clear in your response to 
Senator Cantwell's question because you're in a position to 
issue regulations on this question. You didn't even acknowledge 
it in the 2007 FTC report that it could be a responsible factor 
for driving up these energy prices.
    Mr. Kovacic. The authority in question, of course, is 
relatively new and I think you might sense from my response and 
that of my colleagues that we're going to work as actively as 
we can to undertake the process that could lead to a rule.
    I'd also say that in many instances, I don't know of 
another institution within the Federal Government that has 
spent more time in the past 10 years looking at these types of 
questions. I would say that with respect to futures markets and 
with respect to the aspect of speculation, a consequence of the 
jurisdictional boundaries that we've had is that's principally 
been an issue and a set of concerns devoted to other agencies. 
I think one thing that all of us are committed to do in this 
instance, in the process of developing perhaps a rule in this 
area is to make sure that the separate public institutions--I'm 
thinking about FERC: I'm thinking about the CFTC in 
particular--that instead of having individual effort in these 
areas, have a deeper collaboration, so that as we undertake the 
process that's now possible under the new authority, our focus 
will be more intensely directed at precisely this kind of 
behavior.
    Senator Snowe. Well, to that point, Senator Feinstein and I 
have introduced legislation that passed the Senate unanimously 
as an amendment to the Farm bill that's pending in conference 
to provide, you know, the CFTC with the appropriate oversight 
of futures speculation, I mean oil futures speculation.
    In fact, the CFTC reversed its position last Fall and 
unanimously requested that oversight authority because it is so 
crucial to this issue, but irrespective of that, and hopefully 
it will get done, I frankly would like to have it pulled out of 
the Farm bill and just, you know, advance on its own and go to 
the President for signature so we can address that question 
right now and the CFTC have the oversight for transparency and 
accountability where the various mechanisms now evade the 
oversight by the CFTC, whether it's Internet transactions, 
over-the-counter transactions, or international transactions.
    But be that as it may, you have in the FTC within your 
purview to oversee both consumer prices and futures prices. So, 
while the CFTC does have responsibility, no question, in its 
oversight, you have the ability to look at the macro picture 
and the totality of the picture in terms of the impact on those 
prices and particularly on consumers.
    So, I would ask you to adopt a sense of urgency with regard 
to this issue because people are suffering mightily under the 
weight of these price increases and we need to know why. We 
need to know why, what is driving up these prices, if isn't 
supply and demand.
    So, I would urge you to do so because I think it is 
extremely critical.
    Mr. Kovacic. Yes, Senator, I understand that very clearly 
and I see part of our responsibility here. In addition to 
addressing specific issues that arise in this area, we need to 
draw attention and stimulate debate about all of the forces 
that affect the pricing and supply of energy as we see it 
today. I think that is an indispensable and critical ingredient 
of what we can do. As we identify the strengths and weaknesses 
of different policy tools at our disposal, we need to consider 
the effect of these price developments that you've mentioned. 
So, I see this as being a critical part of our responsibility.
    Senator Snowe. I appreciate that. Thank you.
    Senator Dorgan. Senator Snowe, thank you very much. Mr. 
Chairman, let me ask you with respect to this issue of the 
futures market driving up the price of oil well beyond where 
supply and demand would have it, the top analysts from 
Oppenheimer & Company says this is like a 24/7 casino, open 24 
hours a day.
    You know, we had testimony from a couple of experts in 
front of the Senate Energy Committee saying that what is 
happening is that the futures market has now included 
substantial speculation by hedge funds and investment banks. 
Investment banks for the first time are actually buying oil 
storage capacity in order to buy oil, take it off the market 
and then sell it later when oil is more valuable.
    I mean, what kind of jurisdiction do you have, what kind of 
authority would the FTC have to be taking a look at that?
    Mr. Kovacic. I would say up to this point, we do have a 
broad charter that Congress has given us to do economic studies 
and research, and energy is certainly an area in which we've 
exercised that.
    I would say as a matter of custom, questions related to 
commodities trading and the operation of the commodities market 
has received some attention from us, but because of, in effect, 
the rough distribution of authority that we have across the 
agencies that do this work, that is a responsibility that's 
principally been in the portfolio of another institution, the 
CFTC, but I would certainly expect as a consequence of the 
authority that's contained in the measure that Senator Cantwell 
was instrumental in having this body adopt, that that's 
inevitably, immediately going to become a more intense area of 
concern for us.
    One of the things that the internal group we have, which 
has been working for some time on the measure in question in 
the roughly 3 months or so since the authority was given us, is 
to develop a much closer relationship with the other Federal 
regulators who do exactly this work.
    Part of what I would anticipate as part of that process is 
that we create a greater degree of what I suppose could be 
interoperability so that we have greater direct and continuing 
access to the research they've already done.
    Part of what we're seeking to achieve here, that is, in 
learning more about this dimension of the issue, is that we 
take the fullest possible advantage of work that our 
counterpart agencies have done.
    So, I would say it has been a modest part of our 
responsibility to date but a major focus of the work we're 
doing internally in the run-up to proceedings in this area is 
to make sure that we learn in a meaningful way what our 
counterpart agency has done in this area.
    Senator Dorgan. Yes, I would say, though, that your 
counterpart agency can't see what doesn't exist and what 
doesn't exist is that which is unregulated, behind the curtain, 
on the intercontinental exchanges and so on.
    It's why a 32-year-old was able to control, what was it, 70 
percent of the--was it natural gas? So, my point is, I wouldn't 
worry too much about your relationship with others and waiting 
for someone to do something. If somebody else is not doing it, 
not able to do it, I'd jump right in with both feet and start 
investigating and use all the authorities that you have.
    There's something going on here that's wrong. I started 
this morning by talking about the substantial bail-out to the 
tune of tens of billions of dollars of institutions that are 
now adjudged to be too big to fail. If they're too big to fail, 
they are not too small to regulate, it seems to me, and whether 
it's hedge funds, investment banks, or whoever is engaged in 
these markets in very substantial amounts of speculation, I 
hope you'll use all the authority that you have and that this 
committee wants to give you in a way that is not overly 
deferential to other agencies that may not be doing anything.
    Mr. Kovacic. Senator, I don't think you'll find any 
hesitation on the part of myself and my colleagues to exert 
ourselves vigorously, in particular where we may share 
responsibility with another institution that is less vigorous 
in doing so. So, there's no hesitation there.
    My observation, in exercising that responsibility, is that 
I would like to see us do two things. Where there has been good 
work done that can form our own proceedings, I'd like to have 
the benefit of that. In particular, to think of Senator 
Cantwell's point again for a moment, where there has been 
experience, and we look forward to learning more about this 
experience, where there has been more experience with actual 
implementation, I expect that you would agree with me it would 
be foolish for us as we proceed again in a fast-paced way not 
to make sure that we have the benefit of that so that they can 
tell us----
    Senator Dorgan. Mr. Chairman, I agree with that.
    Mr. Kovacic. So, and the last piece of it is there are a 
number of very wise outsiders who have been following exactly 
these trends. Some of them have been witnesses before your 
Committees. We'd like to talk to them some more as well.
    Senator Dorgan. I don't disagree with you. I would say, 
though, that I don't know of a case where someone has 
effectively accused a Federal agency of speeding recently. 
Whether it's the FTC or a dozen other regulatory agencies, our 
frustration is, I showed you what I put up on the chart, on the 
board today, that even today you can go to the Internet and see 
unbelievably deceptive advertising trying to reach out and 
victimize another homeowner.
    I just would say that we have written a piece of 
legislation that gives you in my judgment much needed new 
authority. Our purpose in doing that is to hope that you will 
be aggressive in using that authority at a time when we are 
surrounded by a whole series of practices that is now costing 
our country and our government a massive amount of dollars to 
try to clean up the mess.
    Mr. Kovacic. I would say, all I could say is that I know of 
a few Federal judges who have given us tickets for speeding and 
have told us to turn over our license in specific cases, but I 
specifically and completely understand the urgency of the 
message you give us today.
    Senator Dorgan. Senator Klobuchar?
    Senator Klobuchar. Thank you very much. I want to now 
explore this issue of regulation of some of the conduct of the 
pharmaceutical industry and part of me wants to know if the 
legislation that's proposed will help at all in this area and 
then also just to explore, as someone who's new to the Senate, 
what we can do to try to get at this problem because I just 
want to help some babies in my state and some doctors in my 
state that want to do their jobs.
    As I mentioned, there is a drug and I have it here called 
``intravenous indomethacin,'' and it's used to treat a disorder 
called Patent Ductus Arteriosus, which is known as PDA and it's 
a rare disorder that prevents holes from healing in the hearts 
of premature infants and they used to use surgery to do this. 
Since the 1970s, this drug has been proven as a commonly used 
method for treating this problem and it actually is cost 
effective and works.
    Well, Merck produced this drug and 2 years ago Ovation 
Pharmaceuticals acquired the rights. The company quickly 
increased the price more than 18 times. So, this used to sell 
for a $100 and then just in a matter of a few months it went up 
to $1,875 for three one milligram units of the drug.
    Now even though this is an American company, the price that 
this company charges in the United States is 44 times higher 
than what they sell it for in Canada. Nothing can justify this 
kind of price disparity as far as I'm concerned.
    I also want to point out that nothing was changed in this 
drug when they acquired it, yet they increased it 18 times. Now 
there's no generic equivalent of this drug on the market and 
there's only one other drug that's approved by the FDA to treat 
this problem and as it happens, Ovation is also the source of 
that drug in the United States and not surprisingly, the price 
that it charges for this medicine is nearly identical to what 
it charges for this medicine.
    So you have a price that's 44 times higher than Canada and 
that went up in just a few months 18 times what it was 
originally and is the price that they charge for the other 
drug, and to me this looks like price gouging and exploiting 
vulnerable babies and a healthcare system that's already taxed 
to the maximum.
    So, what I want to know and we wrote a letter to this 
company May 7. We've been in some communication with them and 
we will continue to do that. My guess is that this will end up 
on your desks. What I want to know is has the FTC conducted 
investigations of problems that are similar to this?
    I know, Commissioner Harbour, you mentioned the current 
investigation that's going on with payments made to keep 
generics off the market. This is obviously, as far as we know, 
a different situation, but are there investigations that are 
similar to these and what has the outcome been?
    Senator Dorgan. Senator Klobuchar, would you hold on that? 
I wanted to point out that I have to depart and Senator 
Cantwell will chair the remainder of this hearing.
    I want to thank the Commissioners. I'm sorry I interrupted 
your question, but----
    Senator Klobuchar. That's all right. It was a dramatic 
moment. That's fine.
    Senator Dorgan. I think perhaps the more dramatic moment 
will come in their answer.
    Senator Klobuchar. Very good.
    Senator Dorgan. But I thank Senator Cantwell for being well 
to chair the meeting.
    Mr. Kovacic. May I thank you, Chairman Dorgan, for the 
chance again to discuss your proposals today? Thank you.
    Senator Dorgan. Thank you.
    Ms. Harbour. Senator Klobuchar, we are very aware of your 
news release and your interest in this area and asking the FTC 
to investigate this price increase.
    In a public setting, we are not in a position to confirm, 
you know, or deny the existence of any such investigation----
    Senator Klobuchar. I understand.
    Ms. Harbour.--but we do share the concerns of rapidly 
rising pharmaceutical prices and we will continue to be very, 
very vigilant in our enforcement. It is a common goal of ours 
to detect and stop these types of anticompetitive practices in 
this industry.
    My colleague, Commissioner Leibowitz, has been on the 
forefront of working with Congress on legislation and I'm going 
to let him talk about some of our current initiatives.
    Senator Klobuchar. Excellent. If you could maybe, 
Commissioner Leibowitz, also if there's examples of other cases 
from the past that you have. Being new at this, I'd just like 
to know the path that this could go.
    Mr. Leibowitz. Well, we spend a lot of our time looking at 
pharmaceutical competition at our agency. We review many 
pharmaceutical mergers and one of our biggest initiatives on 
the ``conduct side'' is to try to stop these pay-for-delay 
settlements, where a brand pays the generic competitor to stay 
out of the market and consumers are left holding the bag or 
footing the bill, and there's legislation introduced by 
Senators Kohl, Grassley, Leahy and Schumer on that.
    As for a legislative approach to this, why don't we take a 
look at it in a little more detail and get back to you and see 
where we need to go and whether legislation is necessary?
    Senator Klobuchar. Well, as far as legislation, I'm curious 
if--and we're waiting to talk to the company about this, but 
I'm just wondering what you would do with this if this came 
your way. What's the course? How long would it take? I'm trying 
to help these people in my state.
    Mr. Leibowitz. So, look, obviously this is a real problem 
and it's a drug that is only needed by a few people. They seem 
to have----
    Senator Klobuchar. Babies.
    Mr. Leibowitz.--raised the price, some would say 
unconscionably, and the disparity between the United States and 
Canada is, it's not a legal term but it seems appalling, and I 
understand why your constituents and probably people in other 
states are enormously concerned about this.
    When you're dealing with unilateral conduct by a company, 
it's more complicated than if they were to sit in a smoke-
filled room and conspire to fix prices. Investigations are very 
labor intensive.
    There are many things that I happen to like about the 
reauthorization--but one of the areas where we are actually 
adding people is in our healthcare shop. We want to add more. 
The reauthorization would grow our agency considerably over a 
period of years.
    I know that doesn't reach this particular circumstance, but 
it will help us when we have sufficient number of personnel and 
good attorneys----
    Senator Klobuchar. Just so--again----
    Mr. Leibowitz. It will help to stop these types of 
problems.
    Senator Klobuchar. Right. I'm not on some crusade against 
you on this.
    Mr. Leibowitz. I know, I know.
    Senator Klobuchar. I'm on a crusade to fix this.
    Mr. Leibowitz. You've always been very friendly.
    Senator Klobuchar. I want to know what would happen. We 
write a letter and we say this isn't fair, it's wrong, so then 
it goes into one of your rulemakings, and does the legislation 
change that? Is it going to take 9 years or, you know, what 
would happen? Not rulemaking. I apologize. But investigation.
    What would happen and how long could it take?
    Mr. Leibowitz. Investigations could take, and usually do 
take a period of months. I think we would first--and we may be 
doing this--look at the issue generally and look specifically 
at this particular case, but again we can't talk in much 
detail----
    Senator Klobuchar. I don't want you to talk about this. I 
understand that as a lawyer.
    Mr. Leibowitz. Sure.
    Senator Klobuchar. I just need generally what's happened.
    Mr. Leibowitz. We'll get back to you on this question.
    Senator Klobuchar. So I can go tell the doctors back in 
Minnesota.
    Ms. Harbour. I'm not speaking about this particular case, 
but in general, if this type of drug was a biologic, one that's 
made by a more natural process, perhaps a generic drug could 
emerge which would exert some sort of competitive pressure, but 
not specifically talking about this case, those are some of the 
things that we would look at as an agency. But this is an 
important issue and certainly this is something that is on our 
radar screen.
    Mr. Rosch. Let me just say one thing about this, if I may, 
Senator, and that is, that this is very fact intensive. We have 
actually litigated in the 11th Circuit and lost a very 
important case where the 11th Circuit held that if and to the 
extent that a biologic or a medicine is covered by a patent, 
then the patentholder, by virtue of the patent laws, is able to 
do just about anything they want to do.
    So, frankly again, we've litigated this and we lost it. We 
tried to take it to the Supreme Court. We were unsuccessful in 
getting the Supreme Court to review it. So, the first issue 
that will arise in any of these cases is going to be whether or 
not it is patented and I don't know at this point what the 
avenue is in the case you have mentioned, I have not a clue, 
but I don't want to overpromise as to what we can do, 
consistent at least, with the 11th Circuit opinion.
    Now frankly, we don't think they're right, but at the 
present time, that's the law.
    Senator Klobuchar. All right. Well, that's very helpful and 
we will continue. I'm sure you'll hear from us on this case and 
it would be nice if there was a generic to have some 
competition going with this area, but what I'm most interested 
in is this action that happened where it went up 18 times and 
the fact that, you know, we can refer it, again I don't want to 
get into the specifics of this.
    Usually you say OK, there's a criminal violation, you refer 
it. It gets charged this way, it takes this long to go through 
the process, and these are the potential outcomes. So that's 
what I'm trying to figure out with something that to me seems 
outrageous.
    What do I do with it, and how do I get some action, and if 
it's not the FTC, then maybe we need legislation.
    OK. Thank you.
    Senator Cantwell. Thank you, Senator Klobuchar. Mr. 
Chairman Kovacic, I'm sorry, Kovacic, not to continue to talk 
about this issue, but I just want to explain one thing to make 
sure that we're clear and then ask you all another question 
about DTV.
    On the market manipulation question, we're not--it's not 
confusing authority that we're giving to the FTC that is as it 
relates to other agencies. The CFTC authority is very clear. 
It's in the futures market. So, they look at futures 
commodities and----
    Mr. Kovacic. Yes.
    Senator Cantwell.--and that's why Senator Snowe's good work 
with Senator Feinstein is trying to close a loophole in the 
futures market as it relates to online trading and particularly 
ICE which is----
    Mr. Kovacic. Yes.
    Senator Cantwell.--a very big part of the trading futures 
market for oil that's basically not regulated in the United 
States, you might have some insight into it, but it's not an 
enforceable market mechanism by the CFTC. So that's a good idea 
to close a loophole in the futures market.
    The FERC, the Federal Energy Regulatory Commission, has the 
ability in physical markets to investigate market manipulation 
of wholesale electricity and natural gas and as I said, that 
authority was given to them in 2005 and has worked very well in 
stopping the market from activities that they might have 
thought were OK to pursue.
    In the grand scheme of Enron, we saw where somebody got 
very elaborate about what they thought they could do in the 
physical market and certainly if you listen to the testimony of 
many of those individuals in court cases, they thought they had 
the authority to do so. They literally thought that their 
perpetration of schemes, of taking supply down or moving it out 
from one state to another state or moving it around, was legal 
to do and that's why a very strong law on the books that says 
no, the physical manipulation for those purposes is wrong and 
so we are now giving and have given and passed, as I said, out 
of this committee to the FTC that new authority on the physical 
market for oil and distillates which doesn't exist.
    It doesn't exist with the CFTC. That doesn't exist with 
FERC. It now exists with the CFTC and the exact language is, it 
is unlawful for any person to directly or indirectly, to use or 
employ in connection with the purchase or sale of crude oil or 
gasoline or petroleum distillates at wholesale any manipulative 
devices or contrivances.
    So, the point is that we are looking to you to look at what 
could be manipulative devices or contrivances, that's language 
based on the SEC's rule and court language that has been 
upheld, to focus on the notion, as my colleague Senator Dorgan 
was saying, somebody might move supply around. A hedge fund 
might hold supply off the coast of the United States for 
several days waiting for the price to go up even more and then 
put the product into the marketplace, thereby shorting the 
domestic U.S. supply, having the price rise and then benefiting 
from the sale of a higher price. That's what we want you to do.
    We want you to do a rule and investigate that. It's not an 
authority that any other agency has. It's unique to the FTC.
    Mr. Kovacic. Thank you, Senator, and I would again like to 
invite you and your colleagues, where there are other scenarios 
of that type in mind to let us know. We would be happy to 
continue to discuss those with you so that we keep them clearly 
in mind for ourselves as we proceed.
    Senator Cantwell. Well, I'll look forward to that, and I 
hope that you are very aggressive about the physical market and 
making sure that there is someone looking at the physical 
market.
    I do have a question about--the Committee is also having a 
hearing this afternoon on DTV transition and I'm curious as to 
what role the FTC thinks that they have in respect to the 
digital television transition.
    I mean obviously the FCC and how they're pursuing this, 
there's a lot of consumer questions. For example, I recently 
met with the AARP representatives who told me that there is a 
1-800 number, 1-800-DTV-2009, that consumers may think that 
they are actually calling to get help or assistance or an 
information hotline, but it is really a sales pitch for 
satellite television services and so what kinds of issues will 
the FTC be taking a lead on as it relates to the DTV 
transition?
    Ms. Harbour. Senator Cantwell, staff has been in contact 
with the FCC, the agency overseeing this transition. The NITA, 
as you probably know, is implementing the program that is 
providing coupons to be used toward the purchase of these set-
top converter boxes.
    But in mandating the DTV transition, Congress didn't give a 
specific role to the FTC; but nevertheless, we are going to be 
working with these agencies to make sure that there is no 
unfair or deceptive conduct leading up to this transition.
    Senator Cantwell. So, what do you think about a 1-800 
number that lures consumers into calling only to find out it's 
about a sales pitch for satellite purchase?
    Ms. Harbour. A 1-800 number based at the Commission? Is 
that what you're asking? I didn't quite----
    Senator Cantwell. No, I'm not saying it's based at the 
Commission, but obviously there are a lot of people that are--
we're going to have a gap this afternoon, I am sure, in what 
many of us think needs to be aggressively done to make sure 
that the transition goes as smoothly as possible, but without a 
vacuum of--I mean with a vacuum of that happening.
    People are jumping in and filling this role and there are 
many seniors that are out there wondering exactly how they're 
supposed to proceed here and when they see this 1-800 number 
DTV, obviously I think that they think that they're really 
calling a 1-800 number for information but I'm happy to have 
you look into it.
    But what I was asking generally was what do you think the 
role is of the FTC in protecting consumers, even to the extent 
of getting more directly involved, because of deceptive 
practices that may be occurring in this transition period or 
maybe even helping to outline what are the best practices to 
some of the major players that are going to be involved?
    Ms. Harbour. I believe the Commission always has a role in 
looking out for the interests of consumers and if there's any 
deception or unfairness going on leading up to the transition, 
that is something that we would be very interested in and would 
certainly like to be taking a look at.
    Mr. Leibowitz. We do have 800 numbers for consumer 
complaints and for identity theft victims, but I think it's 
sort of as you envision it, Senator Cantwell.
    There are two agencies that are designated to be the lead 
agencies: the FCC and the NTIA. We stand ready to help and we 
will fill in any gaps as appropriate and we do consumer 
protection. That's what we're good at.
    I also would add that on the antitrust side, we just 
received a petition and we take our petitions very seriously 
about an allegation that the company that holds the licensing 
rights to some of the technology needed for digital television 
has raised royalty rates beyond its commitment. That might be 
in violation of the antitrust laws. It's a petition we're 
taking a look at.
    Mr. Kovacic. And I would say, Senator, I think you're 
absolutely right with your colleagues to focus on industries in 
a transition of this type. To add to my colleagues' comments, I 
think there's also a role here for us to play with consumer 
education; that is, we've done quite a bit of work, in addition 
to the measures my colleagues have mentioned in posting alerts, 
doing publicity, working with our colleagues at the state 
level, too, to make sure that consumers have rough simple 
guidelines to keep in mind as this unfolds.
    Senator Cantwell. Thank you very much, Senator Snowe.
    Senator Snowe. Thank you, Madam Chairwoman. I wanted to ask 
questions related to identity theft and I know you probably 
addressed it earlier in your testimony, but I'm certainly 
concerned.
    I mean, it's the Number 1 consumer complaint in America.
    Mr. Kovacic. Yes, Senator.
    Senator Snowe. We've seen a major transition from the 
traditional sources of fraudulent practices to online 
practices, deceptive practices, and I just would like to know 
exactly what the FTC is doing and being in the forefront with 
effective methods of beginning to challenge this significant 
issue, even to the point that the IRS advocate, national 
taxpayer advocate in testifying before the Senate Finance 
Committee recently indicating it's the most serious threat to 
the IRS and to taxpayers and is becoming more pronounced and 
that's why I've introduced antiphishing legislation with my 
colleagues, Senator Stevens and Senator Nelson, on this 
question because that's another dimension of identity theft 
that has escalated over this last year 57 percent from the 
previous year.
    So, it continues to go on and in Maine and throughout the 
Northeast and in Florida, we had a major security breach with 
Hannaford Brothers Company, a supermarket food chain where more 
than four million consumers' debit and credit cards were 
breached recently from a period from December through early 
March. I mean, you know, it's significant major breach. I mean, 
it represented 165 stores in the Northeast and another 106 
stores in Florida and 51 of those stores were in the State of 
Maine alone.
    So, we need to have the FTC again on the forefront of this 
major question that is only going to increase in terms of 
practices, deceptive practices that, you know, we're finding 
the perpetrators engaged in.
    Mr. Kovacic. May I respond, Senator?
    Senator Snowe. Yes, you may.
    Mr. Kovacic. And I invite my colleagues as always, not that 
I could hold them back from adding their own thoughts as well.
    I think several considerations come to mind. One strategy 
we've had has been an active litigation program which the 
Committee is aware of. Second, we have an intensive program of 
education for consumers so that they take basic precautions 
that, if taken, would serve to insulate them from some of the 
behavior. I think two other frontiers are worth mentioning as 
well.
    My colleague, Commissioner Harbour, mentioned that to an 
increasing degree, we're working with our international 
counterparts to deal with this issue. As you know and in the 
work you've done on your legislative proposal, this is 
increasingly an international problem and the wrongdoers are 
technologically sophisticated. They're geographically adroit, 
and they appreciate the gaps in individual national systems of 
enforcement.
    We have two countermeasures in mind there. One is to work 
with the authority that this body has given us, U.S. SAFE WEB, 
to work much more closely with our foreign counterparts and 
we're applying that vigorously. The second frontier is that 
ultimately, I think, civil sanctions for the wrongdoers are not 
enough and while we would welcome additional capacity to impose 
civil penalties on the wrongdoers, my impression is, and you 
may well have a different view of this, but my impression is, 
Senator, that most of the wrongdoers in fact are engaged in 
criminal behavior. They are criminals, and the only way to deal 
with the serious wrongdoers is to take their freedom away.
    Our contribution to that as a body with civil enforcement 
authority has been to work much more closely with those with 
criminal prosecution power to exercise it. We prepare cases 
through our Criminal Liaison Unit which was created less than 5 
years ago. We provide them to the Department of Justice and to 
state authorities.
    I see this as the only way for the most serious cases, such 
as phishing, where we're going to get adequate deterrence with 
that is to engage the criminal enforcement powers of their 
jurisdiction and our foreign counterparts in taking away the 
freedom of the wrongdoers.
    Senator Snowe. Does anybody else have a comment?
    Mr. Rosch. Well, the only other comment I would make, 
Senator, is that, I'm sure you are aware of the fact that we've 
been very active in this area. We've brought more than 20 cases 
against--data security cases in the last 2 years since I've 
been at the Commission and we'll continue to do so.
    However, one of the great things about the proposed 
legislation is that it gives us civil penalty authority. I 
quite agree with the Chairman that this is criminal conduct and 
it ought, for the most part, to be referred to criminal 
authorities, but we'd be greatly strengthened in our own battle 
against data security breaches if we had civil penalty 
authority and right now, the only time we can seek civil 
penalties for data security breaches is if it violates a 
specific statute that gives us civil penalty authority and in 
only one of those 20 cases, the ChoicePoint case, was there a 
specific statute that gave us that authority. That's one of the 
great things about this statute.
    Mr. Leibowitz. The reauthorization would give us civil 
penalty authority for violations of Section 5. That would help 
us with getting a strong deterrent here and they need a strong 
deterrent for the data security breach cases.
    There's also legislation out of your Committee, I think, or 
that's been percolating in your Committee, that would give us 
specific data security civil penalty authority and that would 
be helpful, too. And as for phishing, I agree with my 
colleagues that it's criminal. We refer those cases to Justice. 
We looked at your bill. I know it also has a very interesting 
domain name registration provision. That's another issue.
    Ms. Harbour. I completely agree with the civil penalty 
authority that we really could use in this area.
    Just to back up for a moment and tell you some more about 
what we do in the area of identity theft, we train law 
enforcement authorities about how to handle ID theft. We have a 
victim assistance program. Ex-Chairman Majoras was a Co-Chair 
on the President's National Task Force on Identity Theft, which 
came out with 31 recommendations this year. We have new videos 
on YouTube educating consumers about phishing. We have numerous 
education programs to help consumers deter, detect and defend 
and so we've been very vigilant in this area.
    Senator Snowe. Well, I appreciate your comments, and I 
think it is important to know which tools are very effective 
and what we need to do in order to accomplish that and to move 
expeditiously and that's why I've introduced my legislation and 
it does impose civil, you know, penalty authority because it is 
important. The United States hosts 32 percent of these phishing 
sites and so clearly we're the top country in the world.
    So, I just think that we have to do everything that we can 
and I appreciate your comments and that will be helpful to us 
as we move forward.
    Thank you.
    Senator Cantwell. Thank you, Senator Snowe. Senator 
Klobuchar. We promise we are not keeping the FTC here all 
afternoon, but we are going to have another round of questions, 
if anybody has them, and then we'll conclude the hearing.
    Senator Klobuchar.
    Senator Klobuchar. OK. Thank you. I have follow-up 
questions with some of the things that have already been 
raised.
    The first was the area that Senator Dorgan explored with 
you about the subprime mortgages and we all remember the 
pictures he had blown up of what was going on there.
    The proposed FTC Reauthorization bill would provide the 
authority to the state Attorneys General to in certain 
circumstances bring a suit for a violation of the subprime 
mortgage loan rules promulgated by the Commission or a 
violation of the Truth-in-Responsible Lending Act or the 
Homeownership-and-Equity Protection Act.
    Yesterday, I received a letter from the Attorney General 
for the State of Minnesota expressing concerns that the states 
might not have the funding and personnel necessary to 
prosecute. It's not that they don't want to prosecute and I 
also heard this yesterday in Minnesota, I did a forum on the 
mortgage crisis in a suburban area with a number of experts in 
this area, and one of the county commissioners came up and said 
that the prosecutor for the area that had been prosecuting the 
cases and doing a very good job also was concerned about 
resources and as you know, local and state investigative 
agencies are facing tremendous resource issues and given the 
scope of the problem that we're facing. Do you believe that 
state Attorneys General have the resources necessary to bring 
these suits against all violating parties and what role do you 
think the Commission could play in working with states to 
ensure that the appropriate legal actions are taken?
    Ms. Harbour. I think the Commission would be very happy to 
work with the state agencies. It's always good for the American 
consumer to have another cop on the beat and if the states can 
work parallel investigations with the Federal Trade Commission, 
I think that benefits consumers.
    In the past, we have had very cordial working relationships 
with the state Attorneys General in some of our competition 
cases and some of our consumer protection cases, and I see no 
reason why the agencies could not work together in this area as 
well.
    Mr. Kovacic. Senator, I don't know that any of us have had 
the chance, given the continuing evolution of the 
reauthorization draft, to consult with our colleagues in the 
states and talk about their resource capacity at the moment.
    So, I don't know that I have a view, maybe my colleagues 
do, about where they are. I suspect your colleague from 
Minnesota has given you a good glimpse of that, but as 
Commissioner Harbour said, whatever the resource capacity, I 
think our modern history has been to work as closely as 
possible to make the best possible use of the resources they 
would have.
    Mr. Rosch. The only thing I would add, Senator, is that 
there is one aspect of that provision that I think is terrific 
and that is, that even if the states do bring actions, based 
upon this legislation, the Federal Trade Commission is supposed 
to be notified by the state that that action is pending and we 
have the right of intervention.
    I think that's critical in terms of nationwide coordination 
of these actions. The worst thing that can happen is that we 
have a patchwork quilt.
    Mr. Kovacic. Could I add, Senator, that as part of an 
initiative that we've undertaken in the past 2 years, we've 
been having an event every Fall now on a specific topic with 
our state counterparts that do competition and consumer 
protection.
    Our first year was gasoline. Last year it was 
pharmaceuticals and I would like to see us expand that 
framework so that again, as in the case of other matters we 
discussed before, we move away from a fragmentation of effort 
and responsibility to see that the individual public 
institutions that have shared interests work in a more 
collaborative way to make sure that we get the best possible 
results from the resources that all of us have.
    This would be another area where I would expect that 
frontier of cooperation could continue.
    Mr. Leibowitz. Particularly because so much of this fraud, 
it's Internet-based, it transcends state borders. So, we need 
to work with them, they want to work with us, and this bill 
gives us the ability to do that.
    Senator Klobuchar. Do you think that a Federal licensing 
standard would impact the ability to avoid our housing crisis? 
This is an amendment by Senator Feinstein that I'm also 
cosponsor of. It's not yet been debated or voted on in the 
Senate.
    But just based on what you've seen as people who protect 
the consumers' rights, do you think that would be helpful to 
have some kind of Federal licensing standard for mortgage 
brokers?
    Mr. Kovacic. I don't have an immediate reaction, Senator, 
but it's something that, if you would permit us, I'm sure we 
would be glad to address specific questions and give you a 
fuller reply. I don't have an immediate reaction, Senator.
    Senator Klobuchar. OK. Thank you. Then last, I just was 
asking before about the past price gouging cases, not trying to 
get into this situation, as we may be bringing it to your 
attention, but if you could just in writing afterwards look and 
see what past price gouging investigations have gone on that 
have been made public and what were the results of those 
investigations.
    I know about in 1998, the 33-state Attorneys General. This 
was a generic drug investigation regarding Mylon and I think 
there was some kind of a $100 million settlement. I think the 
facts were different than the case I just talked about here, 
and I know that you mentioned another case, but if I could see 
the price gouging cases, the anticompetitive cases in the drug 
area just to gauge our chances, if we go this way or if we need 
to follow another route.
    Mr. Kovacic. Yes, Senator.
    Senator Klobuchar. Thank you. Appreciate it.
    Senator Cantwell. Thank you, Senator Klobuchar, and thanks 
to the FTC Commissioners for being with us here today. We 
appreciate your attention to the issues and the issues that we 
have brought up. We do look forward to working with you not 
just on the FTC reauthorization legislation but on the various 
topics that were brought up by my colleagues today.
    So, thank you very much.
    Mr. Kovacic. Thank you, indeed, Senator. Thank you.
    Senator Cantwell. The hearing is adjourned.
    [Whereupon, at 12:03 p.m., the hearing was adjourned.]
                            A P P E N D I X

Response to Written Questions Submitted by Hon. John D. Rockefeller IV 
                    to the Federal Trade Commission
    Question 1. We know that junk food advertisements have a negative 
effect on children's health and are one of the reasons we are seeing 
such a huge rise in the incidence of childhood obesity in our country. 
Over the past year and a half, the Senate and FCC Joint Task Force on 
Media and Childhood Obesity has been working to find voluntary industry 
solutions to the overexposure of children to junk food advertisements 
on television. One objective of the health and advocacy groups 
participating on the Task Force was to reach a compromise whereby 
television stations and cable channels would agree to a balance of 
healthy and non-healthy food advertisements during their children's 
programming. Rather than asking for a complete ban on junk food 
advertisements, the children's health and media advocates were willing 
to allow a full half of food advertisements to be for unhealthy foods. 
Yet after a year and a half of negotiations, the media and advertising 
companies were unwilling to make this compromise. Since voluntary 
industry action seems unlikely, what is the FTC willing to do to ensure 
that our children's health is not being compromised because they are 
being bombarded with advertisements for junk food?
    Answer. We share your concern about the rise in childhood obesity 
in our country. The FTC has undertaken a study, at the direction of 
Congress, to learn about companies' expenditures and activities in 
marketing food and beverage products to children and adolescents.
    Recognizing the First Amendment issues raised by regulation of 
truthful and non-misleading commercial speech, the Commission continues 
to be a strong advocate of addressing the issues of advertising and 
childhood obesity through industry self regulation. The FTC has 
undertaken its own significant efforts to encourage self regulation in 
this area.\1\ In 2005, the Commission and the Department of Health and 
Human Services convened a workshop on Marketing, Self-Regulation, and 
Childhood Obesity. That workshop--which brought together food 
manufacturers, entertainment companies, academic experts, consumer 
advocates, and government officials--produced a series of 
recommendations, including self-regulation to change the nutritional 
profile of products marketed to children.
---------------------------------------------------------------------------
    \1\ The FTC is not part of the joint task force you describe.
---------------------------------------------------------------------------
    In July 2007, the FTC and HHS convened a follow-up forum to review 
progress in the intervening 2 years. We learned that our 2005 workshop 
had provided a stimulus for various industry initiatives, in particular 
the Children's Food and Beverage Advertising Initiative announced in 
2006 by the Council of Better Business Bureaus (CBBB). To date, 13 
major food and beverage companies have joined the CBBB program with 
concrete pledges that when fully implemented--generally by the end of 
this year--will significantly alter the landscape of food marketing to 
kids. Most of these companies have committed either to not advertise 
directly to children under 12 or to limit such advertising--including 
TV, radio, print, and Internet--to foods that qualify as ``better for 
you'' by meeting specified nutritional standards. In addition, the 
companies have pledged to limit use of licensed characters in 
advertising to promote healthier products and lifestyles, not to seek 
product placements in child-directed media, not to advertise food or 
beverages in elementary schools, and to use their ``better-for-you'' 
products in interactive games (``advergames'') directed to kids.
    At the same time, some media and entertainment companies, including 
Disney, Nickelodeon, and Cartoon Network, have adopted policies to 
limit the licensing of their characters to foods meeting nutritional 
guidelines. Moreover, Ion Media Networks, a producer of children's 
weekend television shows, has committed not to air advertising for less 
healthy foods and beverages on children's programs and to create story 
lines that encourage good eating habits and physical activity. The 
Commission expects that the CBBB Initiative, as well as the media and 
entertainment company efforts, will grow and expand coverage in the 
future.

    Question 2. A recent New York Times article examined how food 
marketers use ``casual games'' or advergames on their websites to 
promote junk foods, and notes that all of the voluntary limits that 
food companies have placed on their food marketing to kids on 
television do not apply on the web. So it appears that while the 
industry is publicly showing restraint in their advertising of 
unhealthy food to kids on television, they are also working harder to 
push such advertising to kids online, where they spend an average of 
twenty minutes with such advertising instead of 30 seconds. Therefore, 
if it is found that the industry's voluntary solutions are not enough 
to protect children from being inundated by advertisements for 
unhealthy foods on the Internet, what are the FTC's plans to hold the 
media and advertising industries accountable?
    Answer. As noted above, recognizing the First Amendment issues 
raised by regulation of truthful and non-misleading commercial speech, 
the Commission continues to be a strong advocate of addressing the 
issues of advertising and childhood obesity through industry self 
regulation. The Children's Food and Beverage Advertising Initiative 
discussed above covers the Internet and online games. As the member 
company pledges become fully implemented, we expect to see changes in 
websites directed to children. If a company publicly states that it 
will change its advertising to children, and then does not do so, that 
failure to match its promise with actions could constitute a deceptive 
practice, which is prohibited under Section 5 of the FTC Act.

    Question 3. Back in the spring of 2006, the FTC, under the 
direction of Congress, initiated a comprehensive study of food 
marketing activities and expenditures directed at children and 
adolescents. Could you please state when the FTC is going to be 
prepared to release the food marketing study?
    Answer. On July 31, 2007, after obtaining the necessary approval 
from OMB, the Commission issued compulsory orders to 44 food and 
beverage companies, seeking information on the companies' expenditures 
and activities in marketing food and beverage products to children and 
adolescents. The Commission's orders sought data not only for 
traditional, measured advertising media--television, radio, and print--
but also for newer and/or unmeasured forms of marketing, including the 
Internet and other new electronic media, packaging and in-store 
displays, event or athletic sponsorship, premiums, product placement, 
character licensing, and in-school marketing. FTC staff received 
responses at the end of 2007, and is now analyzing the data and 
preparing the report. The Commission expects to issue its report this 
summer.

    Question 4. Does the FTC consider an IP address to be personally 
identifiable information under COPPA? If not, does the FTC need greater 
authority to protect children from companies collecting information 
about children's interests and preferences and using that information 
to target ads to children even if they don't actually know the specific 
name of the child? What does the FTC think about the European Union's 
move toward considering IP addresses as personally-identifiable 
information?
    Answer. Under the COPPA Rule, an IP address, by itself, is not 
personally identifiable information. The Rule defines ``Personal 
Information,'' as individually identifiable information about an 
individual collected online, including such information as first and 
last name, street address, e-mail address or other online contact 
information, telephone number, and Social Security Number, or ``a 
persistent identifier, such as a customer number held in a cookie or a 
processor serial number, where such identifier is associated with 
individually identifiable information . . .'' \2\ In the Rule's 
Statement of Basis and Purpose, the Commission specifically noted that: 
``The Commission believes that unless such identifiers [static IP 
addresses or process serial numbers] are associated with other 
individually identifiable personal information, they would not fall 
within the Rule's definition of `personal information.' ''
---------------------------------------------------------------------------
    \2\ 16 C.F.R.  312.2.
---------------------------------------------------------------------------
    The Commission has authority beyond COPPA, pursuant to Section 5 of 
the FTC Act, to protect children from unfair or deceptive practices, 
both online and offline. The Commission staff is actively examining the 
legal and policy issues raised by online behavioral advertising--the 
practice of tracking consumers' activities online to target advertising 
to them. In November 2007, the Commission hosted a Town Hall, entitled 
``Ehavioral Advertising: Tracking, Targeting, and Technology,'' which 
brought together a diverse group of interested parties to examine key 
issues raised by the practice. Following the event and review of the 
public comments received, the Commission staff issued for comment 
proposed principles to guide the development of meaningful self-
regulation of online behavioral advertising. The Commission staff has 
specifically sought comment on whether information collected about 
children's activities online should be treated as sensitive or 
otherwise given special consideration. The comment period closed on 
April 11, and staff is carefully reviewing the comments received.
    The Commission staff is also looking at the European Union's 
position on IP addresses as a part of its examination of the privacy 
issues surrounding online behavioral advertising. The staff is actively 
conferring with technologists, industry, and privacy advocates on 
emerging technologies that may affect the discussion of this issue.

    Question 5. If the FTC finds that an Internet company violated the 
behavioral advertising self-regulatory principles (such as having an 
overly confusing, technical, or lengthy privacy policy), would the 
Commission consider that to be a ``deceptive or unfair trade practice'' 
and consider an enforcement action?
    Answer. In issuing the behavioral advertising principles for public 
comment, FTC staff intended to launch a public dialogue about the 
privacy issues raised by behavioral advertising, and to encourage 
meaningful self-regulatory efforts. The proposed principles, which are 
still being considered in light of the public comments received, should 
not be viewed as a regulation or as an interpretation of what 
constitutes a per se violation of the FTC Act.
    Of course, we note that regardless of the principles, the FTC 
retains the authority to challenge unfair or deceptive practices that 
arise in the behavioral advertising area. Further, some of the 
principles--for example, the principles regarding reasonable security 
for data and material changes to privacy promises--have a basis in FTC 
enforcement precedent. The FTC has brought and can continue to bring 
enforcement actions against companies that fail to provide reasonable 
protections for consumer data.\3\ The FTC can also bring enforcement 
actions against companies that use data in a manner materially 
different from promises made when the data was collected.\4\ However, 
whether or not a particular behavioral advertising practice constitutes 
a deceptive or unfair trade practice will depend on the facts of each 
case.
---------------------------------------------------------------------------
    \3\ See, e.g., In the Matter of The TJX Companies, FTC File No. 
0723055 (proposed consent agreement announced March 27, 2008); In the 
Matter of Reed Elsevier Inc. and Seisint Inc., FTC File No. 0523094 
(proposed consent agreement announced March 27, 2008), http://
www.ftc.gov/opa/2008/03/datasec.shtm.
    \4\ See, e.g, Gateway Learning Corp., Docket No. C-4120 (Sept. 10, 
2004), http://www.ftc.gov/opa/2004/07/gateway.shtm (company made 
material changes to its privacy policy and allegedly applied such 
changes to data collected under the old policy; opt-in required for 
future such changes).

    Question 6. What are the types of behavioral marketing that are 
being used with children? Does the FTC believe that voluntary self-
regulatory guidelines will be sufficient to protect children from these 
forms of marketing?
    Answer. As indicated above, the Commission staff currently is 
examining the practices of online behavioral advertising targeted both 
to children and adults, through its request for public comment on 
proposed self-regulatory principles on behavioral advertising. We 
expect to learn more about the types of behavioral advertising 
associated with children through this process. In this regard, we note 
that one comment the staff received regarding the proposed principles 
raised the concern that children would be less likely to recognize 
behavioral advertising and less able to make informed choices about the 
practices. We also note, however, that we currently are not aware of 
any distinction between the behavioral advertising techniques used for 
children vs. adults and have no data on the products and services most 
promoted to children through behavioral advertising.
    Well-constructed self-regulatory efforts are important to 
protecting children's interests, especially in dynamic marketplaces 
such as online advertising. The Commission staff's publication of the 
proposed behavioral advertising principles may spark further self-
regulatory innovations. For example, the Network Advertising Initiative 
recently proposed a prohibition on behavioral advertising to children 
under the age of 13. In addition to any self-regulatory changes sparked 
by the proposed behavioral advertising principles, existing self-
regulatory programs, such as the Children's Advertising Review Unit of 
the Council of Better Business Bureaus (CARU), apply to all forms of 
online marketing. CARU's guidelines and enforcement actions provide 
strong direction and incentive to industry to conduct responsible 
online advertising to children. Finally, as noted above, the Commission 
also retains its authority under Section 5 of the FTC Act to pursue 
cases of unfair or deceptive online marketing to children.
                                 ______
                                 
   Response to Written Questions Submitted by Hon. Olympia J. Snowe 
                    to the Federal Trade Commission
    Question 1. The FTC has stated that ``phishing is a criminal 
endeavor that is best suited for criminal law enforcement.'' However, 
the FTC actively pursues and enforces activities such as spam, identity 
theft, spyware, data security breaches, and even pretexting. Clearly, 
phishing is directly related to SPAM and identity theft, it [spear 
phishing] also attributes to security breaches of companies' networks, 
and even phishing mirrors pretexting, which is obtaining telephone 
records using false pretenses. So why would phishing fall outside the 
purview and enforcement of the FTC when it is so closely tied to these 
other FTC related areas?
    Answer. Phishing continues to be one of the most vexing problems 
facing consumers, but it is difficult to address through FTC 
enforcement for several reasons. First, the architecture of the e-mail 
system creates significant investigative hurdles for the FTC to 
identify those responsible for sending phishing messages. The Internet 
protocol for e-mail, known as SMTP, does not require the transmission 
of accurate routing information. The only piece of information that 
must be accurate in an e-mail is the recipient's address. Phishers 
exploit this flaw in SMTP, thereby making it virtually impossible to 
trace the source of a phishing e-mail using the e-mail message's header 
information. And because phishers are not generally delivering a 
product to a consumer or using their own account information for 
financial transactions that we can trace, there are few civil 
investigative tools we can use to find the phishers.
    In addition, the nature of the illegal act also makes phishing 
better suited for criminal than civil enforcement. Indeed, in the 
phishing cases that the FTC has filed, the perpetrators of the schemes 
have been identified only with the considerable assistance of criminal 
investigative agencies and Federal prosecutors. Their efforts have 
included obtaining ISPs' records, most of which the FTC is prohibited 
from seeking by the Electronic Communications Privacy Act, and 
conducting stakeouts of addresses where items purchased by the phishers 
are being delivered. Moreover, because phishing involves the brazen 
theft of consumers' personal financial information, it is doubtful that 
a civil injunction will provide appropriate deterrence.
    More specifically, phishing often differs from four of the areas 
that you mention:

        Spam: Spammers making deceptive claims to sell products are 
        generally more amenable to FTC enforcement tools than phishers. 
        In cases involving deceptive spam, we often have civil 
        investigative avenues that we do not have in phishing cases; 
        there is often a product being delivered or a money trail that 
        can be followed. These investigative avenues have enabled the 
        FTC to bring a significant number of cases against deceptive 
        spammers.\1\
---------------------------------------------------------------------------
    \1\ In some cases, spam can be used for phishing or to disseminate 
spyware. In many of these cases, civil law enforcement is more 
difficult for the reasons described in the text.

        Data Security: The FTC can also use its enforcement tools 
        effectively in the data security area. The Commission's 
        investigative targets in these cases are the companies that 
        failed to take reasonable precautions to prevent breaches, not 
        the identity thieves who could take advantage of their 
        failures. Targets in our data security cases are concerned 
        about their reputation in the marketplace; they often cooperate 
---------------------------------------------------------------------------
        in FTC investigations and comply with FTC injunctions.

        Pretexting: While phishers hide behind the SMTP protocol's 
        cloak of anonymity and are engaged in outright theft, 
        pretexters often operate in the open. Although they may provide 
        their services to those who intend to do harm to others, they 
        also may provide services to legitimate entities such as 
        investigative firms, media, or even attorneys, and they operate 
        from a physical location. Moreover, in addition to engaging in 
        pretexting, many pretexters may also offer legitimate legal 
        investigative services. Thus, we have been able to locate the 
        pretexters that have been the subject of our law enforcement.

        Spyware: Spyware can have characteristics of phishing as well 
        as spam. The most egregious forms of spyware, such as 
        keyloggers, share the same attributes as phishing: the 
        perpetrators are extremely difficult to track down and are, at 
        their core, nothing more than thieves. FTC enforcement against 
        such spyware purveyors would likewise be futile. Other types of 
        spyware, however, are more akin to the fraudulent and deceptive 
        business practices that the FTC has traditionally tackled. For 
        example, the FTC has successfully prosecuted a number of 
        software developers and distributors who installed spyware on 
        consumers' computers for the purpose of displaying advertising, 
        or collecting data on consumers' Internet habits.\2\ The FTC 
        has also sued a number of software developers for using 
        deceptive advertising designed to frighten or intimidate 
        consumers into purchasing their products.\3\ In these types of 
        cases, the defendants openly and directly interacted with 
        consumers, and operated as a business (e.g., employing 
        programmers, maintaining a corporate entity and corporate bank 
        accounts, paying taxes on profits, etc.). Although these 
        defendants caused massive consumer harm, they were not high-
        tech bank robbers (like phishers) but rather high-tech con men 
        operating a fraudulent business. As a result, the FTC was able 
        to leverage its investigative resources to locate and prosecute 
        these defendants, and was able to deter future misconduct 
        through injunctive relief and disgorgement.
---------------------------------------------------------------------------
    \2\ See, e.g., In the Matter of DirectRevenue, LLC, FTC File No. 
052 3131 (Jun. 26, 2007); In the Matter of Zango, Inc., FTC File No. 
052 3130 (Mar. 7, 2007).
    \3\ See, e.g., FTC v. Trustsoft, No. H 05-1905 (S.D. Tex. 2005); 
FTC v. MaxTheater, No. 05-CV-0069-LRS (E.D. Wash. 2005).

        Identity Theft: Phishing is more like identity theft, a clearly 
        criminal act that the FTC does not prosecute. Although the FTC 
        plays a significant role in keeping data out of the hands of 
        identity thieves by, among other things, enforcing data 
        security laws and conducting aggressive outreach and education, 
        strong criminal enforcement is the best approach to effectively 
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        punish and deter identity thieves.

    Although civil law enforcement may not be the most effective tool 
against phishers, the FTC has taken aggressive steps to curb the impact 
of phishing by encouraging industry to adopt anti-phishing technologies 
and by providing significant consumer education. Since 2004, the FTC 
has been urging ISPs and businesses that operate their own e-mail 
servers to adopt domain-level authentication technologies. With domain-
level authentication, an ISP or other operator of an e-mail server will 
be able to verify that a message actually comes from the domain 
appearing in the ``from'' address. The FTC is encouraged by the rapid 
adoption of domain-level authentication technologies that is now taking 
place. Combined with other anti-spam technologies, domain-level 
authentication should reduce the likelihood that phishing e-mails will 
enter consumers' in boxes. And, as explained below, the FTC has an 
ambitious consumer and business education program aimed at combating 
phishing.

    Question 1a. So why wouldn't the FTC want to ramp up its efforts 
and allocate more resources toward phishing since phishing scams are 
one of the top threats facing consumers?
    Answer. Although the FTC does not plan to ramp up enforcement 
efforts for the reasons described above, it continues to devote 
resources to phishing. Consumer education is a key tool for helping to 
reduce the number of consumers who fall victim to phishing scams. The 
FTC has long engaged in phishing education through consumer alerts and 
its OnGuardOnline.gov computer education website, which includes 
information on phishing.
    On April 1, the Commission held a workshop with approximately 60 
experts from business, government, the technology sector, the consumer 
advocacy community, and academia to discuss strategies to reach and 
teach consumers about phishing. Several new initiatives for phishing 
education emerged from the workshop. First, the FTC launched new 30-
second phishing education videos, and several participants agreed to 
place the videos on their websites and other channels. Second, the 
National Cyber Security Alliance announced that it is forming a Task 
Force on phishing education, and FTC staff plans to participate. Third, 
several participants supported the idea of using a landing page to 
educate consumers about phishing. Landing pages are web pages that ISPs 
and other entities would use to redirect consumers from sites 
identified as phishing sites to educational sites. Specifically, the 
Anti-Phishing Working Group will continue to develop informational 
phishing landing pages and will translate them into various languages 
for use by domestic--as well as foreign--ISPs.

    Question 2. At the FTC's recent phishing education roundtable, one 
aspect that was addressed was the need for greater Internet safety and 
cyber security education in the K-12 school systems. Some research has 
shown that few school systems are teaching about these issues and as a 
result, teenagers and young adults are more susceptible to identity 
fraud because they're less likely to take the necessary precautions to 
protect themselves from various types of identity theft. Can Congress 
do more to assist the states to incorporate more school-based education 
on computer and cyber security? Would you support effective legislative 
efforts on this issue?
    Answer. We agree that more school-based education on computer 
security, cyber safety, and cyberethics would be beneficial. Several 
participants at our phishing workshop pointed to the Virginia school 
system's legislatively-mandated Internet safety education program as a 
potential model program. See http://www.doe.
virginia.gov/VDOE/Technology/OET/internet-safety-guidelines.shtm. The 
Commission has not taken a position on the respective roles of Congress 
and the states in directing education.

    Question 3. Last fall, evidence surfaced that a broadband provider 
was blocking or, at the very least, slowing down a very popular peer-
to-peer application. The provider had stated prior to this practice 
coming to light that it ``does not block access to any applications.''
    In addition, the operator seemed to employ questionable practices 
in its traffic management of this application such as ``spoofing'' IP 
packets--inserting reset packets that purported being from the 
downloading P2P computer instead of from the operator--and may have 
infringed upon consumer privacy by inspecting IP packet headers and 
payloads to determine what was P2P traffic.
    Has the FTC looked into this matter, since on the surface these 
actions (lack of disclosure and spoofing) may constitute a violation of 
Section 5--with respect to deceptive acts and practices to both 
commerce and competition?
    Answer. Although the FTC cannot comment on the existence of a 
specific investigation, if an Internet service provider (ISP) 
misrepresents, or fails to disclose, material aspects of its services 
in advertising or marketing to consumers, it may be liable for 
violating Section 5 of the FTC Act.
    For over a decade, the FTC has enforced the consumer protection and 
antitrust laws in numerous matters involving Internet access. In 
particular, the FTC has investigated and brought enforcement actions 
against ISPs for allegedly deceptive marketing, advertising, and 
billing of Internet access services.\4\ The FTC has addressed Internet 
access and related issues in a number of merger investigations as 
well.\5\ As increasing numbers of U.S. consumers have chosen to 
subscribe to broadband services, the FTC has been monitoring the claims 
made by broadband providers in marketing their services to consumers. 
In February 2007, the Commission held a workshop on broadband 
competition that focused on net neutrality questions, including 
questions of disclosure by Internet service providers.\6\ In June 2007, 
Commission staff released a report on broadband connectivity 
competition policy.\7\ The FTC has devoted and will continue to devote 
significant resources to protecting competition and consumers in the 
important area of Internet access.
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    \4\ See, e.g., Am. Online, Inc. & CompuServe Interactive Servs., 
Inc., FTC Dkt. No. C-4105 (Jan. 28, 2004) (consent order), available at 
http://www.ftc.gov/os/caselist/0023000/0023000
aol.shtm; Juno Online Servs., Inc., FTC Dkt. No. C-4016 (June 25, 2001) 
(consent order), available at http://www.ftc.gov/os/caselist/
c4016.shtm; Am. Online, Inc., FTC Dkt. No. C-3787 (Mar. 16, 1998) 
(consent order), available at http://www.ftc.gov/os/1997/05/
ameronli.pdf; CompuServe, Inc., 125 FTC 451 (1998) (consent order); 
Prodigy, Inc., 125 FTC 430 (1998) (consent order).
    \5\ See, e.g., Am. Online, Inc. & Time Warner, Inc., FTC Dkt. No. 
C-3989 (Apr. 17, 2001) (consent order), available at http://
www.ftc.gov/os/2001/04/aoltwdo.pdf; Cablevision Sys. Corp., 125 FTC 813 
(1998) (consent order); Summit Commun. Group, 120 FTC 846 (1995) 
(consent order).
    \6\ The agenda for the workshop including presentations made at the 
workshop and the public comments filed in response to the workshop are 
available at http://www.ftc.gov/opp/workshops/broadband/index.shtml.
    \7\ See FTC, Broadband Connectivity Competition Policy (6/27/2007), 
available at http://www.ftc.gov/opa/2007/06/broadband.shtm; see also 
Concurring Statement of Commissioner Jon Leibowitz Regarding the Staff 
Report: ``Broadband Connectivity Competition Policy,'' available at 
http://www.ftc.gov/speeches/leibowitz/V070000statement.pdf (noting the 
importance of transparency and disclosure for consumer rights on the 
Internet).

    Question 3a. Has the FTC received any formal complaints on 
broadband carriers blocking Internet applications?
    The FTC receives complaints directly from consumers and from other 
agencies regarding a host of consumer protection issues. During the 
three calendar years 2005 through 2007, we received over 2.8 million 
consumer complaints, and over 60,000 of those complaints involved 
Internet access services. In an effort to locate consumer complaints 
that related specifically to broadband carriers blocking Internet 
applications, Commission staff searched the Internet access complaints 
for key words and combinations of words such as ``application,'' 
``bandwidth,'' ``block,'' ``broadband,'' ``discriminate,'' 
``Internet,'' ``net,'' and ``network'' Staff found thousands of 
complaints containing these key words. Staff reviewed a small number of 
these complaints and found that they were unrelated to broadband 
carriers blocking Internet applications. It further refined the 
searches for complaints that included the word ``neutrality,'' and 
found less than ten complaints, and for complaints that included the 
key word ``block'' with either the word ``application'' or the word 
``content.'' This search resulted in approximately 100 complaints from 
the past three calendar years. Staff reviewed the comments in each of 
these complaints and found that approximately ten complaints may be 
related to the issue of blocked Internet applications.\8\
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    \8\ The Commission staff replies orally or in writing to complaints 
it receives. In our responses, we explain that the Commission acts in 
the interests of all consumers, and therefore does not generally 
intervene in individual disputes. We also advise the consumers that the 
information they provide would be recorded in the FTC's complaint 
retention system and made available to numerous law enforcement 
agencies.
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    In addition to receiving consumer complaints, the FTC at times 
receives more formal petitions from parties requesting the FTC to 
investigate potential violations of the FTC Act. The FTC has not, 
however, received a formal petition alleging the blocking of an 
Internet application by a broadband ISP. The FTC nonetheless remains 
vigilant to any ISP conduct that may violate the antitrust or consumer 
protection laws.

    Question 4. Commissioner Leibowitz gave a speech to ICANN, back in 
June 2006, and stated that the WHOIS databases, which provide contact 
information of a domain name/website owner, are critical to the 
agency's consumer protection mission. He further mentioned that the FTC 
is concerned that any attempt to limit WHOIS would put its ability to 
protect consumers and their privacy in peril. Can you elaborate on the 
concerns the Commission has about WHOIS?
    Answer. FTC staff has been using WHOIS databases for the past 
decade. As the Commission has noted, ``WHOIS databases often are one of 
the first tools FTC investigators use to identify wrongdoers. Indeed, 
it is difficult to overstate the importance of quickly accessible WHOIS 
data to FTC investigations.'' \9\
---------------------------------------------------------------------------
    \9\ Prepared Statement of the Federal Trade Commission Before the 
Internet Corporation for Assigned Names and Numbers Meeting Concerning 
WHOIS Databases, Marrakech, Morocco, June 2006.
---------------------------------------------------------------------------
    When WHOIS information is available and accurate, it can provide us 
with a tremendous amount of information. For example, in our cases 
enforcing the CAN-SPAM Act and, in particular, the Adult Labeling Rule, 
accurate WHOIS information helped us identify the operators of 
pornographic websites that were promoted via illegal spam messages. In 
the recent Media Motor spyware case,\10\ FTC staff used domain name 
registration information from WHOIS databases to identify the website 
operators who infected more than 15 million computers with destructive, 
intrusive spyware. In that case, the FTC charged that the defendants 
tricked consumers into downloading malware that changed consumers' home 
pages, tracked their Internet activity, altered browser settings, 
degraded computer performance, and disabled antispyware and anti-virus 
software. The WHOIS information was crucial to the FTC's efforts to 
locate--and ultimately stop--this sophisticated and expansive spyware 
operation.
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    \10\ FTC Press Release, FTC Permanently Halts Media Motor Spyware 
Scam; Trojan Program Downloaded Spyware, Adware, Porno Pop-Ups to 
Consumers' Computers (Oct. 1, 2007), available at http://www.ftc.gov/
opa/2007/10/motorspyware.shtm.
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    Key to the utility of the WHOIS databases is our ability to access 
it in real time. The alternative to real-time access, compulsory 
process, is not always a viable option for three reasons. It is often 
too slow in the context of fast-moving Internet fraud; it risks 
disclosing the existence of an undercover investigation; and it may not 
be available or practical when the domain name registrar is located in 
a foreign jurisdiction.\11\
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    \11\ Although the U.S. SAFE WEB Act gives the FTC tools to address 
problems of obtaining information from foreign sources, using these 
tools would still take additional time and resources. Particularly in 
the online world, any such delay could lead to frustration of an 
investigation.
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    Although WHOIS databases continue to yield critical information in 
our investigations, their utility has been hampered by lack of real-
time access to WHOIS records due to proxy registrations and due to 
inaccurate information.\12\
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    \12\ Some have expressed concern that public access to WHOIS 
databases compromises the privacy of domain name registrants. The 
Commission has recognized that non-commercial registrants may require 
some privacy protection from public access to their contact 
information, and that these registrants can be provided such protection 
without compromising real-time access by law enforcement agencies. See 
Prepared Statement of the Federal Trade Commission on Internet 
Governance: The Future of ICANN Before the Subcommittee on Trade, 
Tourism, and Economic Development of the Senate Committee on Commerce, 
Science, and Transportation, Washington, D.C., Sept. 20, 2006.

    Question 4a. Has the FTC ever been hindered in its investigations 
due to the lack of accurate information or not having quick access to 
that information due to proxy services?
    Answer. Yes. Proxy registration services shield the identity of a 
website operator. This layer of anonymity has posed an obstacle in our 
investigations.
    For example, in one FTC investigation, FTC staff encountered at 
least six websites that had proxy registrations, including one 
registered to a proxy service of a domestic domain name registrar and 
two others registered to proxies for foreign domain name registrars. 
Our inquiry into these websites was stalled by the need for compulsory 
process and, indeed, most of the websites closed down before we could 
pursue an alternative route. In the Media Motor case described above, 
the WHOIS results for a number of target websites identified a proxy 
service in place of the registrant's name. To identify the registrant, 
the FTC had to contact the registrar that operates the proxy service. 
This extra step lengthened the time it took for FTC staff to identify 
the true registrant and initiate law enforcement action to stop the 
ongoing spyware operation.
    Even where access is not stymied by proxy registrations, much of 
the information in the WHOIS databases continues to be inaccurate or 
incomplete. FTC investigators can cite numerous instances where the 
WHOIS data has turned up domain names with facially false addresses and 
contact information, including websites registered to ``God,'' and 
``Mickey Mouse,'' addresses listed as ``XXXXXXX,'' and obviously fake 
telephone numbers, such as 111-111-1111. FTC investigators have had to 
spend many hours tracking down perpetrators of Internet fraud because 
of inaccurate WHOIS data--hours that could have been spent pursuing 
other targets.

    Question 4b. Several law enforcement agencies have serious concerns 
about domain name registrars offering proxy or privacy services to 
domain name registrants, and NTIA even enforced the prohibition of 
proxy services for the .us TLD. What is the FTC's position on proxy 
services that are utilized by commercial websites?
    Answer. The FTC has recognized that registrants of non-commercial 
websites might require some privacy protection from public access to 
their contact information, without compromising appropriate real-time 
access by law enforcement agencies. However, the FTC does not believe 
commercial websites have similar legitimate privacy concerns or a 
legitimate purpose to operate under a shroud of anonymity. As explained 
above, proxy registrations can either slow down or completely frustrate 
FTC investigations into the activities of commercial websites.
                                 ______
                                 
      Response to Written Question Submitted by Hon. John Ensign 
                    to the Federal Trade Commission
    Question. Chairman Kovacic, in December 2006, ten of the country's 
leading jewelry industry trade associations petitioned the FTC to 
address the practice of marketing laboratory-created diamonds as 
``cultured diamonds'' to consumers. It is my understanding that the 
term ``cultured'' has traditionally been used in the jewelry industry 
only to refer to organically produced materials, like pearls. These 
industry associations strongly believe that the FTC's Guidelines for 
the jewelry industry must be amended to protect consumers from 
deceptive or unfair business practices. It has been nearly one and a 
half years since that petition was filed and the petitioners have not 
yet received a response. Can you give us an update on the status of the 
FTC's response to this petition?
    Answer. The FTC staff is currently reviewing the petition 
requesting that the Commission amend its Guides for the Jewelry, 
Precious Metals, or Pewter Industries to address the use of the term 
``cultured'' to describe laboratory-created diamonds. The FTC staff's 
review includes a thorough analysis of the petition and the consumer 
perception data submitted in support of the petition, to determine 
whether the use of the term ``cultured'' to market laboratory-created 
diamonds constitutes an unfair or deceptive trade practice in violation 
of Section 5 of the FTC Act. In addition, the staff is considering how 
its proposed recommendation might affect domestic and international 
commerce. Following this analysis, the staff will recommend to the 
Commission a proposed response. The FTC's review will be completed as 
quickly as possible consistent with the serious attention the petition 
deserves.

                                  
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