[Senate Hearing 111-904]
[From the U.S. Government Publishing Office]
S. Hrg. 111-904
FINANCIAL SERVICES AND PRODUCTS:
THE ROLE OF THE FEDERAL TRADE COMMISSION
IN PROTECTING CONSUMERS--PART II
=======================================================================
HEARING
before the
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 17, 2010
__________
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 ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Acting Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
------
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
MARK PRYOR, Arkansas, Chairman ROGER F. WICKER, Mississippi,
BYRON L. DORGAN, North Dakota Ranking
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida JIM DeMINT, South Carolina
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota JOHNNY ISAKSON, Georgia
TOM UDALL, New Mexico DAVID VITTER, Louisiana
C O N T E N T S
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Page
Hearing held on March 17, 2010................................... 1
Statement of Senator Pryor....................................... 1
Statement of Senator Wicker...................................... 2
Prepared statement of Hon. William E. Kovacic, Commissioner,
Federal Trade Commission submitted by Hon. Roger F. Wicker. 6
Statement of Senator Klobuchar................................... 9
Statement of Senator Udall....................................... 17
Witnesses
Rosch, Hon. J. Thomas, Commissioner, Federal Trade Commission.... 10
Prepared statement........................................... 12
Mierzwinski, Edmund, Consumer Program Director, U.S. Public
Interest Research Group........................................ 20
Prepared statement........................................... 22
Pridgen, Dee, Associate Dean and Professor of Law, University of
Wyoming College of Law......................................... 26
Prepared statement........................................... 28
Woolley, Linda A., Executive Vice President, Government Affairs,
Direct Marketing Association, Inc.............................. 34
Prepared statement........................................... 36
Muris, Hon. Timothy J., Foundation Professor, George Mason
University School of Law, and Of Counsel, O'Melveny & Myers LLP 41
Prepared statement........................................... 42
Appendix
Rockefeller IV, Hon. John D., U.S. Senator from West Virginia,
prepared statement............................................. 69
Hutchison, Hon. Kay Bailey, U.S. Senator from Texas, prepared
statement...................................................... 70
Letter, dated March 17, 2010, to Hon. Mark Pryor and Hon. Roger
Wicker from Daniel L. Jaffe, Executive Vice President,
Association of National Advertisers (ANA)...................... 71
Letter, dated November 24, 2009, to Hon. Christopher J. Dodd from
J. Thomas Rosch, Commissioner, Federal Trade Commission........ 74
Letter, dated July 16, 2009 to Hon. Barney Frank, from J. Thomas
Rosch, Commissioner, Federal Trade Commission.................. 76
Response to written question submitted to Hon. J. Thomas Rosch
by:
Hon. Tom Udall............................................... 81
Hon. Roger F. Wicker......................................... 81
Hon. David Vitter............................................ 91
Response to written question submitted by Hon. Tom Udall to
Edmund Mierzwinski............................................. 92
Response to written questions submitted by Hon. Roger F. Wicker
to Hon. Timothy J. Muris....................................... 93
FINANCIAL SERVICES AND PRODUCTS: THE
ROLE OF THE FEDERAL TRADE COMMISSION
IN PROTECTING CONSUMERS--PART II
----------
WEDNESDAY, MARCH 17, 2010
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, and Insurance,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:06 p.m. in
room SR-253, Russell Senate Office Building, Hon. Mark L.
Pryor, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. MARK L. PRYOR,
U.S. SENATOR FROM ARIZONA
Senator Pryor. I'd like to call this hearing to order.
I want to welcome everyone to the Consumer Protection
Product Safety and Insurance Subcommittee of the Senate
Commerce Committee. And today our hearing is on Financial
Services and Products: the Role of the Federal Trade Commission
in Protecting Consumers, Part 2.
This is the second in a series of two, and Senator
Rockefeller was gracious enough to allow us to do this today.
And we're going to have two panels, and I would like to ask the
witnesses to please limit their opening statements to 5 minutes
each, and then I'm sure my colleagues have a series of
questions.
Today, we will examine the Federal Trade Commission's role
in protecting consumers in the context of financial services
reform. This is the second hearing, as I mentioned before.
Senator Rockefeller heard the first Commerce Committee hearing
on the subject on February 4. Today, we continue that dialogue
and I look forward to robust debate.
Let's see. As Chairman of the Subcommittee last year, we
held a series of hearings on deceptive advertising, frauds, and
scams in the distressed economy; and the Federal Trade
Commission's actions to protect consumers from unfair and
deceptive practices in these areas. This is a tough economic
environment America finds itself in, and unfortunately, our
citizens are repeatedly targeted for fraudulent and
unscrupulous actors seeking to exploit their vulnerabilities.
Consequently, I think it's proper for us to look at what's
working, look at what's not, talk to the FTC about how things
could be strengthened or changed to make what they do work
better and be more effective.
On Monday, Senator Dodd unveiled financial regulatory
reform legislation he has been crafting over the past several
months, and they've spent a lot of time on it in the Banking
Committee. And I look forward to looking at that legislation as
it is rolled out. I will be keeping a sharp eye for--as I'm
sure people on this committee will, for the Federal Trade
Commission's authority and the Consumer Financial Protection
Bureau, proposed by Senator Dodd, that will be housed in the
Federal Reserve.
As the Committee considers FTC authorities in light of
proposed Financial Regulatory Reforms, I think it'll be
important to make sure this agency's core consumer protection
mission is properly preserved, and also to make sure that we
don't create any gaps that might occur if we're not careful in
how we draft that other piece of legislation. It is also very
important to consider just how the Federal Trade Commission can
improve on what it's doing.
And before I turn it over to the Ranking Member, Senator
Wicker, I'd like to just say that we are scheduled to have a
vote today, about 3:30. So, I know we have some colleagues
that'll be coming and going, and I'd like to just do very brief
opening statements and then turn it over to our first panel. We
may have to slip out and vote and come back, but we'll try to
keep the Committee going, if at all possible.
Senator Wicker?
STATEMENT OF HON. ROGER F. WICKER,
U.S. SENATOR FROM MISSISSIPPI
Senator Wicker. Thank you, Mr. Chairman.
The FTC plays a key role in ensuring the safety of American
consumers and financial services. As Chairman Leibowitz said in
our last hearing, it is the only agency whose sole objective is
to protect consumers. During the economic recession, when so
many have taken advantage of vulnerable consumers through
fraudulent offers of financial assistance, that role has been
even more important. Beyond just financial services, the FTC
deals with issues that economically impact every American.
We want to ensure the FTC has the capabilities and
resources necessary to keep our consumers safe. However,
history has shown that even the most well-intentioned
protectors need boundaries to prevent overreaching and
negatively impacting the very people they are trying to help.
To address this concern in the late 1970s, the Congress passed
laws equipping the FTC with necessary tools to protect
consumers while building in safeguards that require appropriate
justification for new rules and additional enforcement
capabilities. That system has served our people and our economy
well over 30 years. Yet, some believe there's a need for the
FTC to be able to react faster, create new rules and
regulations without the consent of Congress, and have the
authority to enforce these rules in new ways against
potentially unknown actors.
At our last hearing Chairman Leibowitz discussed this issue
and talked about the expansions of authority he feels the FTC
needs to conduct its mission better. Now, I appreciate his
concerns, and believe we should always be willing to consider
whether change is warranted; however, we must proceed with
caution, as the Chairman has just said. A significant expansion
of the FTC's rulemaking and enforcement authority could
essentially create powerful new policy--a powerful new policy-
setting agency, one that has jurisdiction over nearly the
entire economy.
No significant analysis has been conducted on how this
would impact our economy. Ultimately, we are discussing today
what many would argue would amount to a direct repeal of
Congressional action. It concerns me that we are doing so
without a full understanding of the ramifications for the
economy and American jobs.
Today, we'll have the opportunity to hear from other
stakeholders who are interested in how the FTC fills its
consumer protection role. It is unfortunate that we're not able
to hear from others in the business community who would be
affected, as there was no shortage of willing participants for
today's hearing. I believe it is particularly relevant to note
the number and variety of industries who are concerned with
Chairman Leibowitz' proposals and the impact they could have on
businesses.
I have a letter in my hand from a number of these groups,
and I request, at this point, Mr. Chairman, that this letter be
entered into the record for this hearing.
Senator Pryor. Without objection.
[The information referred to follows:]
January 19, 2010
U.S. Senate,
Washington, DC.
Dear Senator:
The undersigned associations write to express our significant
concerns about the provisions of H.R. 4173, the Wall Street Reform and
Consumer Protection Act of 2009, that would amend the Federal Trade
Commission Act (``FTC Act'') by removing existing procedural safeguards
on the rulemaking and enforcement capabilities of the Federal Trade
Commission (``FTC'' or ``Commission''). Expecting that the Senate may
consider these provisions as part of its work on FTC reauthorization,
we write to highlight the potentially significant and negative impact
such changes would have on the business community at large.
The provisions in question would eliminate procedural safeguards
that were imposed upon FTC rulemaking decades ago, after Congress
determined the Commission had repeatedly overstepped its regulatory
authority. The legislation couples this unrestrained rulemaking
authority with enforcement powers to seek civil penalties for unfair or
deceptive acts or practices; to seek such penalties without
coordinating with the Justice Department; and to pursue companies that
allegedly provide ``substantial assistance'' in an FTC Act violation,
even without actual knowledge of the violation. Taken together, these
provisions grant such sweeping powers that the FTC could essentially
act as an unelected legislature governing industries and sectors across
the economy.
There has been remarkably little debate on the consequences of
reversing the considered decisions of two earlier Congresses. In
particular, there has been no opportunity for affected industries to
appear at a hearing to present their concerns about the potential
effect of these provisions on American commerce and our economic
future. A proposal for Congress to delegate such sweeping new
regulatory authority deserves more thorough deliberation.
I. Elimination of Existing Procedural Safeguards
When the FTC operates under congressional guidance in the form of a
specific authorizing statute, the Commission may use the notice-and-
comment rulemaking procedures followed in most Federal agency
proceedings. However, the FTC's consumer protection mandate under the
FTC Act is exceptionally broad. The Commission's authority extends to
all ``unfair or deceptive acts or practices in or affecting commerce,''
including business-to-business interactions as well as conduct toward
consumers.\1\ The statute provides scant guidance to channel the FTC's
exercise of its discretion in executing this mission.
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\1\ 15 U.S.C. 45(a).
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The FTC is also set apart from other Federal agencies by the
breadth of its jurisdiction. The FTC has authority to regulate across
the U.S. economy, except for a few sectors that are specifically
exempted and within the jurisdiction of other agencies. While it is
true that certain other agencies, such as the Securities and Exchange
Commission and the Commodity Futures Trading Commission, may issue
rules using expedited procedures under the Administrative Procedure Act
(``APA''), these agencies are narrowly focused in both jurisdiction and
mission. In contrast, the FTC is, by definition, a generalist agency.
It is therefore appropriate to require robust industry and consumer
participation when the FTC seeks to issue a rule that would affect a
broad range of trades or sectors, in order to inform the agency and
avoid the types of abuses that occurred previously.
In 1975 and again in 1980, Congress stepped in to stop the FTC's
abuse of its rulemaking authority. Congress imposed enhanced
safeguards, including more public input opportunities, when the FTC
seeks to outlaw specific acts or practices as ``unfair'' or
``deceptive.'' As the Senate Commerce, Science, and Transportation
Committee explained in 1979, greater procedural safeguards were
necessary because the FTC had proposed rules ``[n]otwithstanding the
intent of Congress'' in areas such as abuses associated with the sale
of used cars and children's television advertising.\2\
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\2\ S. Rept. No. 96-500 (1979), reprinted in 1980 U.S.C.C.A.N.
1101, 1103.
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The procedures that Congress required, and that remain the law
today, are quite reasonable. In addition to the notice-and-comment
steps required by the APA, the FTC must afford advance rulemaking
notice to Congress and the public, must provide an informal hearing so
that the public may comment orally or in writing on the agency
proposal, and must provide a Statement of Basis and Purpose for any
final rule. Robust judicial review ensures that these procedures are
followed. In addition, existing law requires transparency when
Commissioners meet with outside parties about regulatory proceedings,
and prohibits staff from giving Commissioners facts outside the
regulatory record. These procedures improve the quality of agency
decision-making and increase public accountability and support.
Timothy Muris, who served as Chairman of the FTC from 2001 until
2004, testified before Congress on July 14, 2009, to oppose the removal
of these longstanding safeguards. As Chairman Muris explained:
``The Administration's proposal would do more than just change
the procedures used in rulemaking. It also would eliminate the
requirement that unfair or deceptive practices must be
prevalent, and eliminate the requirement for the Commission's
Statement of Basis and Purpose to address the economic effect
of the rule. It also changes the standard for judicial review,
eliminating the court's ability to strike down rules that are
not supported by substantial evidence in the rulemaking record
taken as a whole. The current restrictions on Commissioners'
meetings with outside parties and the prohibition on ex parse
communications with Commissioners also are eliminated. These
sensible and important protections should be retained.''
Jim Miller, another former FTC chairman, has commented that passage
of the legislation as currently drafted would be ``like putting the FTC
on steroids.'' \3\ In the past, the existing safeguards have proven an
essential check on FTC regulation that exceeds congressional intent.
Congress, then acting under Democratic leadership, established the
current set of procedural protections after finding ``that in many
instances the FTC had taken actions beyond the intent of Congress.''
\4\ For example, the FTC notoriously considered a total ban on
children's advertising in a proceeding that the Washington Post
criticized as ``a preposterous intervention that would turn the FTC
into a great national nanny.'' \5\ As laid out in H.R. 4173, these
provisions would give the FTC free rein--and a congressional blessing--
to repeat these abuses. There would be little to restrain the FTC from
pursuing sweeping new regulations in areas where Congress has not yet
legislated, or from drastically reshaping regulations in areas where
Congress has already legislated.
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\3\ Brody Mullins and John D. McKinnon, ``FTC's Powers Would Grow
Under Financial Overhaul,'' Wall Street Journal Online, October 29,
2009, available at http://online.wsj.com/article/
SB125677809189114853.html (last visited October 30, 2009).
\4\ S. Rept. No. 96-500 at 2.
\5\ Editorial, The Washington Post (Mar. 1, 1978).
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We share the concerns expressed by these former FTC Chairmen, and
we agree with current FTC Commissioner William Kovacic, who previously
served as the agency's Chairman and General Counsel, that it is
``prudent to retain procedures beyond those encompassed in the APA''
when the FTC acts without specific authorization from Congress.\6\
Given the extremely broad scope of the FTC's jurisdiction and mandate,
and the agency's history of regulatory overreaching, the existing
procedural protections remain necessary and appropriate in those cases
when the FTC seeks to outlaw certain business acts or practices.
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\6\ Prepared Statement of the Federal Trade Commission at 11 n. 25,
``Proposed Consumer Financial Protection Agency: Implications for
Consumers and the Federal Trade Commission,'' Hearing Before the House
Comm. on Energy and Commerce, Subcomm. on Commerce, Trade and Consumer
Protection, 111th Cong. (July 8, 2009).
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II. Excessive Enforcement Authorities
Likewise, removing existing checks on the FTC's enforcement powers
would not serve the public interest. While we support the FTC's mission
to prevent and punish unfair and deceptive acts or practices, we
believe that the current limits on the FTC's discretion are appropriate
given the significant consequences of any enforcement action for a
targeted company and its shareholders and employees.
Civil Penalty Authority: The FTC has ample enforcement tools at its
disposal, and adding civil penalty authority would produce negative
unintended consequences. Currently, the FTC primarily proceeds by
imposing an administrative order to change a company's behavior or
seeking a court order that may force a company to return ill-gotten
gains. The FTC may then seek civil penalties if an administrative order
is violated. This system gives companies an incentive to reach an
agreement with the FTC to improve their business practices, rather than
litigating against the FTC. The FTC routinely issues detailed
administrative orders to correct companies' policies and behavior, and
other companies look to these orders to understand the FTC's
expectations and shape their own practices. We therefore agree with
Commissioner Kovacic that ``routine availability of civil penalties,
even if subject to a scienter requirement, would . . . risk
constraining the development of doctrine'' through enforcement actions,
and should not be adopted.\7\
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\7\ Id. at 12 n. 30.
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``Substantial Assistance'' Violation: H.R. 4173 would provide that
any person that ``knowingly or recklessly'' provides ``substantial
assistance'' to another in committing an unfair or deceptive act or
practice can be punished as a primary perpetrator, even without actual
knowledge of the violation. We believe that such an expansion of FTC
jurisdiction is neither reasonable nor necessary, given that the FTC
has the ability to pursue a perpetrator of any unfair or deceptive act
or practice.
Independent Litigating Authority: As passed by the House, H.R. 4173
would provide the FTC with independent litigating authority to seek
civil penalties. This provision would eliminate the current requirement
that the FTC notify the Department of Justice (DOJ) when the FTC
intends to seek civil penalties, after which the DOJ has 45 days to
decide whether to pursue the case on behalf of the FTC. This
consultation is necessary to allow DOJ to coordinate law enforcement
activities across agencies, and to provide a critical check on the
FTC's discretion when a company is exposed to excessive and damaging
penalties. This approach also provides a more considered and orderly
access to the Federal courts.
For the reasons discussed above, the undersigned associations
strongly oppose the provisions currently set out in H.R. 4173 that
would remove existing checks on the FTC's discretion. These provisions
would afford the FTC unprecedented and sweeping powers to execute its
broad mandate. We urge the Senate Commerce Committee to discard these
provisions as it progresses in its work toward FTC reauthorization.
Sincerely,
American Association of Advertising Agencies
American Advertising Federation
American Business Media
American Financial Services Association
Association of National Advertisers
Consumer Data Industry Association
Consumer Electronics Association
Consumer Healthcare Products Association
Direct Marketing Association
Direct Selling Association
Electronic Retailing Association
Financial Services Institute, Inc.
Interactive Advertising Bureau
International Franchise Association
The Marketing Research Association
National Association of Manufacturers
National Association of Mutual Insurance Companies
National Association of Professional Background Screeners
National Association of Realtors
National Association of Wholesaler-Distributors
National Automobile Dealers Association
National Business Coalition on E-Commerce and Privacy
Natural Products Association
National Retail Federation
Online Publishers Association
Shop.org
Software & Information Industry Association
U.S. Chamber of Commerce
United States Organizations for Bankruptcy Alternatives
Senator Wicker. This letter, sent to all Senators,
expresses strong opposition to the removal of existing
safeguards on the rulemaking and enforcement capabilities of
the FTC. Signed by 29 different associations who represent
nearly all aspects of our economy, from healthcare and
manufacturers to telecommunications and financial services, the
letter warns of the potentially significant and negative impact
such changes would have on the business community at large.
It's important to note that these are representatives of the
very businesses we are relying on to create new jobs and put
our constituents back to work.
It is also unfortunate that scheduling conflicts prevented
FTC Commissioner Kovacic from being with us today. We would
certainly have benefited from his expertise, as a current
Commissioner and former General Counsel and Chairman of the
FTC. However, Commissioner Kovacic has submitted testimony for
the record, and it is important to point out that the
Commissioner shares many of the concerns expressed about the
ramifications of such a large expansion of the FTC's rulemaking
authority.
[The information referred to follows:]
Prepared Statement of Hon. William E. Kovacic, Commissioner,
Federal Trade Commission
Chairman Pryor, Ranking Member Wicker, and Subcommittee Members,
thank you for the opportunity to present my views on a number of
proposals to augment the FTC's authority. They are the following: APA
rulemaking, civil penalty authority, independent litigating authority
for civil penalty actions, and aiding and abetting liability. Although
I was unable to present testimony at your Subcommittee's hearing, I am
grateful for the opportunity to make my views known by offering this
statement for the record.
I. APA Rulemaking
The FTC's strongest policymaking tool, in addition to litigation,
is rulemaking. In 1975, Congress granted the FTC express authority to
issue substantive rules under Section 18 of the FTC Act, and authority
under Section 5(m)(1)(A) of the Act to seek civil penalties for
violations of those rules.\1\ Magnuson-Moss rulemaking, as this
authority is known, requires more procedures than those needed for
rulemaking pursuant to the Administrative Procedure Act (``APA'').\2\
These include two notices of proposed rulemaking, prior notification to
Congress, opportunity for an informal hearing, and, if issues of
material fact are in dispute, cross-examination of witnesses and
rebuttal submissions by interested persons.
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\1\ Magnuson-Moss Warranty--Federal Trade Commission Improvement
Act, Pub. L. No. 93-637, 88 Stat. 2183 (1975) (codified at 15 U.S.C.
57a, 57b).
\2\ 5 U.S.C. 551.
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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 those specific
instances, Congress has given the FTC authority to issue rules using
APA rulemaking procedures. A significant and recent example of APA
rulemaking authority that Congress expressly granted to the FTC was the
authority, under the Telemarketing and Consumer Fraud and Abuse
Prevention Act, to issue rules proscribing deceptive and abusive acts
or practices in telemarketing.\3\ Under that authority, the Commission
issued the Telemarketing Sales Rule,\4\ including provisions that
created the do-not-call registry, whereby consumers can protect their
privacy by electing not to receive commercial telemarketing calls.
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\3\ 15 U.S.C. 3009(a).
\4\ 16 C.F.R. 310.1-.9.
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My position in the past, and to which I still adhere, is to dissent
from the FTC's endorsement of authority to use, for promulgating all
rules respecting unfair or deceptive acts or practices under the FTC
Act, the notice and comment procedures of the APA.\5\ While many other
agencies do have the authority to issue rules following notice and
comment procedures, the Commission's rulemaking is unique due to the
range of subject matter (unfair or deceptive acts or practices) and
sectors (reaching broadly across the economy, except for specific
carve-outs). Except where Congress has given the FTC a more focused
mandate to address particular problems, beyond the FTC Act's broad
prohibition of unfair or deceptive acts or practices, I believe that it
is prudent to retain procedures beyond those encompassed in the APA. As
a former Bureau of Consumer Protection Assistant Director stated during
a panel addressing the agency's rulemaking efforts, the Commission
should wait for Congress to give the agency specific authority to issue
rules in a given area because that approach results in ``clearer
direction'' to the agency's audience.\6\ The lack of a more focused
mandate and direction from Congress, reflected in legislation with
relatively narrow tailoring, could result in the FTC undertaking
initiatives that ultimately arouse Congressional ire and lead to
damaging legislative intervention in the FTC's work. This is precisely
what occurred toward the end of the Carter administration. Ongoing
Commission initiatives led Congress to turn against the Commission in
1979 and 1980, enacting significant legislative constraints (while
individual members proposed even more significant cutbacks in
Commission authority). This occurred even though many of the
Commission's initiatives were undertaken with the urging of
Congressional Committees, individual Senators and Representatives.\7\
Through specific, targeted grants of APA rulemaking authority, Congress
makes a credible commitment not to attack the Commission when the
agency exercises such authority.
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\5\ See, e.g., Prepared Statement of the Federal Trade Commission
Describing the Commission's Anti-Fraud Law Enforcement Program and
Recommending Changes in the Law and Resources To Enhance the
Commission's Ability to Protect Consumers before the Subcommittee on
Consumer Protection, Product Safety, and Insurance of the Committee on
Commerce, Science, and Transportation, U.S. Senate (July 14, 2009), at
3 n.4, available at www.ftc.gov/os/2009/07/P094402antifraudlawtest.pdf.
\6\ Paul Luehr, Remarks at FTC at 100: Into Our Second Century
Roundtable, Northwestern University School of Law, Chicago (Sept. 25,
2008), at 67-68 (transcript available at http://www.ftc.gov/ftc/
workshops/ftc100/transcripts/chicagotranscript.pdf). For additional
discussion of FTC rulemaking see A Report by Federal Trade Commission
Chairman William E. Kovacic, The Federal Trade Commission at 100: Into
Our 2nd Century, The Continuing Pursuit of Better Practices (Jan.
2009), at 124-28, available at http://www.ftc.gov/ftc/workshops/ftc100/
docs/ftc100rpt.pdf.
\7\ See William E. Kovacic, The Federal Trade Commission and
Congressional Oversight of Antitrust Enforcement, 17 Tulsa L. J. 587,
630-67 (1982). As the title suggests, my article focused on the
Commission's antitrust enforcement.
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I would be willing to consider whether all the rulemaking
requirements that are currently required by Magnuson-Moss to
promulgate, amend, or repeal rules are needed, as they may be
unnecessarily cumbersome and often lead to rulemaking proceedings that
can last several years.
II. Civil Penalty Authority
The FTC has authority to seek civil penalties in some instances.
For example, the FTC can seek civil penalties against an entity that
violates an FTC administrative order, to which it is subject, or a
trade regulation rule promulgated by the FTC. Congress has also
specifically authorized the FTC to seek civil penalties for violations
of certain statutes, e.g., CAN-SPAM Act.\8\ The Commission has
recommended that Congress authorize the FTC to seek civil penalties for
all violations of the FTC Act and the authority to prosecute civil
penalty cases in Federal court in its own name \9\--instead of
referring such cases to the Department of Justice (``DOJ'') to bring
civil penalty actions on behalf of the Commission, as is discussed in
part III below.\10\
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\8\ See 15 U.S.C. 7701 et seq.
\9\ See, e.g., Prepared Statement of the Federal Trade Commission
Describing the Commission's Anti-Fraud Law Enforcement Program and
Recommending Changes in the Law and Resources To Enhance the
Commission's Ability to Protect Consumers Before the Subcommittee on
Consumer Protection, Product Safety, and Insurance of the Committee on
Commerce, Science, and Transportation, U.S. Senate (July 14, 2009),
available at www.ftc.gov/os/2009/07/P094402antifraudlawtest.pdf.
\10\ In general, under the FTC Act, the Commission must notify the
Attorney General of its intention to commence, defend, or intervene in
any civil penalty action under the Act. See 15 U.S.C. 56(a)(1).
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In my view, the existing consequences attendant to a finding that
an act or practice is unfair or deceptive under the FTC Act are
generally appropriate and are consistent with the goal of developing
FTC law to establish new doctrine and to reach new and emerging
problems. These include an administrative order (whose violation would
then subject the respondent to civil penalties) or a court-issued
injunction (which can contain such equitable remedies as redress and
disgorgement). The routine availability of civil penalties, even if
subject to a scienter requirement, would risk constraining the
development of doctrine. This is similar to what has happened in the
antitrust sphere, where judicial concerns about the costs of private
litigation, and the effect of mandatory treble damages in antitrust
cases, have led the courts to constrain the development of antitrust
doctrine in ways that unduly limit the U.S. antitrust system.\11\
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\11\ See, e.g., NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 136-37
(1998) (``To apply the per se rule here . . . would transform cases
involving business behavior that is improper for various reasons, say,
cases involving nepotism or personal pique, into treble-damages
antitrust cases.''); III Phillip Areeda & Donald F. Turner, Antitrust
Law (1978), 625; William E. Kovacic, The Intellectual DNA of Modern
U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard
Double Helix, 2007 Colum. Bus. L. Rev. 1, 51-64.
---------------------------------------------------------------------------
Additionally, if the FTC were granted civil penalty authority for
consumer protection violations, another possibility is that the
Commission might routinely challenge as unfair acts, under its consumer
protection authority, conduct which might also be challenged under its
antitrust authority as unfair methods of competition (as it did in N-
Data \12\). Thus, it might seek (routinely or otherwise) civil
penalties for competition infringements. Here, also, Judicial fears
about overdeterrence could induce courts to cramp the sensible
development of doctrine.
---------------------------------------------------------------------------
\12\ In the Matter of Negotiated Data Solutions LLC, File No.
0510094, Complaint, Decision and Order, and other documents, available
at http://www.ftc.gov/os/caselist/0510094/index.shtm. In my dissent, I
noted that, if unfair acts coverage extends to the full range of
business-to-business transactions (as N-Data suggests it might), it
would seem that the three-factor test prescribed for unfair acts (15
U.S.C. 45(n)) could capture all actionable conduct within the FTC's
competition jurisdiction, including conduct within the proscriptions of
the Sherman and Clayton Acts. See Dissenting Statement of Commissioner
Kovacic, In the Matter of Negotiated Data Solutions LLC, File No.
0510094, available at http://www.ftc.gov/os/caselist/0510094/
080122kovacic.pdf.
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Given these concerns, instead of across-the-board civil penalty
authority, Congress may consider more targeted authority to seek civil
penalties where restitution or disgorgement may not be appropriate or
sufficient remedies. 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.\13\ What makes these cases distinguishable is that
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 the amount of restitution. In
addition, disgorgement may be problematic. In data security cases,
defendants may not have actually profited from their unlawful acts. The
Commission has also found that in pretexting and spyware cases, the
defendants' profits are often minor, and disgorgement would accordingly
be an inadequate deterrent.
---------------------------------------------------------------------------
\13\ See Prepared Statement of the Federal Trade before the
Committee on Commerce, Science, and Transportation, U.S. Senate (Apr.
8, 2008), at 10-12, available at http://www.ftc.gov/os/testimony/
P034101reauth.pdf.
---------------------------------------------------------------------------
III. Independent Litigating Authority for Civil Penalty Actions
As noted above, the Commission must generally refer civil penalty
actions to the DOJ.\14\ The Commission has recommended to Congress that
the FTC be able to bring actions for civil penalties in Federal court
without mandating that DOJ have the option to litigate on the FTC's
behalf. I support expanding the FTC's independent litigating authority
when it seeks civil penalties as it would allow the agency with the
greatest expertise in the FTC Act to litigate more of its own civil
penalty cases, while still retaining the option to refer matters-where
appropriate-to the DOJ. This would be in line with the authority
granted to other agencies, such as the Securities and Exchange
Commission (``SEC'') and Commodity Futures Trading Commission
(``CFTC''). The SEC has such independent authority to seek judicial
civil penalties for any violation of the securities laws,\15\ and may
even issue administrative penalties against registered entities.\16\
The CFTC may also seek judicial civil penalties or assess
administrative civil penalties.\17\
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\14\ In general, under the FTC Act, the Commission must notify the
Attorney General of its intention to commence, defend, or intervene in
any civil penalty action under the Act. 15 U.S.C. 56(a)(1). DOJ then
has 45 days to commence, defend, or intervene in the suit. Id. Should
DOJ not act within the 45-day period, the FTC may file the case in its
own name, using its own attorneys. Id.
\15\ 15 U.S.C. 77t.
\16\ 15 U.S.C. 78u-2.
\17\ 7 U.S.C. 9; 7 U.S.C. 13a; 7 U.S.C. 13a-1.
---------------------------------------------------------------------------
Apart from having the efficiency of having the agency with the most
expertise in the area bringing the civil penalty prosecutions, it will
also result in more timely actions. Currently, once the FTC makes a
referral, DOJ has 45 days to commence a civil action. This extra time,
and the associated delay necessary to brief DOJ attorneys on a case
already familiar to their FTC counterparts, could be easily avoided if
the FTC could seek civil penalties directly.
IV. Aiding and Abetting a Violation
The Supreme Court's ruling in Central Bank of Denver v. First
Interstate Bank of Denver \18\ threw the Commission's ability to pursue
those who assist and facilitate unfair or deceptive acts and practices
into doubt. As the Commission has recommended in the past, I believe
that Congress should clarify that the Commission is able to challenge
those who provide knowing and substantial assistance to others who are
violating Section 5 of the FTC Act.\19\
---------------------------------------------------------------------------
\18\ 511 U.S. 164 (1994).
\19\ See Prepared Statement of the Federal Trade before the
Committee on Commerce, Science, and Transportation, U.S. Senate (Apr.
8, 2008), at 22-23, available at http://www.ftc.gov/os/testimony/
P034101reauth.pdf.
---------------------------------------------------------------------------
V. Conclusion
Thank you for the opportunity to submit this statement for the
record. I hope that my comments will be useful to the Subcommittee.
I share concerns over the impact a new regulator like the
Consumer Financial Protection Bureau could have on the FTC's
role in consumer protection, financial services and products.
However, those concerns do not create an immediate need to
address changes to FTC rulemaking authority and enforcement
over its entire jurisdiction.
So, I want to thank our Chairman and work with him in any
efforts to reauthorize the FTC. And I certainly hope that, when
legislative text is available, we will make every effort to
have a legislative hearing. That type of process is the best
way to ensure that changes are thoroughly vetted as we fully
understand the ramifications of any new FTC authority.
So, thank you, Mr. Chairman.
I want to thank our witnesses for joining us today. And we
welcome your expertise in working through these issues.
Senator Pryor. Thank you.
Senator Klobuchar.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Senator Pryor.
Thank you for holding this important and timely hearing.
And thanks, Chairman Rockefeller, as well.
As a former prosecutor, I've seen the devastating effects
on the lives of those that have been financially victimized,
and I know how important it is that our law enforcement
agencies have the tools and resources they need to effectively
investigate and prosecute those crimes.
Since coming to the Senate, I have worked closely with the
FTC, in particular, to help protect consumers from fraud and
abuse. From working to curb anticompetitive behavior in the
pharmaceutical industry to protecting consumers from online
scams, I have found the FTC to be a very strong ally in our
fight to protect consumers.
This hearing comes at an important time as we work to
create a framework for financial regulatory reform. As we look
at the options available to us, we must carefully examine the
future role the FTC will play. As we consider various options
for strengthening enforcement in the financial industry, I want
to be assured that consumers won't lose out. Moving forward, we
need to make sure, as Senator Pryor and Senator Wicker
mentioned, that the FTC has the resources it needs to pursue
those who perpetrate fraud, and deter those who may even
consider such crimes.
Finally, I'd like to add that, as we look at these
regulatory options and we work together to find common ground,
we have to remember that the ideas of consumer protection and a
healthy business environment are not always at odds with each
other; in fact, sometimes it is quite the opposite. Consumers
win when competition is strong, and businesses win when
consumers have confidence in the marketplace.
I think of two incidences, just in the last year, when we
worked with retailers who were very concerned about the lead-
in-toy issue and actually wanted a bill to pass that would show
the people of this country that we were going the extra mile to
protect the consumers that frequent their stores. Or I think
about the formaldehyde bill, that I have with Senator Crapo,
where the timber industry is behind us because they know that
they want to protect people from wood products that contain
formaldehyde, and they know that that's not coming from them,
it's coming from other countries, since they voluntarily agreed
to some strong consumer standards. So, that's just two
examples, that I just thought of when I was sitting here, of
where industry and consumer interests are aligned.
Thanks again, Senator Pryor and Senator Rockefeller, for
holding this hearing. And I look forward to hearing from our
witness.
Senator Pryor. Thank you.
Our first witness today is J. Thomas Rosch. He's a
Commissioner with the Federal Trade Commission. I have a longer
bio on you, but, in the interest of time, I'll just give that
very concise introduction.
But, also I want all the witnesses to know that we'll make
your statements part of the record, your written statements.
And we would like to ask each of you to keep your opening
statements to 5 minutes.
Mr. Rosch.
STATEMENT OF HON. J. THOMAS ROSCH, COMMISSIONER, FEDERAL TRADE
COMMISSION
Mr. Rosch. Thank you very much, Chairman Pryor and Ranking
Member Wicker, and Senator Klobuchar, as well, for this chance
to speak with you about the proposals to provide the FTC with
additional tools to protect consumers in the marketplace. And I
stress that it's consumer protection law enforcement tools that
we're talking about today, not antitrust law enforcement tools.
I'd like to briefly discuss each of those proposed tools.
The first is APA rulemaking. The need for APA rulemaking--
and I'm talking now not about expedited APA rulemaking, but
about regular notice-and-comment rulemaking--is rooted in the
fact that our basic organic statute, which is Section 5 of the
FTC Act, is a very broad statute. On the consumer protection
side, it prohibits, quote, ``all unfair or deceptive acts or
practices.'' Rules fleshing out that broad statute are good for
both consumers and the industry, as the Senator has said.
They describe with specificity what the rules of the road
are. Take, for example, the Franchise Rule and the Funeral
Rule. They inform businesses about the particular information
they must provide to consumers during their transactions, and
the ways in which to provide it, in order to prevent deception.
As such, they've been very helpful in improving competition and
the marketplace.
APA rulemaking, I should stress, is not radical. The SEC,
for example, has the authority to engage in notice- and-comment
APA rulemaking, and it seeks civil penalties for violation of
those rules. Nor can any adverse inference be drawn from the
Commission's existing Magnuson-Moss rulemaking procedures,
under which rules can be enforced with civil penalties. I know,
because I was present at the creation. I happened to be at the
Bureau of Consumer Protection in 1974, when Magnuson-Moss was
enacted.
We had rulemaking at the time, but not the authority to
enforce a rule with civil penalties. We at the Commission
suggested the current Magnuson-Moss statute to give us both.
That statute has turned out to be enormously burdensome and
expensive, involving lengthy hearings and cross-examination--in
essence, a trial. But nobody knew that then. In fact, there
have not been any Magnuson-Moss rules since 1978. That's 32
years.
Both we and the Congress just felt, as I say, that rules
that had teeth in them were a good thing for both consumers and
good corporate citizens. That's what Magnuson-Moss was about.
The second tool is enhanced new civil penalty authority.
Let me be clear about what I don't support and what I do
support. I don't support a scenario where the FTC, ourselves,
can order civil penalties for violations of Section 5. I think
Commissioner Kovacic is correct that coupling that kind of
civil penalty authority with a statute that is as expansive as
Section 5 is needs some checks and balances. But I do support a
grant of authority to enable us to seek civil penalties for
Section 5 violations in Federal district court, where a Federal
judge would ultimately decide whether, and how much of, a civil
penalty would be obtained. Settlements involving civil
penalties also would be filed in Federal district court and be
subject to court review. As I say, that wouldn't be radical.
The third tool is independent litigating authority. As
matters now stand, we don't have authority to file and litigate
civil penalty cases in our own name, though we can do that when
we seek other remedies. Instead, any cases seeking civil
penalties must be referred to the Department of Justice, which
has 45 days within which to file a civil penalty action on our
behalf. As a result, we've often had to make a choice, even
before the facts of the case have been thoroughly investigated,
between seeking immediate relief and pursuing consumer redress,
or instead seeking civil penalties by referring the case to
Justice and forgoing the ability to pursue relief, such as a
TRO or asset freeze. That makes no sense. We should have the
authority to pursue the most appropriate remedy in order to
protect consumers. Again, as you probably know, other agencies,
such as the SEC, routinely file such cases on their own behalf.
And the fourth tool is clarification of our aiding and
abetting authority. Historically, we operated with the
understanding that there was an implied cause of action for
aiding and abetting under Section 5. Unfortunately, the
decision in Central Bank of Denver threw that into doubt, and
I'd encourage you to clarify the law to make sure that we have
that aiding and abetting authority.
Thank you, Mr. Chairman. And I'll be glad to answer any
questions that any member of this committee might have with
respect to any of these four tools, as well as the Dodd Act.
[The prepared statement of Mr. Rosch follows:]
Prepared Statement of Hon. J. Thomas Rosch, Commissioner,
Federal Trade Commission
Thank you, Chairman Pryor, Ranking Member Wicker, and distinguished
members for this chance to speak about proposals to provide the Federal
Trade Commission with additional tools to protect consumers in the
marketplace. I'd like to briefly discuss each of these proposed tools.
APA Rulemaking: The first is APA rulemaking. The need for APA
rulemaking is rooted in the fact that our basic organic statute--
Section 5--is a very broad statute. On the consumer protection side, it
prohibits ``all unfair or deceptive acts or practices.''
Rules fleshing out this broad statute are good for both consumers
and the industry. They describe with specificity what the ``rules of
the road'' are. Take for example, the Franchise Rule and the Funeral
Rule. They inform businesses about the particular information they must
provide to consumers during their transactions, and the ways in which
to provide it, in order to prevent deception. As such, they've been
very helpful in improving the marketplace.
APA rulemaking isn't radical. The SEC, for example, has the
authority to engage in ``notice and comment'' APA rulemaking; and it
seeks civil penalties for violations of those rules.
Nor can any adverse inference be drawn from the Commission's
existing Magnuson-Moss rulemaking procedures, under which rules can be
enforced with civil penalties. I know because I was ``Present at the
Creation'' in 1974 when the Magnuson-Moss Act was enacted. We had
rulemaking authority at the time, but not the authority to enforce a
rule with civil penalties. We at the Commission suggested the current
Magnuson-Moss statute to give us both. That statute has turned out to
be enormously burdensome and expensive, involving lengthy hearings and
cross-examination (in essence a trial), but nobody knew that then. Both
we and the Congress just felt, as I say, that rules that had teeth in
them were a good thing for both consumers and good corporate citizens.
Civil Penalty Authority: The second tool is enhanced new civil
penalty authority. Let me make clear what I don't support and what I do
support.
I don't support a scenario where the FTC ourselves can order civil
penalties for violations of Section 5. I think Commissioner Kovacic is
right that coupling that kind of civil penalty authority with a statute
that is as expansive as Section 5 needs some checks and balances.
However, I do support a grant of authority to enable us to seek
civil penalties for Section 5 violations in Federal district court,
where a Federal judge would ultimately decide whether and how much of a
civil penalty would be obtained. Settlements involving civil penalties
also would be filed in Federal district court and be subject to court
review. As I say, that wouldn't be radical.
Independent Litigating Authority: The third tool is independent
litigating authority. As matters now stand, we don't have authority to
file and litigate civil penalty cases in our own name (although we can
do this when we seek other remedies). Instead, any cases seeking civil
penalties must be referred to the Department of Justice, which has 45
days within which to file a civil penalty action on our behalf. As a
result, we often have to make a choice--even before the facts of a case
have been thoroughly investigated--between seeking immediate relief and
pursuing consumer redress, or instead seeking civil penalties by
referring the case to Justice (and foregoing the ability to pursue
relief such as a TRO or asset freeze). That makes no sense. We should
have the authority to pursue the most appropriate remedy in order to
protect consumers. Again, as you probably know, other agencies, such as
the SEC, routinely file such cases on their own behalf.
Aiding and Abetting: The fourth tool is clarification of our aiding
and abetting authority. Historically we operated with the understanding
that there was an implied cause of action for aiding and abetting under
Section 5 of the FTC Act. Unfortunately, the 1994 decision in Central
Bank of Denver threw this into doubt. I'd encourage you to clarify the
law and provide us with explicit authority to take law enforcement
action against those who provide substantial assistance to another
while knowing, or consciously avoiding knowing, that the person is
engaged in unfair or deceptive acts or practices in violation of
Section 5 of the FTC Act.
Senator Pryor. Thank you very much.
Mr. Rosch. Or Dodd bill, rather.
Senator Pryor. Yes. I'll go ahead and start us today.
Let me dig in, if I can, on the Magnuson-Moss issue, which
was your first point. You talk about ``APA rulemaking isn't
radical,'' you talk about the SEC, and so, it sounds like you
definitely support the changeover from the current Magnuson-
Moss to the APA--the regular APA rulemaking authority.
Mr. Rosch. That's correct, Mr. Chairman. I will say that,
as somebody who tried cases for more than 40 years, I never,
ever participated in a trial that lasted as long as a Magnuson-
Moss hearing did, and I never had the misfortune to participate
in a case that lasted as long as some of these Magnuson-Moss
proceedings do.
Senator Pryor. And how long do they last?
Mr. Rosch. They last, on average--the hearing lasts, on
average, 38 days. The proceeding lasts, on average, for 7
years. That's an average. We have not proposed any Magnuson-
Moss rules since 1978, unless one wants to count our recent
attempt to carve out business opportunities from the Franchise
Rule. That was proposed 4 years ago, and it didn't involve a
hearing.
Senator Pryor. And what is it about Magnuson-Moss that
takes so long?
Mr. Rosch. I beg your pardon?
Senator Pryor. What is it about the statute that takes so
long? Why is it so cumbersome?
Mr. Rosch. A large part of the cumbersome aspect of
Magnuson-Moss is attributable to the hearing process. But, it
is by no means the only part of it that's cumbersome.
Senator Pryor. Well, one reason I ask is, you know, you
compared it to a trial; most trials don't take 7 years to get
to a conclusion, or don't take--however--38 days, or whatever
you said. So, what is it about the hearing process that just
makes it go on and on?
Mr. Rosch. Well, the hearing process involves a number of
things. First of all, it involves every participant being able
to suggest disputed issues of fact to the Presiding Officer at
the hearing trial. And sometimes there are dozens and dozens of
these participants in the process. So, that takes quite a
while.
Second, there is cross-examination, just as there is in a
regular trial, as well as direct examination. There are closing
arguments. It is presided over by a hearing officer. The whole
proceeding is presided over by a hearing officer. I don't know
that there's any way to shorten the process, if one assumes
that this process was supposed to hamstring us, which it was
not.
Senator Pryor. And if you could change--let's just say that
the Congress decides not to repeal Magnuson-Moss, but decides
to--let's just say one major change. Let's say the Congress
decides to do one major change. What would you recommend that
that one change be?
Mr. Rosch. Well, there have been four, actually that have
been proposed. Let me briefly recount what those are.
Senator Pryor. Sure.
Mr. Rosch. One is that we would retain the prevalence
requirement--namely that an act or practice be prevalent in an
industry before a rule could be enunciated. That was a
requirement which the District of Columbia Court of Appeals
upheld in the Katharine Gibbs case some time ago. And we take
that quite seriously. That is part of the statute. What does
``prevalence'' mean? That's one problem with retaining the
requirement.
The other problem I've got with that particular suggestion
is that, frankly, the adage is correct that one bad apple, or a
number of bad apples, can spoil the whole barrel. I believe
that to be true. I think we hurt businesses if we impose too
strict a prevalence rule--the legitimate businesses that are
the good apples in the bunch.
Senator Pryor. So, prevalence is----
Mr. Rosch. Prevalence is one.
Second is to eliminate the hearing process. As I say, that
would help, but it certainly did not shorten considerably our
recent experience with the Business Opportunities Rule.
Third is, allow oral submissions. We already do that, to
some extent, by allowing voluntary oral submissions. We also do
it, frankly, by outreach, which I myself have participated in.
The fourth is to have a statement of economic effects.
That's required right now with respect to the costs of a rule.
So we do spell out what the costs of every rule will be, APA or
otherwise. So, we're already doing that.
And the fifth is a standard of judicial review, which for
Magnuson-Moss is substantial evidence, and for APA rulemaking
is arbitrary and capricious. The problem with that is, the
standard of review is already the same, according to, now,
Justice Scalia's decision in the 1986 case, Consumer Union's
case.
Senator Pryor. Thank you.
Senator Wicker.
Senator Wicker. Thank you very much, Mr. Rosch. Appreciate
your testimony.
The Magnuson-Moss Act resulted from a feeling that, because
of the sweeping powers the FTC has, there was a need for
protections against overzealous regulation. And apparently that
argument carried the day and resulted in Magnuson-Moss. Do you
believe that basic finding was in error at that time, in the
early 1970s?
Mr. Rosch. Absolutely, Senator. And I'm a Republican, I
should add. But, that was my view then, and it is my view now.
Senator Wicker. So, actually, Magnuson-Moss was a mistake
from the get-go.
Mr. Rosch. Magnuson-Moss, the way it has turned out--the
way it has turned out was a prescription for doing nothing with
respect to rulemaking.
Senator Wicker. Well----
Mr. Rosch. It brought rulemaking to a halt. And there was
no reason for that, because at the time that it was enacted, we
had enacted very few rules, and they were not abusive rules.
The Funeral Rule was not an abusive rule. The Holder-in-Due-
Course Rule was not an abusive rule. These were some of the
rules that were enacted before the end of 1974, when Magnuson-
Moss was enacted.
Senator Wicker. OK. Well, you compared this to trials in
court. It seemed to me that perhaps the Commission could bring
in some Federal judges and Federal administrators and get some
advice from Federal courts, if they do things so much faster.
For example, evidential hearings, with direct and cross-
examination, you argue, is an unnecessary step. I think many
Americans might think that, ``Well, in the case of an agency
with powers like this, we should keep that.''
The 38 days for testimony, surely there's a way to shorten
that, short of adopting the APA. The proceedings lasting 7
years--of course, we know that, once a case is tried in Federal
court, sometimes the appeals and various levels of the district
court, the circuit court, and the Supreme Court might last that
long. Might it be that, if we provided the FTC with more
resources, this 7-year average proceedings--or the proceedings
lasting as long as 7 years could be shortened if we provided
FTC with additional resources? Might that be another approach
to this?
Mr. Rosch. I think not, Senator. And let me tell you why I
think that's so. The reason I think that is so is because the
hearing process is not by any means the only resource-intensive
part of this entire process. There are, by my count, 29
sequential steps in Magnuson-Moss rulemaking.
Senator Wicker. And you're going to supply that for us on
the record? OK.
Mr. Rosch. We have already, Senator. That is part of the
submission that was sent up earlier this week.
But, in any event, I will say this. I was an antitrust
lawyer. Those are the cases that I tried, and they were
complex. You are quite correct that sometimes the appellate
process lasted as long as some of these proceedings did. When
you include the appellate process, that is correct. However,
what I'm talking about in terms of the average length here--7
years--is just the rulemaking process. It does not involve
appellate process at all. So, I don't think, frankly, giving
the Commission a whole lot of resources is going to solve the
problem, not when you have that many sequential steps in the
entire process.
Senator Wicker. All right. Now let me ask about prevalence.
Would it help if we better defined the term ``prevalence''? We
could do that without adopting the Administrative Procedures
Act for the FTC, couldn't we?
Mr. Rosch. I think that that would be--that would be
useful, Senator. I don't think it would be--it doesn't cure the
bad-apple-in-the-barrel problem, but it certainly would cure
the problem of ambiguity.
Senator Wicker. OK.
Thank you, Mr. Chairman.
Senator Pryor. Thank you.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman.
You know, whenever we talk about enhancing the authority of
the FTC--and I believe that we should do everything we can to
give you to the tools that you need--but, there are always
concerns about due process and--for all affected parties. Could
you talk about how we could do this in a way that makes sure
that we are giving you the tools that you need and, at the same
time, making sure that due process is there for the parties
that are affected?
Mr. Rosch. Yes. Thank you, Senator. I think that the answer
to that lies in what other agencies have, the authority that
they have. They have notice-and-comment APA rulemaking
authority. Their rulemaking has not been successfully
challenged on the grounds that it violates due process. They
have been able to make rules just fine with this process. And
so, frankly, have we. On the five occasions when we've come to
this committee and we've asked, specifically with respect to
special statutes, that we be given APA rulemaking authority, we
have acted responsibly in each and every one of those cases.
And it has not--the process has not lasted for 7 years. So, we
can do it. Other agencies can do it, consistent with due
process. I think that that's the answer.
Senator Klobuchar. OK. The aiding-and-abetting enforcement
authority that you talked about earlier, some people talk about
how the Commission's unfairness jurisdiction would provide
adequate authority to the FTC to pursue third parties who
facilitate fraud. What is the response to that?
Mr. Rosch. I think we have proceeded under the unfairness
prong of Section 5 from time to time. We've also proceeded
under various other theories since the Central Bank case, but
nothing is as good as clarification with respect to our aiding-
and-abetting authority. That--I believe, in my heart of hearts,
that that is true. I just don't think it's a substitute. We can
use these other tools, if you wish, but I think both you and we
would be accused of pounding a round peg into a square hole. It
just doesn't fit.
Senator Klobuchar. When Chairman Leibowitz was here, I
talked to him. I know he's getting these examples together,
examples of how your ability has been hampered in recent years
to protect consumers, by lack of the rulemaking authority. Do
you have some examples of that?
Mr. Rosch. Well, all I can say is that when I came back to
the Commission in 2006, it was a completely different ball game
than it was when I left in 1975. Practices that we never
dreamed of occurring then are occurring now. And frequently,
they cannot be the subject of consumer redress because while
they hurt consumers, they don't hurt their pocketbooks.
Now, what am I referring to? I'm referring, for example,
first of all, to the situation where there's foreclosure
relief. That doesn't necessarily hurt every consumer, though it
certainly does sometimes. Data security, identity theft, those
are practices which hurt consumers, but they may not hurt them
in the pocketbook.
Similarly, with respect to a lot of online practices, where
we see spam, we see malware that isn't so prevalent that it
fouls up your computer and makes it impossible for you to use
it. That hurts consumers, but it doesn't necessarily cause them
injury in their pocketbooks. So, we can't effectively get
consumer redress for those practices. What we can do to stop
them, though, is to seek civil penalties. And that's our only
alternative, and that's what we try to do. That's why we want
civil penalty authority that is enhanced.
Senator Klobuchar. Thank you. One last question. I know,
from my days as a prosecutor, that financial scams are
incredibly difficult to investigate; they take a lot of
resources and know-how. You need sophisticated employees. I
can't tell you the number of times we had police, with good
meaning, go into a house that had a computer on, maybe it was a
child porn case, and they'd turn it on and just start--and it
would--automatically, because the perpetrator would have put
something in there that it meant it was all erased and--or that
somehow the evidence got ruined. So, computer specialists,
other skilled professionals, do you feel that you have the
professionals on staff and the know-how to investigate these
financial frauds? And what could we do to help?
Mr. Rosch. We are facing a huge financial crisis, still, I
think. The fact of the matter is, there are mortgage frauds
today. There are still, as I indicated before, foreclosure
relief issues. There are debt settlement issues. And all of
those are very complicated. They do require the kinds of tools
that you're talking about. I'm convinced that we at the FTC,
have the best professionals that are available. But we could
always use more, particularly in an environment like this.
Senator Klobuchar. Thank you very much.
Senator Pryor. Thank you, Senator Klobuchar.
And we have about 5 or 6 minutes left in the vote, so I
assume you're going to hustle over there and cast your vote.
And Senator Wicker's on his way back.
And before I bring up the next panel, I would like to say
that I have----
STATEMENT OF HON. TOM UDALL,
U.S. SENATOR FROM NEW MEXICO
Senator Udall. Senator Pryor, could I just----
Senator Pryor. Oh. I'm----
Senator Udall. Yes.
Senator Pryor.--I'm sorry.
Senator Udall. I was----
Senator Pryor. I am so sorry. You snuck in on me.
Senator Udall. I'm just sitting over here silently----
Senator Pryor. Thank you.
Senator Udall.--but, I wish to----
Senator Pryor. Yes.
Senator Udall.--to participate----
Senator Pryor. I apologize.
Senator Udall.--a little bit here.
Senator Pryor. I apologize. Well, I may go vote----
Senator Udall. No problem.
Senator Pryor.--I may go vote----
Senator Udall. OK.
Senator Pryor.--then. Thank you.
Senator Udall. OK. Thank you.
Senator Pryor. Have you voted?
Senator Udall. I haven't voted.
Senator Pryor. OK. OK. OK.
Senator Udall. I haven't voted for----
[Laughter.]
Senator Udall. Let me just be very quick. And I want to
agree with what I've heard earlier, that we have to give you
the tools. And I know as a State Attorney General, when we were
doing a lot of this work, protecting the public, that if you
don't have the tools, it can take a long time to get them. And
so, the question I really want to ask you is, it seems like
you're advocating for a lesser authority than the APA. And so,
if you compare these two--you have the lesser authority and you
have the APA--what's the time difference to get something in
place to protect the public? I've had the figure given to me,
here, you know, that it takes 7 years under Magnuson-Moss. And
I think what I'm advocating, and I others here are advocating--
How do we get it to the point where you can more quickly
protect the public, than that kind of timeline? And what do you
see as a timeline?
Mr. Rosch. First of all, let me make it clear, Senator
Udall, that as far as I'm concerned, we can handle APA
rulemaking. We have done it responsibly; I think we can do it.
Senator Udall. You can handle it.
Mr. Rosch. Absolutely.
Senator Udall. Yes.
Mr. Rosch. I don't know that anything in between is
necessary, or even desirable.
Senator Udall. And you would like it. You----
Mr. Rosch. I----
Senator Udall. As Commissioner, you would like that
authority.
Mr. Rosch. I'd like APA rulemaking authority.
Senator Udall. Yes.
Mr. Rosch. I've mentioned five suggestions for an in-
between solution, and I've tried to identify the problems with
each of them. I don't know of any suggestion that's been made
for an in-between solution that doesn't have some problems
attached to it.
Senator Udall. Great. So, that's good to have on the
record. You're an advocate for the Commission having APA.
Mr. Rosch. That's correct.
Senator Udall. Yes.
Mr. Rosch. But, let me make it clear, Senator, that I speak
for myself, and not necessarily for the Commission on that
regard.
Senator Udall. No. No, we all understand that.
Knowing we have a vote on, Mr. Chairman, I would yield back
any time. Thank you very much.
Senator Pryor. Thank you, Senator.
Senator Udall. And thank you for your leadership on these
issues.
Senator Pryor. Thank you, Senator Udall. And I'm sorry I
almost skipped over you. I just didn't see you slip in. I
apologize for that.
I have two last questions. One is the question of
independent litigating authority.
Mr. Rosch. Yes.
Senator Pryor. And could you just give us your thoughts
and--very concisely on that? You mentioned it in your opening
statement, but I just want to make sure I'm clear on where you
stand on that.
Mr. Rosch. OK. With respect to independent litigating
authority, as far as, I know we are the only agency that has to
have Justice do it for us. And we can go to the Federal
district court, as it is right now, and seek a TRO, or
preliminary injunction, and consumer redress. We can do that.
But, when it comes to civil penalties, we can't do that. It's
got to be done for us by Justice.
First of all, I think that's anomalous. It's particularly
anomalous because the Dodd bill would give that independent
authority to a new bureau--brand new bureau, completely
untested as to how they would use it.
Senator Pryor. That was actually--my second question is a
very succinct, if possible, analysis of the Dodd bill. I'm
going to have to go vote, here, in just a minute or so, but--
I'll tell you what I may do is, I may--because I do want the
Committee to have this answer, and I would like to get your
thoughts on that. So, I'll go ahead and ask it, and I'll let
Senator Wicker, then, take the gavel at that point. But, go
ahead--if you don't mind, give the subcommittee your thoughts
on the Dodd legislation and how it might impact the Federal
Trade Commission.
Mr. Rosch. OK. I think the first thing to be said is that
it's a very lengthy bill, and we have not completely analyzed
it yet. But we've done our best to review it, to identify those
problems that are in it. And we will do our best to get a fix
to those problems up to you, Senator, and as well as to the
entire committee, as quickly as possible, hopefully by the end
of the week.
Frankly, at this point, I think that the heart is in the
right place. I see the intent of the Dodd bill to protect the
FTC, just as the House bill does. But, I'm not clear that that
intent is reflected in its sometimes warring provisions.
For example, sometimes the Dodd bill seems to take away all
of our consumer protection authority, and at other times it
talks about us having concurrent authority with this new
bureau. Now, those can't coexist. There's not a savings clause
that gives us back what's been taken away, as there is in the
House bill. That's one of the major fundamental problems with
the Dodd bill, and that's one of the things that we'll be
sending up as a fix to you in the next couple of days.
It is vital, in our opinion, that these problems be fixed,
because I'm afraid that some of these powers may fall betwixt
and between the two agencies, or between the bureau, on the one
hand, and the FTC, on the other hand. What is a financial
practice or a financial institution versus a nonfinancial
practice or a nonfinancial institution? It's very much in the
eye of the beholder. And unless there are clear demarcations,
I'm afraid that things are going to fall between the cracks.
Unless our authority is really beefed up the way that we
suggest that it should be, I'm concerned that consumers and
businesses are not going to be protected the way that they
ought to be.
Now, my first choice, frankly--and I'm speaking, again, for
myself, Senator Wicker--my first choice is that the FTC be
given all of the authority over consumer protection law
enforcement--with the exception of safety and soundness. We
have no core competency in that area, and I see a tension
between that and consumer protection law enforcement in some
instances.
But, my second choice is, frankly, that we have concurrent
jurisdiction with a bureau or agency, whatever it happens to be
called. We've cooperated with sister agencies in the past,
we'll continue to do so in the future.
Senator Wicker [presiding]. Well, thank you very much, Mr.
Rosch. And I know that if the Chairman were not away at a vote,
he would also thank you.
We very much appreciate your testimony and those items that
you will add to the record. So, we very much appreciate it.
And we--it now is time to bring forward panel number two.
Mr. Rosch. Thank you, Senator.
Senator Wicker. Thank you so much.
Panel number two consists of Mr. Edmund Mierzwinski,
Director of Consumer Program, Federation of State Public
Interest Research Groups; The Honorable Timothy Muris, former
Chairman of the Federal Trade Commission, now at the George
Mason University Law School; Ms. Dee Pridgen, Associate Dean
and Professor of Law at the University of Wyoming, College of
Law; and Ms. Linda A. Woolley, Executive Vice President for
Government Affairs at the Direct Marketing Association in
Washington, D.C.
We very much appreciate these witnesses being here, also.
It's such a pretty day outside that, in absence of the
Chairman, I'm tempted to suggest that we have class outdoors.
[Laughter.]
Senator Wicker. But, I'll not----
Voice. Sounds good.
Senator Wicker.--I'll not abuse my temporary privileges.
But, we're glad to have all four of you, as we appreciate
Commissioner Rosch, also.
So, again, we're asking witnesses to limit testimony to 5
minutes each. And we'll begin, from my left to right, with
Director Mierzwinski.
And if I need to be corrected on the pronunciation of your
name, now would be a good time for that, so we won't do it all
afternoon.
STATEMENT OF EDMUND MIERZWINSKI,
CONSUMER PROGRAM DIRECTOR,
U.S. PUBLIC INTEREST RESEARCH GROUP
Mr. Mierzwinski. Thank you, Senator Wicker and members of
the Committee. I'm Ed Mierzwinski, consumer program director of
the Public Interest Research Groups.
That was a very good pronunciation. The----
Senator Wicker. I left out the ``z.''
Mr. Mierzwinski. Right.
Well, the State Public Interest Research Groups are a
federation of nonprofit, nonpartisan consumer and public
interest advocacy groups. We are here--and we have been long
supporters of the Federal Trade Commission. We also support
Congress enacting and establishing a new consumer financial
protection agency that has broad power over regulation of all
consumer financial products, whether you purchase them at a
bank or at a nonbank. Nevertheless, we also support
strengthening the authorities of the Federal Trade Commission,
as well.
Over the last several years, the collapse of the economy
was precipitated by a number of practices in the financial
industry. The housing bubble was not recognized by the Federal
Reserve Board; large financial institutions, not under the
jurisdiction of the Federal Trade Commission, used exotic
financial instruments as a match that lit the economy on fire.
But, there was an accelerant to that fire in the economy, and
that accelerant was the rise of predatory lending.
We believe that if the FTC had had broader authority and
broader ability to take action, that the problem would not have
been as great as it ended up to be in the end. We believe that
it's time to modernize the FTC's authority so it can address
new threats to consumers and communities, and in particular, to
address the aftermath of this problem, as other witnesses have
discussed, or will discuss.
Every time you have a financial crisis you have new scams
and new schemes to take what money is left in consumers'
wallets. So, we've already heard from the Commissioner about
foreclosure relief scams and other scams that the Federal Trade
Commission needs to be able to go after.
We also support returning to a system where Federal law
returns to a floor, not a ceiling, of protection, and that
states can go further, and their attorneys general can go
further, in protecting the public.
Well, we have four recommendations to strengthen the
Federal Trade Commission:
First, we also support, as was in--by the way, all of our
recommendations, but one, are in the Obama-proposed legislation
that the House enacted as H.R. 4173, the Wall Street Reform and
Consumer Protection Act, on December 11.
First, the Obama proposal is enacted, in the House bill, to
return the FTC to the more prevalent Administrative Procedures
Act rulemaking that is used by virtually every other agency. As
Chairman Leibowitz testified last month in this committee,
``Magnuson-Moss rulemaking is both draconian and medieval.''
And I don't think he was being redundant. This committee, last
year, already gave the Federal Trade Commission, in Section 626
of the omnibus appropriations bill, the--some of this
authority, and we would encourage you to give it to the entire
Commission's jurisdiction.
Second, the Obama proposal is enacted in the bill that
gives the Federal Trade Commission the right to sanction
professionals who are aiding and abetting unfair practices.
There is no question that, behind every scammer's scheme, there
could be a banker, there could be a lawyer, there could be an
accountant who could have stopped the scheme. We're not looking
for deep pockets, we are looking to hold people involved in
schemes accountable.
Third, we believe that a fundamental flaw in the FTC's
authorities are its lack of ability to impose civil penalties,
except in limited circumstances and except when it goes to the
Justice Department. You have to have previously violated an
order of the Commission, or in some cases it--some of the
companies under its jurisdiction are, in fact, under trade
rules that do have civil penalty authority for a first offense.
Commissioner Rosch talked about practices that harm
consumers that are new, that weren't envisioned when the
original Magnuson-Moss Act was passed and the original FTC Act
was passed. And the rise of the Internet is certainly one of
them, the practices on the Internet--identify theft, data
security, the spamming, and the other problems that consumers
face.
In the first 20 or so cases that I looked at--and I don't
have the complete list with me, but I know that other groups
have compiled it--concerning Internet privacy violations, the
only time a company was sanctioned with a civil penalty was the
company, Choice Point, that, in fact, had also violated the
Fair Credit Reporting Act. And had it not been for the fact
that it had violated the Fair Credit Reporting Act, even though
it sold--it essentially sold credit reports to identity
thieves--is the only reason it was sanctioned for $15 million.
Finally, one thing that is not in either the House bill or
the Senate proposal--we strongly support that consumers gain a
private right of action under Section 5 of the Federal Trade
Commission Act. We believe there should be three prongs of
consumer protection in any law: Federal enforcement, state
attorney general enforcement, and private enforcement.
Thank you, sir.
[The prepared statement of Mr. Mierzwinski follows:]
Prepared Statement of Edmund Mierzwinski, Consumer Program Director,
U.S. Public Interest Research Group
Chairman Rockefeller, Senator Hutchison, members of the Committee.
My name is Edmund Mierzwinski and I am Consumer Program Director for
the Federation of State Public Interest Research Groups, or U.S. PIRG.
The state PIRGs are non-partisan, non-profit public interest advocacy
organizations that take on powerful interests on behalf of their
members.
Among the key issues that the organization has focused on over the
years is fairness in the financial services marketplace. We have
published reports on skyrocketing bank fees, on inaccuracies in credit
reports and other privacy threats, on credit card marketing to college
students, on predatory payday loan and rent-to-own stores that seek
self-serving exceptions from consumer protection and lending laws and
on the need for strong reinvestment laws to ensure that heavily
subsidized financial firms serve the interests of the local community.
Throughout all these efforts we have urged Congress and Federal
regulators to enact and enforce strong Federal laws but as a floor not
ceiling of consumer protection so that states and their attorneys
general can react quickly to new threats to their citizens and
communities. We have also sought to preserve and enhance the rights of
consumers to enforce those laws themselves.
Summary
U.S. PIRG strongly supports the proposed Consumer Financial
Protection Agency (CFPA). We also support a robust Federal Trade
Commission (FTC). The Obama administration's proposed Wall Street
reform legislation, as enacted by the House in December,\1\ effectively
provides for both.
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\1\ The original administration CFPA and FTC improvement language
was released on 30 June 2009 and is available at http://
www.financialstability.gov/latest/tg189.html (last visited 15 March
2010). The Wall Street Reform and Consumer Protection Act, H.R. 4173,
passed the House on 11 December 2009. See Section 4901. This week,
Senator Chris Dodd, Chairman of the Senate Banking Committee, released
his own comprehensive reform proposal, which does not appear, as filed,
to address issues of expanding FTC authorities as discussed herein.
---------------------------------------------------------------------------
U.S. PIRG supports establishment of a new, independent Federal
Consumer Financial Protection Agency (CFPA) to protect consumers from
unfair credit, banking, payment and debt management products, no matter
what company--bank or non-bank--sells them and no matter what agency
may serve as the primary prudential regulator for that company or bank.
Having one agency for all financial products will prevent regulatory
arbitrage, promote efficient rulemaking and give consumers one-stop
shopping for their financial complaints.
U.S. PIRG also supports enhancement of the authorities of the
Federal Trade Commission (FTC). Even after Congress establishes a CFPA,
the Federal Trade Commission will still maintain broad authority over
important parts of the marketplace and will also act as the CFPA's
enforcement partner in many areas. Its efforts to protect consumers
will be enhanced if it is given greater ability to impose civil
penalties, the ability to seek redress for aiding and abetting
violations and modernized, more efficient rulemaking authority under
the Administrative Procedures Act.\2\
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\2\ With assistance from this committee, Congress has recently
given the FTC expedited rulemaking authority in the areas of unfair
practices related to mortgage loans. See Omnibus Appropriations Act of
2009, Pub. L. No. 111-8, 626, 123 Stat. 524 (Mar. 11, 2009) as
modified by the Credit CARD Act of 2009, Pub. L. No. 111-24,
511(a)(1)&(2), 123 Stat. 1734 (May 22, 2009).
---------------------------------------------------------------------------
It is time to modernize the FTC's authorities so that it can
respond to new threats to consumers and communities. Some of these
threats--foreclosure relief and debt settlement scams and other
frauds--are on the rise because the Federal bank regulators allowed
unsafe and unsustainable practices that led first to the failure of the
financial system and then to the collapse of the economy. The FTC can
play a critical role in protecting consumers from its aftermath and
ensuring that it won't happen again.
We also support return to a system where Federal financial
protection law serves as a floor not as a ceiling and where consumers
are again protected by the three-legged stool of baseline Federal
protection, strong state enforcement and private enforcement.
Discussion
In our view, while the current economic crisis may have been
directly caused by Federal Reserve inattention to the housing bubble
that grew and then burst into flames--as it was lit by the match of
exotic, risky financial instruments used by reckless Wall Street firms
deemed too big or too interconnected to fail--the unregulated urge by
banks, other lenders, and mortgage companies to extract even greater
profits by selling predatory financial products acted as an accelerant
to that fire. Those predatory products harmed consumers, families,
neighborhoods and communities and helped make the mortgage meltdown
into an economic catastrophe for consumers on Main Streets here and
around the world.
Unfortunately, over the years the Congress in some cases and, in
particular, the Federal banking regulators in nearly all cases have
opposed our views that consumers needed to be protected from unfair or
predatory financial practices. For at least the last fifteen-twenty
years, Federal bank regulator disdain for consumer protection and
antipathy toward state attorney general authority has contributed to an
atmosphere that led to a spectacular rise in those predatory lending
practices by banks, credit card firms and mortgage companies. At the
same time, the resources and authorities of the FTC to act in the areas
it was allowed to act in were constrained.
That rise in predatory lending was also fueled by regulatory
arbitrage at the Federal level that allowed banks to pick and choose
the most pliant bank regulator for themselves and also their non-bank
affiliates. That contributed to a regulatory race to the bottom. As the
report of the House Energy and Commerce Committee on its passage of
CFPA legislation explained:
Consumer protection in the financial arena is governed by
various agencies with different jurisdictions and regulatory
approaches. This disparate regulatory system has been blamed in
part for the lack of aggressive enforcement against abusive and
predatory loan products that contributed to the financial
crisis, such as subprime and nontraditional mortgages.
FTC has broad authority to protect consumers from unfair,
deceptive, and unlawful practices with respect to credit and
debt. The authority of the FTC is limited, however, to those
functions conducted by non-depository institutions. Depository
institutions are overseen by the Office of the Comptroller of
the Currency, the Office of Thrift Supervision, the Federal
Reserve, the National Credit Union Administration, and the
Federal Deposit Insurance Corporation.\3\
\3\ 111th Congress, Rept. 111-367, House of Representatives, at
page 91, 9 December 2009.
Consumer financial products which compete directly against one
another are often covered by different laws and thus provide different
rights and obligations to the consumer and to the provider. Although
many new products are emerging every day, no agency has the single job
of evaluating whether or how existing laws and rules should be changed
to address emerging financial products. Worse, those bank regulatory
agencies have a different, primary job--protecting the safety of the
financial system. The new CFPA will have the single job of protecting
financial consumers. Even the FTC, a strong consumer protector, has
many other jobs.
The idea of a new Federal consumer protection agency focused on
credit and payment products has gained broad and high-profile support
because it targets the most significant underlying causes of the
massive regulatory failures that occurred. First, Federal agencies did
not make protecting consumers their top priority and, in fact, seemed
to compete against each other to keep standards low, ignoring many
festering problems that grew worse over time. If agencies did act to
protect consumers (and they often did not), the process was cumbersome
and time-consuming. As a result, agencies did not act to stop some
abusive lending practices until it was too late. Finally, regulators
were not truly independent of the influence of the financial
institutions they regulated.
The New CFPA Needs a Stronger FTC As A Partner
Congress can eliminate these weaknesses and inefficiencies in the
Federal Government by creating a single Federal agency--the CFPA--with
exclusive authority in all consumer protection areas except
enforcement. In the area of enforcement, the CFPA should be assisted by
a bolstered FTC. The FTC also needs the strengthened authorities to
continue its efforts in areas where it remains the primary enforcer in
the consumer marketplace.
Establishing a new CFPA--while also enhancing the FTC's enforcement
authority--will remedy many of the inherent flaws in the current
system. We believe that as enacted by the House, the Wall Street Reform
and Consumer Protection Act, H.R. 4173, offers an approach that the
Senate should consider taking.
It establishes a new CFPA as an independent agency \4\ to write
rules for all financial products (subject to a few carved-out
exceptions) over the entire financial sector, so that no matter where a
consumer buys a financial product, at a bank or a non-bank, she has
equal protection. But the House bill also improved the Obama proposal
because it carefully preserves the FTC as an enforcement partner of the
CFPA while eliminating some of the original bill's consultative and
procedural impediments that may have hampered both agencies. At the
same time, the House-passed bill significantly improves FTC's existing
authorities. It also retains FTC authority under the FTC Act and the
FTC's enforcement authority under the enumerated statutes, concurrently
and in coordination with the CFPA.
---------------------------------------------------------------------------
\4\ The final Senate CFPA proposal may be weaker, however. Senator
Dodd's draft this week places the CFPA inside the Federal Reserve Board
as a bureau--although maintaining some independence through firewalls--
and subjects its rules to a veto of 2/3rd of the proposed new Systemic
Risk Council. Although the Senate proposal as introduced places all
four corners of the financial sector--big banks, small banks, mortgage
companies and other non-bank lenders--under CFPA's rules, the CFPA does
not have full enforcement authority over non-mortgage, non-banks,
making it even more imperative that FTC authorities be bolstered, since
the non-bank lenders not fully covered will include predatory payday
lenders, rent-to-own stores, auto title pawn loan firms and their ilk.
---------------------------------------------------------------------------
As Professor Prentiss Cox has explained, it makes sense to
consolidate rulemaking in the new agency but to allow for broad
enforcement authority under an ``open'' model, with the FTC--and state
Attorneys General--as partners.
Enforcement of consumer protection laws and rule-making for
consumer protection are different activities that require
different models to be effective. Unified rule-making authority
in an agency dedicated to consumer protection goals presents an
extraordinary opportunity to reform the consumer finance system
to ensure products and sales practices that meet minimum
standards of fairness for consumers. Public enforcement, on the
other hand, is best accomplished in an open model; a system
that allows multiple public entities the opportunity to gauge
compliance.\5\
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\5\ Testimony of Prentiss Cox, University of Minnesota Law School,
``The Proposed Consumer Financial Protection Agency: Implications for
Consumers and the FTC,'' Hearing of the Subcommittee on Commerce, Trade
and Consumer Protection, U.S. House of Representatives, 08 July 2009.
But in addition, as this committee recognized when it recently used
the Appropriations process to enact reforms championed by Senator
Dorgan and Chairman Rockefeller to the FTC's rulewriting authority over
mortgage loans, \6\ the FTC has had only limited weapons in its arsenal
against corporate wrongdoing. These shackles and constraints--most
enacted in the 1970s--must be removed if the FTC is to be expected to
do its job in the 21st century.
---------------------------------------------------------------------------
\6\ See Omnibus Appropriations Act of 2009, Pub. L. No. 111-8,
626, 123 Stat. 524 (Mar. 11, 2009) as modified by the Credit CARD Act
of 2009, Pub. L. No. 111-24, 511(a)(1)&(2), 123 Stat. 1734 (May 22,
2009).
---------------------------------------------------------------------------
Recommendations for the Committee to Improve the FTC's Authorities
The House-passed bill, H.R. 4173, the Wall Street Reform and
Consumer Protection Act, makes the following changes to strengthen FTC
authorities as recommended by President Obama's blueprint for financial
reform. We support the House approach and urge the Committee to work
with Chairman Dodd and Senator Shelby, at an appropriate time, to add
these provisions to the Wall Street reform package before it is
finalized.
First, the Obama proposal as enacted in the House passed bill
changes the FTC's cumbersome Magnuson Moss rulemaking process to the
more prevalent Administrative Procedures Act (APA) rulemaking process
used by other agencies. In his recent testimony to this committee, FTC
Chairman Jon Leibowitz called Magnuson-Moss rulemaking both
``draconian'' and ``medieval.'' He was not being redundant.\7\ As many
have noted, the FTC's inability to swiftly enact predatory mortgage
lending rules was a contributor to the mortgage meltdown. From
testimony before the committee by a leading expert, Kathleen Keest, a
former state assistant attorney general:
\7\ Testimony of FTC Chairman Jon Leibowitz, ``Financial Services
and Products: The Role of the Federal Trade Commission in Protecting
Consumers,'' Hearings of the Senate Committee on Commerce, Science and
Transportation, (oral statement), 4 February 2010.
Though the FTC has authority to enforce the Truth in Lending
Act and the Equal Credit Opportunity Act, among others, the
nature of the recent abuses were such that its UDAP authority
was the primary weapon available to it. However, the FTC's
ability to wield that weapon is governed by rules of engagement
which make it difficult to prevent abuses. [. . .] Rule-making:
The FTC's ``Mag-Moss'' Albatross. . .\8\
---------------------------------------------------------------------------
\8\ Testimony of Center for Responsible Lending, by Kathleen E.
Keest, Hearing Before the Senate Committee on Commerce, Science and
Transportation, Subcommittee on Interstate Commerce, Trade and Tourism
on ``Improving Consumer Protections in Subprime Home Lending'' April
29, 2008.
Those UDAP (Unfair and Deceptive Acts and Practices) authorities
were limited, as noted, by the ``albatross'' of the Magnuson-Moss
rulemaking provisions. As noted above, the Congress has already
extended APA rulemaking authority for ``unfair or deceptive acts or
practices regarding mortgage loans, which may include unfair or
deceptive acts or practices involving loan modification and foreclosure
rescue services.'' We recommend, however, that the APA rule-making be
granted to the FTC in all its consumer protection roles, as provided by
the House bill.
Second, the Obama proposal as enacted in the House passed bill
gives the FTC the right to sanction professionals aiding and abetting
illegal schemes by others. U.S. PIRG has long supported improving
aiding and abetting statutes to better protect consumers. It is highly
likely that many schemes designed to extract wealth from consumer
pocketbooks involve lawyers, accountants, bankers and others advising
the seller. Clarifying aiding and abetting liability will help assure
that all those involved in the scheme or the scam can be reached by the
law.\9\ Our goal is not to reach deep pockets, as opponents will
assert, it is to deter fraud by requiring well-compensated
professionals to pay attention and to be held accountable when they do
not.
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\9\ In 1994, the Supreme Court eliminated the Securities and
Exchange Commission's aiding and abetting authority under the Exchange
Act in Central Bank of Denver v. First Interstate Bank of Denver, 511
U.S. 164. U.S. PIRG was an (unsuccessful) friend of the court in the
case. It had been the widely held view that the FTC had a similar cause
of action under Section 5 of the FTC Act for aiding and abetting unfair
or deceptive acts and practices. While the Congress in the (otherwise
dreadful for small investors) 1995 Private Securities Litigation Reform
Act (Public Law 104-369) reinstated the SEC's aiding and abetting
authority for knowing violations it has not reinstated the FTC's
implied authority. Regrettably PSLRA also did not reinstate a similar
previous implied private right of action for aggrieved investors under
the Exchange Act. See also: Prepared statement of the Federal Trade
Commission on ``Financial Services and Products: The Role of the
Federal Trade Commission in Protecting Consumers,'' Hearing of the
Senate Committee on Commerce, Science and Transportation, 4 February
2010, at footnote 43.
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Third, the Obama proposal as enacted in the House passed bill give
the FTC the authority to impose civil penalties for violations of the
FTC Act. Currently, a firm that violates the FTC's core enforcement
mechanism--Section 5's prohibition on unfair and deceptive acts and
practices--gets a free bite of the apple. The inability of the FTC to
impose civil penalties for first offenses limits its ability to police
the marketplace. Unless a firm violates a trade rule that the FTC
enforces, such as the Fair Credit Reporting Act, or violates an
existing consent decree or order, the FTC cannot impose civil
penalties. This lack of a credible threat of punishment is an
inadequate deterrent against wrongdoing. The proposals also wisely
eliminate onerous requirements requiring the FTC to ask permission of
the Department of Justice--and to give it a 45-day right of first
refusal--before bringing a civil case involving civil penalties.
Finally, we would also support establishing a private enforcement
right for consumers under Section 5 of the FTC Act and also under the
new CFPA Act. Congress should provide a private right of action to
enable consumers to enforce their own right to be free of unfair and
deceptive acts and practices, for neither the FTC's nor the CFPA's
resources will ever be adequate to police the entire market, and public
enforcement will never move fast enough to protect them.
Conclusion
We appreciate the opportunity to testify before you today on the
important matter of reinvigorating the FTC's authorities to protect the
public and police the marketplace at the same time as the Congress
establishes a new, Consumer Financial Protection Agency.
Senator Pryor [presiding]. Thank you very much.
Ms. Pridgen.
STATEMENT OF DEE PRIDGEN,
ASSOCIATE DEAN AND PROFESSOR OF LAW,
UNIVERSITY OF WYOMING COLLEGE OF LAW
Ms. Pridgen. Senator Wicker and members of the Committee,
thank you for inviting me to testify today.
My name is Dee Pridgen. I'm the Associate Dean and a
Professor of Law at the University of Wyoming College of Law.
And I just need to say, at the outset, that the testimony
that I'm giving today expresses my own private views and is not
on behalf of the University of Wyoming or the College of Law.
The main thing that I would like to address today is the
proposal to provide the FTC with workable APA rulemaking
procedures to replace the unworkable Magnuson-Moss Act
procedures from the mid-1970s. I believe this change will
benefit consumers, and it will not be dangerous or radical or
bad for business.
Let me just tell you why I say that. Magnuson-Moss is a
hybrid kind of rulemaking. It's adjudicatory, it's adversarial,
it's very time-consuming and unwieldy, and, as a result, the
FTC has not used their rulemaking power that they were granted
under Magnuson-Moss for many years, as the Commissioner noted.
The FTC now basically issues industry guides, which are
nonbinding, such as the environmental advertising guides, which
they issued in the 1990s. And then, also the FTC engages in
rulemaking at the specific request of Congress, on a case-by-
case basis.
Now, it's been mentioned that the Law of Unfair and
Deceptive Trade Practices is very broad. And that may have been
one of the reasons why it was thought special safeguards were
needed in the Magnuson-Moss procedures. But, I would just like
to point out that, since Magnuson-Moss was passed in the mid-
1970s, a lot has changed at the Commission, and in other
statutes, as well.
First of all, the FTC, in the early 1980s, passed a couple
of policy statements, by which they restrained--constrained
their own authority under unfairness-and-deception authority.
The unfairness policy, which is now part of the statute,
requires the FTC to find significant consumer injury, and to
engage in a type of cost-benefit analysis before finding an
unfair trade practice. And then, in the deception area, the FTC
uses a standard involving misleading substantial numbers of--
``misleading reasonable consumers under the circumstances''
before they'll find deception. And this replaced some of the
older FTC jurisdiction on deception.
The other thing I'd like to say is, the APA rulemaking is
not going to be resulting in regulatory excess by the FTC or
any other agency. The APA has notice requirements, comment
requirements, judicial review, and it does allow the FTC and
other agencies to engage in a more informal type of hearing--
roundtable fact-finding hearings, without having adversarial
hearings. There's also in place now, since 1975, the Regulatory
Flexibility Act, which requires a statement of impact on small
businesses. There's the Congressional Review Act. All
regulations by any agency, including the FTC, have to be
reviewed by the Office of Information and Regulatory Affairs.
So, there are a lot of safe guards that are--would be in place
without Magnuson-Moss procedures.
I would also like to say that the civil penalties that the
FTC Act currently provides for only comes into play when
there's already an order against a party, or when there's
already a rule. And so, the FTC could use a better deterrent,
in terms of having the opportunity to go to court and get civil
penalties directly for a violation of the FTC Act. That would
increase the deterrent effect of the civil penalties, and it
would supplement their current jurisdiction to go into court
and seek injunctions.
And then, finally--and I would also say that I support the
aiding-and-abetting provisions, making that specific. The FTC
is a law enforcement agency. They have always tried to go
after, not just the direct violator, but also other parties
that are providing financing or other kinds of assistance to a
violator. And any prosecutor knows that, if you don't wipe out
the whole--all the direct and indirect violators, you're not
going to get rid of the problem.
So, in sum, I just would like to say, I do support these
reforms for the FTC Act. And I know they're part of the
Consumer Financial Protection Agency, which I'm not prepared to
comment on, but I think these reforms are so important that the
Senate and the Congress ought to consider amending the FTC Act,
regardless of what happens with the rest of the legislation.
Thank you.
[The prepared statement of Ms. Pridgen follows:]
Prepared Statement of Dee Pridgen, Associate Dean and Professor of Law,
University of Wyoming College of Law
I. Introduction
Chairman Pryor, Ranking Member Wicker, and members of the
Subcommittee, I am Dee Pridgen, and I am the Associate Dean and a
Professor of Law at the University of Wyoming College of Law.\1\ I
appreciate the opportunity to appear before you today to discuss the
efforts of the Federal Trade Commission to regulate and enforce against
``unfair or deceptive acts or practices'' with regard to financial
products and services; and on the sufficiency of the FTC's current
enforcement and regulatory authority; and whether an enhancement of
that authority would benefit consumers. At the outset let me note that
the views I express today are my own personal and professional views
and do not represent the views of either the University of Wyoming or
the College of Law.
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\1\ A brief biography is attached to this testimony as an appendix.
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II. FTC Activities Against Unfair and Deceptive Practices in Financial
Products and Services
The Federal Trade Commission (FTC or Commission) has a long history
of acting to protect the public from unfair and deceptive practices
with regard to certain financial products and services. The
Commission's law enforcement responsibilities across broad sectors of
the economy do include the financial sector to some extent. However,
certain entities such as banks, are exempt from the FTC Act.\2\ The FTC
routinely partners with state consumer protection offices (typically
state attorneys general) to conduct enforcement sweeps in the financial
sector and other problem areas as they arise. The FTC also works with
bank regulatory agencies to enforce certain consumer credit statutes
and regulations, such as the Truth in Lending Act. The FTC is
responsible for enforcing various consumer credit statutes with regard
to the non-bank entities under its jurisdiction.\3\ It does this by
bringing cases against potential violators, and in some cases, by
issuing regulations. For example, the Commission promulgated a rule on
the advertising and marketing of free annual credit reports on March 3,
2010, addressed to the prevention of deceptive marketing of free credit
reports.\4\ The FTC has been particularly active in the financial
sector recently given the rise of bad actors attempting to exploit
vulnerable consumers in desperate financial straits.\5\ In another
example, the FTC recently was tasked by Congress to promulgate a rule
on Mortgage Assistance Relief Services (foreclosure rescue) and has
just this month published a proposed rule on that subject.\6\ The FTC
was able to speedily address these consumer issues in the area of
residential mortgages in part because Congress authorized that these
rules be promulgated using APA notice-and-comment rulemaking, rather
than the FTC's traditional Magnuson-Moss rulemaking procedure.
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\2\ 15 U.S.C. 45(a)(2).
\3\ 15 U.S.C. 1607(c) (Truth in Lending; 16 U.S.C. 1681s(a)
(Fair Credit Reporting Act); 15 U.S.C. 1691c(c) (Equal Credit
Opportunity Act; and 15 U.S.C. 16921(a) (Fair Debt Collection
Practices Act).
\4\ 75 Fed. Reg. 9726 (March 3, 2010) to be codified at 16 C.F.R.
Part 610.
\5\ See Prepared Statement of the Federal Trade Commission before
this subcommittee, dated July 14, 2009, for a detailed discussion of
the FTC's recent activities regarding unfair and deceptive trade
practices in the financial sector.
\6\ 75 Fed. Reg. 10707 (March 9, 2010), to be codified as 16 C.F.R.
Part 322. Another proposed rule on Mortgage Acts and Practices is still
pending. Advance Notice of Proposed Rulemaking, 74 Fed. Reg. 26,118
(June 1, 2009).
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III. Magnuson-Moss Versus APA Rulemaking
The Federal Trade Commission's work to protect consumers in the
marketplace could be significantly enhanced if Congress were to grant
the Commission the authority to use APA informal rulemaking procedures
in all cases under its general authority. The FTC is the Nation's
preeminent and the oldest Federal consumer protection agency in the
United States. The Commission has various tools for enforcing its
legislative mandate to protect the citizens from unfair and deceptive
trade practices, which include administrative proceedings generally
resulting in cease and desist orders; \7\ injunctions in Federal court;
\8\ policy statements and ``guides''; \9\ and regulations defining with
specificity acts or practices which are considered unfair or
deceptive.\10\ The Commission's rulemaking authority was established by
statute by the Magnuson-Moss Warranty--Federal Trade Commission
Improvement Act of 1975, and will be referred to herein as Magnuson-
Moss rulemaking. Prior to 1975, the Commission utilized industry-wide
``trade practice conferences'' to provide guidance to business on how
to comply with the FTC Act. In the mid-1960s, the Commission first
asserted the power to issue binding substantive rules, pursuant to
then-Section 6(g) of the FTC Act which provided that the Commission may
``make rules and regulations for the purpose of carrying out the
provisions of this Act.'' \11\ This rulemaking authority was upheld in
the D.C. Circuit Court in a 1973 case,\12\ but Congress at that time
apparently felt it was prudent to provide the FTC with specific
rulemaking authority. The result was the Magnuson-Moss rulemaking
provisions,\13\ which are still the governing law today.
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\7\ 15 U.S.C. 45(b).
\8\ 15 U.S.C. 53(b).
\9\ 15 U.S.C. 57a(a)(1)(A).
\10\ 15 U.S.C. 57a(a)(1)(B).
\11\ 15 U.S.C. 46(g).
\12\ National Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 (D.C.
Cir. 1973).
\13\ Supra n. 10.
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The Magnuson-Moss rules were to be conducted using a ``hybrid''
type of rulemaking procedure, providing more due process safeguards
than would be applicable under the Administrative Procedure Act, yet
somewhat less than would govern in an adjudicatory context. The
Commission proposed an array of regulations shortly after the
legislation was passed, but the effort proved to be much more time-
consuming, costly and controversial than may have been initially
foreseen.\14\ In response to the controversies over the Commission's
proposed children's advertising rule and the funeral rule, among other
things, Congress acted again to amend the FTC Act in 1980. This law
added further limitations on the FTC's rulemaking process.\15\
Consequently, many of the rules proposed after the 1975 legislation
were abandoned in the 1980s, with the exception of the credit practices
rule,\16\ the used car rule \17\ and the funeral practices rule.\18\ By
1990, the FTC's use of its formal consumer protection rulemaking
authority had come to a virtual standstill.\19\
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\14\ See generally Dee Pridgen & Richard Alderman, Consumer
Protection and the Law, 12:10-12:14 (West 2009-2010 edition).
\15\ Pub. L. No. 96-252, 94 Stat. 374 (1980), codified at 15 U.S.C.
57b-3.
\16\ 16 C.F.R. 444.
\17\ 16 C.F.R. 455.
\18\ 16 C.F.R. 453.
\19\ Report of the American Bar Association Section of Antitrust
Law Special Committee to Study the Role of the Federal Trade
Commission, reprinted in 56 Antitrust & Trade Reg. Rep. (BNA, April 6,
1989), at S-20, and Graph 17, Appendix C at S-44.
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In the 1990s the Commission did increase the pace of rulemaking but
not through the now-defunct Magnuson-Moss rulemaking procedures.
Instead the Commission either reverted to the old-style Industry Guides
or launched rulemaking proceedings under specific mandates from
Congress. For instance, in 1992 the Commission issued an Industry Guide
regarding environmental marketing claims, rather than attempting to
promulgate a trade regulation rule, in order to address expeditiously
the issue of deceptive ``green marketing'' claims.\20\ Another emerging
trend during this period was for the FTC to engage in Congressionally-
mandated rulemaking. For instance, the FTC was directed to promulgate
regulations governing the marketing of pay-per-call telephone services
under the Telephone Disclosure and Dispute Resolution Act of 1992.\21\
The Telemarketing Act of 1994 also contained a legislative mandate for
FTC rules, which ultimately resulted in the establishment of the ``Do
Not Call Registry,'' one of the most popular Federal regulations in
history.\22\ The Commission has also been charged with promulgating
regulations under the Fair and Accurate Credit Transactions Act,\23\
the CAN-SPAM Act \24\ and several other acts as well. Most recently,
Congress authorized the Commission to promulgate rules with respect to
mortgage loans, using APA notice and comment rulemaking procedures.\25\
These Rules are currently pending.\26\
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\20\ FTC Guides for the Use of Environmental Marketing Claims, 16
C.F.R. 260. These Guides are currently being reviewed by the
Commission for possible updating.
\21\ 15 U.S.C. 5711 et seq.
\22\ 15 U.S.C. 6101 to 6108. The FTC regulation is codified at
16 C.F.R. 310. Rule was upheld against a constitutional challenge in
Mainstream Marketing Services v. FTC, 358 F.3d 1228, cert. denied, 543
U.S. 812 (2004).
\23\ FACT Act, Pub. L. No. 108-140, 117 Stat. 1952 (2003), amending
various sections of the Fair Credit Reporting Act.
\24\ CAN-SPAM Act, Pub. L. No. 108-187, 117 Stat 2699 (2003),
codified at 15 U.S.C. 7704. FTC regulations are codified at 16 C.F.R.
316.
\25\ Credit CARD Act of 2009, Pub. L. No. 111-24, 511(a)(1) &
(2), 123 Stat. 1734 (May 22, 2009).
\26\ 74 Fed. Reg. 26,118 (June 1, 2009); 74 Fed. Reg. 26,130 (June
1, 2009).
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In sum, the Magnuson-Moss rulemaking procedures, which started as a
clarification of the FTC's general rulemaking authority, have become a
dead letter and are not being used to protect consumers. Instead, the
Commission either uses the ``soft'' non-binding industry guides, or
waits for Congress to provide specific direction. A change to the more
commonly used notice-and-comment rulemaking under Section 553 of the
Administrative Procedures Act would allow the FTC to proceed more
flexibly and more effectively. At the same time, however, the APA
rulemaking procedures, along with other currently applicable regulatory
safeguards, will provide ample due process and judicial review for all
affected parties.
One issue with regard to notice-and-comment rulemaking by the FTC
is the fact that its governing statute uses the rather broad standard
of ``unfair and deceptive'' trade practices, which applies across a
wide variety of business sectors. Thus, when Congress originally passed
the Magnuson-Moss Act in 1975, a legislative committee noted that
``[b]ecause of the potentially pervasive and deep effect of rules
defining what constitutes unfair or deceptive acts or practices and the
broad standards which are set by the words `unfair and deceptive acts
or practices,' the Committee believes greater procedural safeguards are
necessary.'' \27\ In this regard, it should be noted that since the
Magnuson-Moss Act was passed in 1975, the Commission has taken steps to
define and constrain its unfairness and deception jurisdiction through
the use of policy statements that have become either codified into its
own statute or have been incorporated into Commission adjudicatory
opinions. For instance, the Commission's policy statement on
unfairness, which defines an unfair act or practice as one which
``causes or is likely to cause substantial injury to consumers which is
not reasonably avoidable by consumers themselves and not outweighed by
countervailing benefits to consumers or to competition,'' is now a part
of the FTC authorizing statute.\28\ This statement of policy provided a
focus on consumer sovereignty and cost/benefit analysis that was
lacking in the older interpretations of FTC unfairness.\29\ Prior to
the issuance of the unfairness policy statement, the Commission's
unfairness criteria included an inquiry into whether the practice
offended public policy or was immoral, unethical, oppressive, or
unscrupulous.\30\
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\27\ House Report No. 93-1107, reprinted in 1974 U.S.C.C.A.N. 7702,
7727.
\28\ 15 U.S.C. 45(n).
\29\ See In re International Harvester, 1984 WL 565290, 104 FTC
949, 1061 (1984) (``The Commission [in applying its unfairness
authority] . . . seeks to ensure that markets operate freely, so that
consumers can make their own decisions''). See also Neil Averitt, The
Meaning of ``Unfair Acts or Practices'' in Section 5 of the Federal
Trade Commission Act, 70 Geo. L.J. 225, 229-36 (1981).
\30\ Proposed Rule on Cigarette Advertising, 29 Fed. Reg. 8324,
8355 (1964), known as the ``the Cigarette Rule'' test. The rule was
later superseded by legislation requiring a warning label in ads and on
packages for cigarettes, Cigarette Labeling and Advertising Act of
1965, codified at 15 U.S.C. 1331-40.
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The FTC also reigned in the standard for defining consumer
deception in a 1983 policy statement, which basically says that ``the
Commission will find an act or practice deceptive if, first, there is a
representation, omission, or practice that, second, is likely to
mislead consumers acting reasonably under the circumstances, and third,
the representation, omission, or practice is material.\31\ Prior to
that development, the FTC's deception standard was used to protect the
ignorant and the unwary, not the ``consumer acting reasonably under the
circumstances'' as required under current policy. Indeed, critics of
the pre-policy statement approach to deception, such as Howard Beales,
former Bureau of Consumer Protection Director, have called this the
``fools test.'' \32\ The Deception Policy Statement has effectively
eliminated any such ``fools test'' at the modern FTC. Thus, the
concepts of unfairness and deception have become more defined by policy
statements and other precedents since 1975.
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\31\ In re Cliffdale Associates, 103 FTC 110 (1984).
\32\ J. Howard Beales, III, Brightening the Lines: the Use of
Policy Statements at the Federal Trade Commission, 72 Antitrust L.J.
1057, 1068 (2005).
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The FTC Act also contains a ``public interest'' standard \33\ that
could serve to constrain the FTC from engaging in activities that are
trivial, insignificant, or are not prevalent in a particular business
sector.
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\33\ 15 U.S.C. 45(b).
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In addition to the agency's own self-restraints embodied in the
unfairness and deception policy statements, there are other safeguards
applicable to the FTC now that were not in effect when the Magnuson-
Moss procedures were passed. Thus a change from Magnuson-Moss
rulemaking to APA notice-and-comment rulemaking procedures at the FTC
would by no means result in a free-for-all of regulatory excess. There
are checks and balances in the APA process and elsewhere that should be
sufficient to protect the interests of all parties while providing the
FTC with the tools it needs to protect consumers. For instance, the APA
requires prior notice of rulemaking, provides a mechanism for all
interested parties to submit comments, requires a statement of basis
and purpose, and also provides for judicial review of the final
rule.\34\ Judicial review includes a determination of whether the rule
is arbitrary or capricious, unconstitutional, or outside the bounds of
the authorizing statutes, among other things.\35\ Indeed over the years
the level of judicial scrutiny of APA-based rules has increased and is
not overly deferential to any government agency. As one scholar has put
it:
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\34\ 5 U.S.C. 553 and 706.
\35\ 5 U.S.C. 706(2), allows the court to overturn an agency rule
if it is:
(A) arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law;
(B) contrary to constitutional right, power, privilege, or
immunity;
(C) in excess of statutory jurisdiction, authority, or limitations,
or short of statutory right;
(D) without observance of procedure required by law; . . .
Although informal rulemaking is still an exceedingly effective
tool for eliciting public participation in administrative
policymaking, it has not evolved into the flexible and
efficient process that its early supporters originally
envisioned. During the last fifteen years the rulemaking
process has become increasingly rigid and burdensome. An
assortment of analytical requirements have been imposed on the
simple rulemaking model, and evolving judicial doctrines have
obliged agencies to take greater pains to ensure that the
technical bases for rules are capable of withstanding judicial
scrutiny.\36\
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\36\ Thomas O. McGarity, Some Thoughts on ``Deossifying'' the
Rulemaking Process, 41 Duke L. J. 1385 (1992). See also Mark
Seidenfeld, Why Agencies Act: A Reassessment of the Ossification
Critique of Judicial Review, 70 Ohio St. L. J. 251 (2009).
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Other safeguards in place on all agency rulemaking include:
the Regulatory Flexibility Act,\37\ requiring an analysis of
the impact on small entities, the publication of a regulatory
agenda, and periodic review of rules;
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\37\ 5 U.S.C. 601.
the Congressional Review Act,\38\ requiring submission of
rules to Congress along with a cost/benefit analysis and a
Congressional ``disapproval'' process; and
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\38\ 5 U.S.C. 801
cost/benefit review by the Office of Information and
Regulatory Affairs.\39\
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\39\ This office is within the Office of Management and Budget and
was established by Congress as part of the 1980 Paperwork Reduction
Act, 44 U.S.C.A. 3501.
Another reason why the FTC should be authorized to use APA notice-
and-comment rulemaking is that it is more appropriate for industry-wide
rulemaking involving many conflicting interests. The Magnuson-Moss
rulemaking process became unworkable in part because it is not suitable
for large rulemaking initiatives that have multiple stakeholders. By
using a quasi-judicial model, these procedures require rulemaking
procedures tantamount to an individual adjudication but with multiple
attorneys representing multiple parties, all of whom would seek to
examine and cross-examine witnesses, etc. The APA notice-and-comment
procedure is much better suited to modern-day industry-wide rulemaking
in that it allows all parties to provide as much comment and as many
submissions as needed, without the expense and unwieldiness of
adjudicatory hearings.
APA notice-and-comment rulemaking will also allow the FTC to work
with business more effectively. The FTC has traditionally used
voluntary industry self-regulation as an alternative to formal
regulation or adjudication. One example of voluntary self-regulation
has occurred in the privacy area, where the FTC has encouraged website
operators to publish a privacy policies. The FTC can then, if
necessary, use individual enforcement actions against website owners
who do not abide by their own policies on the basis that they have thus
committed a deceptive trade practice.\40\ The availability of a
workable rulemaking process would enhance the FTC's ability to
encourage industry self-regulation because that option lurking in the
background would provide a more powerful incentive for industry
participants to self-regulate if they wish to avoid more formalized
rules.
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\40\ See, e.g., FTC v. Toysmart.com, LLC, consent agreement (D.
Mass. 7/21/00), available at www.ftc.gov.; In re National Research
Center for College & University Admissions, Consent Decree (FTC 10/2/
02), available at 222.ftc.gov.
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The FTC has also been very active in certain situations in bringing
individual injunction and administrative cases against multiple
companies aimed at addressing an industry-wide problem. When the
Commission puts together a group of similar cases with similar orders,
it can become tantamount to a regulation by adjudication. For instance,
the FTC brought a series of cases against companies that failed to take
appropriate measures to secure consumers' personal data they had stored
in their data bases.\41\ The resulting orders specified certain
security procedures in each case. Having notice-and-comment rulemaking
procedures available would give the FTC the ability to bring all
parties to the table to consider an industry-wide rule, rather than
establishing de facto rules by adjudication against selected individual
companies.
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\41\ See, e.g., In re B.J.'s Wholesale Club, Inc., 2005 WL 2395788
(FTC 2005). Pursuant to the Gramm-Leach-Bliley Act, the FTC and other
Federal agencies also issued regulations imposing obligations on
financial institutions to protect consumer information. 16 C.F.R.
314.
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Finally, providing the FTC with APA rulemaking power under their
general unfair and deceptive practices authority will not replace the
duty to respond to Congressional mandates for particular rules under
specific statutes. But having the availability of notice-and-comment
rulemaking could provide the FTC with the ability to identify and
respond to particular unfair and deceptive trade practices more
quickly. One of the benefits of the broad statutory mandate of the FTC
Act, which covers all ``unfair and deceptive acts or practices,'' is
that this statute has the potential to adjust to ongoing changes in the
marketplace. Statutes that are very specific soon become outmoded as
the technology and/or the marketplace move on to other ways of doing
business, some of which may raise consumer protection issues. By
authorizing the FTC to engage in APA informal rulemaking to combat
unfair and deceptive trade practices under their general statutory
authority, as defined by policy statements and precedents, Congress
will empower the Commission to protect the public interest in a more
timely fashion.
IV. Civil Penalties for FTC Act Violations
Civil penalty authority for violations of the FTC Act is needed to
strengthen the Commission's law enforcement activities to protect the
public from unfair or deceptive trade practices. Under current law, the
FTC only has authority to seek civil penalties in court for violations
of rules or prior orders.\42\ It does not have the authority to obtain
civil penalties directly for FTC Act violations. Also the FTC refers
all civil penalty cases to the Department of Justice, which then has 45
days to determine whether to file the case itself or return it to the
Commission. In the fast-moving world of financial and Internet fraud,
such delays can be devastating to the consumers who could have been
protected by swifter government action. While the Commission does have
the authority to go to court to seek injunctive relief in situations
where it has reason to believe that there is a current or imminent
violation of any provision of law enforced by the FTC,\43\ such actions
may not be sufficient to deter certain types of fraud, where the harm
to a potentially large number of consumers is difficult to quantify or
to stop by injunction once the damage has been done. Expanded civil
penalty authority would provide more meaningful deterrence against
unfair and deceptive practices under the FTC Act.
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\42\ 15 U.S.C. 45(1) and 45(m). The Commission can issue ``cease
and desist'' orders in its own administrative proceedings under 15
U.S.C. 45(b). Some would say this approach is tantamount to ``every
dog gets one bite.''
\43\ 15 U.S.C. 53(b).
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V. Aiding and Abetting Authority
The FTC is not only an independent regulatory agency, it is also a
law enforcement agency, and as such, needs to be able to use its
limited resources effectively to stamp out fraudulent practices by
reaching not only direct violators, but also those who knowingly assist
the direct violators. Thus, former Bureau of Consumer Protection
Director Barry Cutler said in the early 1990s that the FTC must cutoff
not only the tops of the dandelions of unfair and deceptive practices,
but also to get at the root of the problem, lest the weeds just spring
up again.\44\ Thus, in a telemarketing scam using so-called ``boiler
rooms,'' for instance, the Commission could put a halt to the phone
room, but without also being able to go behind the scenes and stop
entities that were aiding and abetting by laundering money or putting
together phony travel packages, the FTC would be in effect cutting off
the heads of the dandelions, without getting to the roots.
---------------------------------------------------------------------------
\44\ Barry Cutler, former director of the FTC's Bureau of Consumer
Protection, as stated in earlier Congressional testimony.
---------------------------------------------------------------------------
Unfortunately, the ability of agencies like the FTC to go after
persons or companies who knowingly support or enable direct
participants in unfair or deceptive practices was called into question
in 1994 by the U.S. Supreme Court ruling in Central Bank of Denver v.
First Interstate Bank of Denver.\45\ In that case, the Court ruled
there was no civil liability in private suits under the Securities and
Exchange Act against secondary participants in certain fraudulent
practices prohibited by that statute, basically because the statute did
not specifically state that. Later, Congress amended the Securities and
Exchange Act to provide the SEC with direct authority to pursue persons
knowingly aiding and abetting such violations.\46\ In the mid-nineties,
the FTC also received direct authority to sue persons ``assisting and
facilitating'' violations of the Telemarketing Sales Act and its
regulations.\47\ At this point in time, it would enhance the FTC's
ability to protect the public if it could rely on explicit statutory
authority to pursue aiders and abettors in all aspects of their
jurisdiction, not just for telemarketing violations. For instance, in
today's world of Internet based consumer issues, such as fraudulent
business opportunity or job placement sites, certain unfair or
deceptive practices are supported by a complicated network of entities
who knowingly receive some financial benefits, and should be held
responsible. Also, despite the improvements in global enforcement
initiated by the U.S. SAFE WEB Act,\48\ sometimes it is not possible
for the FTC to go after a foreign-based perpetrator, but could stop the
damage to consumers by pursuing U.S. based affiliates who knowingly
provide support to unlawful activities. ``Aiding and abetting''
liability could be coupled with safe harbor provisions for Internet
providers and similar entities who are mere conduits and do not
knowingly participate as aiders and abettors.
---------------------------------------------------------------------------
\45\ 511 U.S. 164 (1994).
\46\ 15 U.S.C. 78t(e).
\47\ 15 U.S.C. 6101-6108; 16 C.F.R. Part 310.
\48\ Pub. L. No. 109-455, 120 Stat. 3372 (2006).
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VI. Conclusion
In conclusion, I fully support what the FTC and Congress are doing
to help protect vulnerable consumers during this time of financial
trouble for the average person. However, I also support the idea that
Congress should take this opportunity to enhance the FTC's enforcement
tools so that they can do an even better job of protecting the public
interest. This includes giving the FTC across-the-board authority to
issue regulations using APA informal rulemaking procedures. Such a
change is needed because the current Magnuson-Moss rulemaking
procedures are so unwieldy that they have effectively become a dead-
letter. And while the cumbersome procedures under Magnuson-Moss may
have become unneeded and outmoded, other developments in the law can
ensure that any renewed FTC rulemaking activities using APA procedures
would not be excessive. APA rules are subject to judicial review and
other Congressional safeguards that have been put in place over the
last 30 years. Also, the FTC has itself engaged in major policy reforms
since the Magnuson-Moss Act was passed in 1975, and now has a more
solid doctrinal basis for any rules it might promulgate based on
unfairness or deception.
In addition to the changes in rulemaking procedures described
above, I also support the use of civil penalties for FTC violations
because they would provide a stronger deterrent against fraudulent,
unfair or deceptive activities than the current practice of seeking
civil penalties only after a company is under order or rule. Similarly,
the ability to pursue not only direct violators but also the aiders and
abettors of FTC violations will be of significant help to the FTC in
its pursuit of protecting the public.
Thank you for allowing me this opportunity to appear before the
Committee to give my views on this important matter.
Appendix
Dee Pridgen is Associate Dean and the Carl M. Williams Professor of
Law and Social Responsibility, at the University of Wyoming's College
of Law, where she has taught since 1982. Her subjects include Consumer
Protection, Contracts, Antitrust, Communications Law, Constitutional
Law, and Internet Law. She received her Juris Doctorate in 1974, from
New York University, and a B.A. in 1971, from Cornell University. She
is a member of the Order of the Coif and Phi Beta Kappa. Pridgen has
been a Fulbright Scholar/Lecturer at Tokyo University in Japan and a
Visiting Professor of Law at the University of Baltimore School of Law,
the University of Maryland School of Law, and the Catholic University
of America, Columbus School of Law. She also served as a Staff
Attorney, for the Federal Trade Commission, Bureau of Consumer
Protection, Washington, D.C. from 1978-82. Pridgen's publications
include two treatises aimed at practicing Attorneys, Consumer
Protection and the Law, and Consumer Credit and the Law, co-authored
with Richard Alderman, both published by Thomson/West, and updated
yearly. She is also a coauthor of a law school casebook Entitled
Consumer Law: Cases and Materials (Thomson/West 3d ed. 2007). She has
written articles and reports on consumer law, and has given
presentations at international consumer law meetings in Helsinki,
Finland and Auckland, New Zealand. She has also presented at and been
the co-chair of the Consumer Issues Conference held yearly at the
University of Wyoming since 2001. She has been on the faculty for
Teaching Consumer Law, a biennial conference sponsored by the Consumer
Law Center at the University of Houston since 2002. Pridgen was elected
to the American Law Institute in 2003.
Senator Wicker. Thank you very much.
Ms. Woolley.
STATEMENT OF LINDA A. WOOLLEY,
EXECUTIVE VICE PRESIDENT, GOVERNMENT AFFAIRS,
DIRECT MARKETING ASSOCIATION, INC.
Ms. Woolley. Thank you, Senator Wicker.
I am Linda Woolley, Executive Vice President of Government
Affairs for the Direct Marketing Association. Thank you for the
opportunity to be here today.
The Direct Marketing Association, or DMA, is the leading
global trade association, representing more than 3,100
businesses and nonprofit associations. About 50 percent of our
member companies are businesses that facilitate direct
marketing; the other 50 percent are companies that actually
market products and services directly to consumers, and most of
those companies are household names.
DMA considers consumer protection to be one of our core
functions. We have a Corporate and Social Responsibility
Department that develops industry standards and--industry
standards for ethical marketing practices. And those standards
are enforced through a very robust self-regulatory program
that's been in existence for over 30 years.
Let me begin by emphasizing that DMA and its member
companies hold the FTC in extremely high regard. We have a long
history of working with FTC on public education publications,
the development of industry self-regulation, and on enforcement
matters in order to protect consumers. While we may not agree
with FTC on every policy or legal matter affecting the
marketing community, the DMA views FTC as an essential partner
in promoting reputable business practices, and in protecting
consumers from a small minority of companies that deceives
consumers and ultimately negatively affect the image of
responsible businesses.
Senator Wicker, you introduced for the record a letter that
DMA and nearly 30 other trade associations sent to this
committee about the far-reaching and unintended consequences
that would result from the FTC's expanding authority, as
currently proposed. You have the record--the letter in the
record, but let me note some of those signatories here in order
to exemplify the breadth of the industry concern over these
proposals.
Signing that letter were the American Business Media
Consumer Electronics Association, Consumer Healthcare Products
Association, International Franchise Association, National
Association of Manufacturers, the National Association of
Realtors, the National Association of Wholesalers and
Distributors, National Automobile Dealers Association, the
National Retail Federation, Software and Information Industry
Association, and the U.S. Chamber of Commerce.
We very much believe that safeguards and protections
required by Magnuson-Moss continue to serve a valuable and
useful purpose, and should not be repealed. The Magnuson-Moss
safeguards were enacted incrementally--not all in one fell
swoop, but incrementally--throughout the early 1980s,
specifically as a result of the FTC abuse of APA rulemaking
authority in the 1970s, when the FTC ventured into regulating
children's advertising, gas additives, anticompetitive gasoline
prices, eyeglasses, distributors of paperback books and
newspapers, lawyer's fees, doctor's ads, ready-to-eat cereals--
breakfast cereals, automobile manufactures, hearing aids,
mobile homes, over-the-counter drugs, and products that long-
haul truckers could carry.
The Commission indicated that all other agencies have APA
rulemaking authority. First, let me say that that--not every
agency has APA authority. Second, the agencies currently having
APA rulemaking authority have mandates that are much narrower
in scope than that of the FTC. Third, the FTC already has APA
rulemaking authority under many different statutes, because
Congress has granted it that authority. And the DMA has
supported every instance that the Congress has granted specific
grants of APA rulemaking authority.
It's only in this expansive area of unfair or deceptive
practices, where the standards and jurisdiction are very broad,
that the FTC must follow the protections and safeguards of the
Magnuson-Moss Act. And, given the FTC's very unique and broad
mandate in this area, we believe that the Magnuson-Moss--the
safeguards of the Magnuson-Moss Act should be retained.
DMA is particularly concerned that the Commission would use
its expanding rulemaking authority to venture into areas that
it's been most actively involved in, in public-policy
discussion, and that particularly involves Internet commerce.
Currently, we believe that the Commission has a very good track
record of working with business to encourage the establishment
of meaningful and effective self-regulatory standards in the
marketplace.
Just last year, following the proposed standards by FTC,
DMA partnered with all of the other advertising agency--
advertising associations, effectively representing the entire
advertising industry, to develop self-regulatory principles for
online advertising practices. And we very much believe that
such a context--that the context for such a collaborative
effort between industry and FTC would change significantly if
the regulatory--if the rulemaking safeguards were repealed.
There are other--I'm watching the time, and I realize that
there are other aspects that my panel--fellow panelists have
spoken about, including aiding and abetting, civil penalty
authority, and independent litigation authority, that we are
prepared to discuss, but, since I'm almost out of time, I would
entertain your questions on those subjects.
In summary, DMA very much believes that the FTC has done a
commendable job in protecting consumers from unfair and
deceptive practices through its existing enforcement and
regulatory authorities. And I look forward to your questions.
Thank you.
[The prepared statement of Ms. Woolley follows:]
Prepared Statement of Linda A. Woolley, Executive Vice President,
Government Affairs, Direct Marketing Association, Inc.
I. Introduction and Summary
Good afternoon, Mr. Chairman and members of the Subcommittee. I am
Linda Woolley, Executive Vice President of Government Affairs for the
Direct Marketing Association. Thank you for the opportunity to appear
before the Subcommittee and provide insight from industry's perspective
regarding the regulatory powers of the Federal Trade Commission
(``FTC'' or ``Commission'').
The Direct Marketing Association, Inc. (``DMA'') is the leading
global trade association of more than 3,100 businesses and nonprofit
organizations using and supporting multi-channel direct marketing tools
and techniques. About fifty percent of our member companies are in the
business of facilitating direct marketing, including analytics firms,
list compilers, sellers of lists, printers, mailers, and Internet
Service Providers. The other fifty percent of our members are those
actually marketing products and services directly to consumers. Many of
those companies are household names.\1\ In addition to its education,
research and advocacy roles, DMA has a Corporate and Social
Responsibility Department that develops industry standards for ethical
marketing practices. Those standards are published as ``Guidelines for
Ethical Business Practice'' and enforced through a robust self-
regulatory program.\2\ DMA has an antitrust exemption from the FTC that
enables us to prosecute ethics cases that involve business-to-business
complaints.\3\
---------------------------------------------------------------------------
\1\ Founded in 1917, DMA today represents more than 3,100 members
across dozens of vertical industries in the U.S. and 50 other nations,
including a majority of the Fortune 100 companies, as well as nonprofit
organizations. Included are cataloguers, financial services, book and
magazine publishers, retail stores, industrial manufacturers, Internet-
based businesses, and a host of other segments, as well as the service
industries that support them. DMA and our members appreciate the
Subcommittee's continued outreach to the business community on
significant issues such as FTC authority.
\2\ The full text of DMA's Guidelines for Ethical Business
Practice, as well as additional information regarding our robust self-
regulatory program are available at http://www.dmaresponsibility.org/.
\3\ DMA releases an annual Ethics Case Report summarizing the
findings of the DMA Committee on Ethical Business Practice. The most
recent report, covering the period between February 2009 and February
2010 is available online at http://www.the-dma.org/guidelines/
DMAEthicsCaseReport2-09-2-10-Final.pdf.
---------------------------------------------------------------------------
Let me begin by emphasizing that the DMA and its member companies
hold the FTC and its staff in very high regard. DMA regularly works
with the FTC on public education campaigns, the development of industry
self-regulation, and enforcement matters in order to protect consumers
in a wide variety of areas.\4\ While we may not agree on every policy
or legal matter affecting the marketing community, the DMA views the
FTC as an essential partner in promoting reputable business practices
and in protecting consumers from a small minority of companies that
deceive consumers and, thus, negatively impact the image of responsible
businesses. Through the work of its Corporate and Social Responsibility
Department, DMA demonstrates the belief that consumer protection is one
of its core functions.
---------------------------------------------------------------------------
\4\ For example, we have worked with the Commission in the
following areas, among others: (1) Telemarketing Sales Rule (Complying
with the Telemarketing Sales Rule, available at http://www.ftc.gov/bcp/
edu/pubs/business/marketing/bus27.shtm); (2) Children's Online Privacy
Protection (How to Comply with the Children's Online Privacy Protection
Rule: A Guide from the Federal Trade Commission, the DMA, and the
Internet Alliance, available at http://www.ftc.gov/bcp/edu/pubs/
business/idtheft/bus45.shtm); and (3) Onguard Online, available at
http://www.onguardonline.gov/about-us/overview.aspx.
---------------------------------------------------------------------------
Today, we wish to discuss the Commission's current authority, as
well as the proposed grant of additional powers to the FTC in financial
regulatory reform legislation. We do not believe providing the FTC with
broad new authority of the type included in the ``Wall Street Reform
and Consumer Protection Act''--and as requested by the Commission--is a
necessary or relevant response to the causes of the current financial
crisis. The kind of additional authority that the FTC seeks is in no
way related to ``credit default swaps'' or ``subprime mortgages,'' and
would have far-reaching effects on a multitude of businesses outside of
the financial services area.
DMA and nearly thirty other associations recently wrote to this
committee about the far-reaching and unintended consequences that would
result from expanding the FTC's authority. With your permission, I
would like to submit that letter for the record, but let me also note
some of those signatories here in order to exemplify the breadth of
industry concern over these proposed changes to the FTC's authority:
American Business Media, Consumer Electronics Association, Consumer
Healthcare Products Association, International Franchise Association,
National Association of Manufacturers, National Association of
Realtors, National Association of Wholesaler-Distributors, National
Automobile Dealers Association, National Retail Federation, Software &
Information Industry Association, and the U.S. Chamber of Commerce.
Further, we believe that the safeguards and protections required by
Magnuson-Moss--enacted in the early 1980s as a result of FTC abuse of
APA rulemaking in the 1970s--continue to serve a valuable and useful
purpose, and should not be repealed. These protections were established
to achieve balance in government policymaking, limit regulatory
overreaching, and to maintain Congress' authority to legislate on
policy issues. We do not believe that a complete elimination of
important procedural safeguards is necessary, or that it will
ultimately be in the best interest of businesses and consumers.
My remarks today will focus on the following four areas, which have
been the subject of recent discussion surrounding FTC reauthorization:
(1) Rulemaking under the Administrative Procedure Act (``APA''); (2)
Authority to assess civil penalties; (3) Authority to pursue aiding and
abetting; and, (4) Authority for independent litigation.
II. The Procedural Safeguards Currently Governing the FTC's ``Unfair or
Deceptive'' Authority Should Remain Intact
A. Procedural Safeguards Are Necessary Given the FTC's Broad
Jurisdiction
As I mentioned earlier, DMA has joined with nearly thirty major
trade associations--representing virtually every industry--in
expressing concerns about the proposed repeal of statutory protections
that currently govern the FTC's rulemaking ability. These statutory
protections were enacted precisely to ensure appropriate checks and
balances on FTC rulemaking under its ``unfair or deceptive'' authority,
which gives the Commission sweeping jurisdiction over all but a few
sectors of the American economy. The legislation currently under
consideration would give the FTC streamlined APA authority to
promulgate rules regarding any ``unfair or deceptive'' acts or
practices across dozens of industries and countless marketing
practices. Such a sweeping allocation of power would mitigate the need
for congressional oversight and specific grants of authority to
regulate on particular issues.
DMA believes that the potential economic impact of such broad, new
authority should be fully evaluated by Congress in the process of
considering such a dramatic change. Many DMA member companies were
severely impacted by the current economic downturn. Our most recent
Quarterly Business Review suggests that marketing spending--the
principle measure of economic productivity--is ``finally reversing the
endemic downward spiral that began, for many, as early as mid-2007,''
\5\ but that economic recovery in the marketing community remains very
slow in gaining steam. We strongly believe that the addition of new
regulatory burdens at this time would limit market innovation and
reduce the number of new jobs that the business community is able to
create.
---------------------------------------------------------------------------
\5\ DMA/Winterberry Group Quarterly Business Review: Fourth Quarter
of 2009. Pg. 6. New York: Direct Marketing Association. March 2010.
---------------------------------------------------------------------------
B. The FTC Already Has APA Rulemaking Authority in Many Significant
Areas and Congress Has the Power to Grant Additional Authority
as Is Appropriate and Necessary
Let me address several items that must be clarified with regard to
the FTC's current rulemaking authority. The Commission has indicated
that all other agencies have APA rulemaking authority. First, not every
other agency has APA rulemaking authority. Second, the agencies
currently using APA rulemaking have mandates that are very different
from that of the FTC. Third, the FTC already has APA rulemaking
authority under many different statutes,\6\ and DMA supports those
specific grants of APA authority. It is only in the expansive area of
``unfair and deceptive'' practices--where the standards and
jurisdiction are very broad--that the FTC must follow the protections
and safeguards of the Magnuson-Moss Act.
---------------------------------------------------------------------------
\6\ See e.g., Controlling the Assault of Non-Solicited Pornography
and Marketing Act, Children's Online Privacy Protection Act, Fair
Credit Reporting Act, Gramm-Leach-Bliley Act, American Recovery and
Reinvestment Act (i.e., health data security breach notification),
Energy Policy and Conservation Act (i.e., appliance labeling, testing
procedures and labeling for recycled oil), Fair Debt Collection
Practices Act, Fairness to Contact Lens Consumers Act, Telemarketing
and Consumer Fraud and Abuse Prevention Act, Omnibus Appropriations Act
of 2009 as clarified by the Credit CARD Act of 2009 (i.e., mortgage
loans).
---------------------------------------------------------------------------
Prior to the implementation of the Magnuson-Moss safeguards in 1975
and 1980, the FTC followed APA rulemaking procedures to fulfill its
exceptionally broad mandate. The Commission exercised little restraint
and began conducting rulemakings on a wide range of subjects, including
a proposal to completely ban children's advertising. The Washington
Post viewed such rulemakings as ``preposterous intervention[s] that
would turn the agency into a great national nanny.'' \7\ As a result,
Congress took steps to curb such FTC overreaching by enacting the
Magnuson-Moss Act.
---------------------------------------------------------------------------
\7\ Editorial, The FTC as National Nanny, Washington Post. Mar. 1,
1978, at A22.
---------------------------------------------------------------------------
The FTC's extremely broad authority spans innumerable industries
and, therefore, is quite different in nature from that of other Federal
agencies, whose powers tend to be more industry-specific. When a
Federal agency has authority over particular industry, such as
pharmaceuticals or education, its staff can become expert in that area.
Even in the case of the Environmental Protection Agency, whose
regulatory powers span many industries, its rulemaking authority is
limited to particular areas by congressionally-approved and narrowly
focused statutes, such as the Clean Air Act that limits air pollutants.
By contrast, the FTC has authority to determine on its own what
constitutes an ``unfair or deceptive'' practice, and to regulate such a
practice wherever it occurs. Based on the Commission's record of past
overreaching, we are concerned that providing the FTC with
comprehensive APA rulemaking authority would once again lead the agency
to overstep its bounds. Given the FTC's broad mandate and the
historical need for the imposition of safeguards, we believe that the
Magnuson-Moss provisions should not be repealed.
C. There Is No Need for Comprehensive APA Rulemaking Authority and
Specific Shortcomings of Magnuson-Moss Have Not Been
Demonstrated
We question the Commission's claims that it needs APA rulemaking
authority in order to properly protect consumers, and strongly believe
that the FTC has done a superb job heretofore without such broad
authority. Just last month, FTC Chairman Jon Leibowitz testified before
this committee that, ``. . . in 2009 alone, the FTC and the states,
working in close coordination, brought more than 200 cases against
firms that peddled phone mortgage modification and foreclosure rescue
scams.'' \8\ He went on to say,
---------------------------------------------------------------------------
\8\ ``Prepared Statement of the Federal Trade Commission on
Financial Services and Products: The Role of the Federal Trade
Commission in Protecting Consumers, before the Senate Committee on
Commerce, Science, and Transportation.'' Pg. 1. February 4, 2010.
``The FTC is primarily a law enforcement agency, and it has
used its authority proactively to protect financially
distressed consumers. In many of these cases, the Commission
has used its powers to seek temporary restraining orders, asset
freeze orders, and other immediate relief to stop financial
scams in their tracks and preserve money for ultimate return to
consumers. Even prior to the economic downturn, the Commission
acted aggressively to stop financial fraud and assist consumer
victims. For example, the agency brought a series of cases
against a number of the Nation's subprime mortgage lenders and
services challenging a variety of unfair and deceptive
practices. Over the past 5 years, the FTC has filed over 100
actions against providers of financial services, and in the
past 10 years, the Commission has obtained nearly half a
billion in redress for consumers of financial services.'' \9\
---------------------------------------------------------------------------
\9\ ``Prepared Statement of the Federal Trade Commission on
Financial Services and Products: The Role of the Federal Trade
Commission in Protecting Consumers, before the Senate Committee on
Commerce, Science, and Transportation.'' Pg. 4. February 4, 2010.
Over the past fifteen years, there is no record of the FTC
requesting broad APA rulemaking authority from Congress. Further, if
such rulemaking authority is critical, the Commission should be able to
specifically enumerate the areas in which it would use such authority.
Instead, during last month's hearing, in response to a request from
Senator Johanns that he enumerate areas in which APA rulemaking
authority would be helpful, Chairman Leibowitz indicated ``. . . we'd
really want to [. . .] think for a while if we got this authority about
what we wanted to do and what we wouldn't want to do . . .'' \10\
---------------------------------------------------------------------------
\10\ ``Senate Commerce, Science and Transportation Committee Holds
Hearing on the Role of the Federal Trade Commission Concerning
Financial Services and Products As it Relates to Consumers.'' CQ
Congressional Transcripts. February 4, 2010.
---------------------------------------------------------------------------
If there are specific areas in which such streamlined rulemaking
authority is necessary, then we believe that Congress should consider
and pass legislation detailing those areas. In general, DMA supports
granting APA rulemaking authority to the FTC in order to address very
specific problems. For example, the Commission was appropriately given
APA rulemaking authority when implementing rules regarding children's
privacy, commercial e-mail, telemarketing, and (jointly with other
financial regulators) financial privacy. Just last year, Congress
provided APA rulemaking authority to the FTC in order to address
specific problems in the mortgage industry.
Similarly, while it has been suggested that the Magnuson-Moss
safeguards make it impossible to promulgate a rule in less than 8 to 10
years, the Commission has not shown any specific evidence to support
this assertion, or to show that a particular procedure under Magnuson-
Moss results in an unduly lengthy rulemaking process. In the absence of
such evidence, Congress should not change the Magnuson-Moss procedures.
If the FTC were to make such a specific showing, then we believe that
Congress should evaluate the particular aspects of Magnuson-Moss that
the Commission finds problematic, and it should seek to identify a
targeted solution in order to preserve the policy goals behind these
important and longstanding safeguards.
We are particularly concerned about the unintended consequences of
repealing the ``prevalence'' requirement under Magnuson-Moss. This
provision requires the FTC to issue a finding that an ``unfair or
deceptive'' practice has become ``prevalent'' in the marketplace before
proceeding with a rule. Requiring that the Commission show prevalence
of an ``unfair or deceptive'' practice by industry ensures that
responsible businesses across the country are not burdened with
regulations that stifle innovation or legitimate commerce as a result
of the bad practices of a few actors. The FTC has asserted that it has
had difficulty making a showing of prevalence, and that such a
requirement is burdensome, since the Commission is required to amass a
body of evidence before a rulemaking can proceed.
Currently, the FTC independently decides to expend considerable
resources on enforcement actions, workshops, and other educational and
information-gathering activities in order to establish weighty hearing
records on a particular issue for the purpose of commencing a
rulemaking. We are not aware that the FTC has documented any difficulty
in establishing a finding under the ``prevalence'' standard, and we do
not believe that Congress should repeal it until or unless the FTC can
document evidence to support such a claim.
Likewise, there has been no evidence to suggest that the Commission
has experienced difficulty in demonstrating ``prevalence'' in our
Nation's courts, or that the courts are incapable making such an
interpretation. Both business and consumers will benefit if Congress
continues to require the FTC to produce evidence of ``prevalence'' that
will survive independent legal scrutiny. Business will not have to bear
the expense of unnecessary litigation, which is sure to arise if a
lesser standard of proof were to be created. Consumers will be sure
that the FTC was focusing its attention and resources on the most
prevalent and egregious problems in the marketplace.
D. Magnuson-Moss Protections Should Remain in Place to Avoid Limiting
Innovation in Critical Areas of the Economy Such as the
Internet
The DMA is particularly concerned that the Commission would use its
expanded rulemaking authority to regulate in the areas where it has
been most actively involved in policy discussion and enforcement
activity, and that its involvement in those areas would hinder new and
emerging business practices, such as mobile and interactive marketing.
Currently, the Commission has an especially good track record of
working with business to encourage the establishment of meaningful and
effective self-regulatory standards in the marketplace. Just this year,
following proposed standards by the FTC, DMA partnered with the
American Association of Advertising Agencies (4A's), Association of
National Advertisers (ANA), Interactive Advertising Bureau (IAB) and
Better Business Bureau (BBB)--collectively representing the entire
advertising industry--to develop self-regulatory standards for online
advertising practices. We believe that the context for such
collaborative efforts would change significantly if the rulemaking
safeguards were repealed.
Specifically, we are concerned that over time regulations could
emerge without affording Congress the opportunity to exercise its
important oversight function to ensure that the appropriate checks and
balances are in place. Such unchecked regulation might occur in areas
such as information-sharing, privacy, Internet advertising and
marketing, mobile marketing, affiliate marketing, targeted marketing,
online behavioral marketing, marketing to children and teenagers, and
numerous other topics where the best-intentioned rulemaking almost
certainly cannot anticipate innovation and change, and may not be able
to achieve its intended purpose without significant unintended
consequences.
For example, regulation could limit Internet development--one of
the continued key economic drivers and areas of job growth. DMA
recently forecast that the Internet marketing workforce has the
potential to grow 6.1 percent over the next 5 years--with 11 percent
growth in the social networking medium alone--generating more than 2.6
million new jobs. Growth of the mobile marketing workforce was
projected at more than 30 percent by 2014.\11\ Instead, such rules
could limit market innovation, and jeopardize the corresponding jobs
and products that flow from such innovation.
---------------------------------------------------------------------------
\11\ The Power of Direct Marketing 2009-2010. Produced by IHS
Global Insight for DMA. 13th Edition. Pg. 184-185. New York: Direct
Marketing Association. October 2009.
---------------------------------------------------------------------------
III. The Commission Already Has Sufficient Enforcement Powers to Deter
and Punish Bad Actors
We are also concerned with proposals to remove checks on the FTC's
enforcement powers, including the proposal to grant the agency civil
penalty authority. DMA believes that the FTC's existing enforcement
tools are sufficient to protect consumers. Currently, the FTC can
impose settlement orders on companies and seek the disgorgement of ill-
gotten gains. If a company subsequently violates the order, then the
FTC can also seek to obtain civil penalties. Based on feedback from
DMA's members, this system provides very strong and effective
incentives for companies to work cooperatively with the Commission in
reaching settlements, which in turn provide industry with valuable
guidance on the scope of acceptable practices in a timely fashion. We,
therefore, strongly recommend against granting the FTC new authorities
that could have significant unintended consequences, such as disrupting
and even discouraging the cooperative spirit in negotiating
settlements, and unduly lengthening the settlement process, thus
leaving more time when consumers are unprotected.
IV. Additional Authority to Pursue Aiding and Abetting Is Unnecessary
Likewise, DMA is concerned with the proposals to grant the FTC
authority to treat persons that ``knowingly or recklessly'' provide
``substantial assistance'' to others in committing ``unfair or
deceptive'' acts or practices as primary wrongdoers even when they lack
actual knowledge of a violation. The FTC already has authority to
pursue those who commit ``unfair or deceptive'' acts or practices. We
also caution that granting authority specifically over aiders and
abettors in this manner would be unworkable because it would put a wide
range of service providers in the position of policing the actions of
clients over which they exercise no control. Examples of service
providers who would be put in the position of having to police the
actions of their clients--were the FTC to have authority over aiders
and abettors--include agencies involved in the creation of a campaign
advertising a product that was later found to be faulty, printers of
catalogues, web hosting companies, or publishers who place
advertisements in their newspapers or on their websites.
V. Current Litigating Authority That Is Coordinated Through the
Department of Justice Is Effective
Finally, we oppose proposals to grant the FTC independent
litigating authority to seek civil penalties. Such proposals would
remove the current requirement that the FTC provide the Department of
Justice (``DOJ'') with 45 days to determine whether it will take a case
on behalf of the FTC, and instead permit the agency to bring suits
immediately on its own. We believe that inclusion of the DOJ in this
process is necessary to provide a check on agency discretion and that
it has the added benefits of promoting orderly access to the Federal
courts, as well as providing for consistent and coordinated Federal
litigation.
VI. Conclusion
In summary, DMA believes that the FTC does a commendable job in
protecting consumers against unfair or deceptive acts or practices
through its existing enforcement actions under the more than twenty
statutes that it currently administers. Given the broad organic
jurisdiction of the FTC, however, we oppose the repeal of important
safeguards provided by the Magnuson-Moss Act over ``unfair and
deceptive'' practices. Similarly, we believe that the current
enforcement regime provides effective tools to both combat bad
practices and to deter wrongdoers.
I thank you for your time and for the opportunity to speak before
your Subcommittee. I look forward to your questions.
Senator Pryor. Thank you.
Mr. Muris.
STATEMENT OF HON. TIMOTHY J. MURIS, FOUNDATION
PROFESSOR, GEORGE MASON UNIVERSITY SCHOOL OF LAW, AND OF
COUNSEL, O'MELVENY & MYERS LLP
Mr. Muris. Thank you, Mr. Chairman.
I've held four positions at the FTC. I was Chairman from
2001 through 2004, and am the only person ever to direct both
of the agency's enforcement bureaus. While at the Commission I
worked on each issue I discuss today. I've also worked on most
as an academic and consultant.
I believe strongly in the mission of the Commission.
Serving as Chairman was the greatest honor of my professional
career, and I'm especially proud of our accomplishments. As
just one example, we protected the privacy of Americans,
including creating the National Do Not Call Registry.
My testimony makes seven points:
First, Americans use markets to organize the economy. The
FTC has an important, albeit limited, role. The Commission
works best as a referee, not the star player.
Second, using its existing authority over vast parts of our
economy, the prestigious Global Competition Review already
gives the Commission its highest rating, praising the agency's
performance in both areas.
Third, again using its existing authority, the Commission
has embraced new initiatives that would greatly expand its
impact on the economy. As one example, the Commission, together
with three other agencies, recently proposed guides to ban
advertising of many breakfast cereals, soups, yogurts, and
other products from thousands of TV shows and other media.
The agency has been down this road before. Thirty years
ago, after 3 years of work, an editorial in the Post, scolding
the Commission for acting like the National Nanny, and an
increasingly exasperated Congress, the Commission abandoned the
children's advertising rulemaking. Today's proposal should fare
no better.
Obesity is a major problem, but these guides would be
ineffective, because the ads kids see do not make them obese.
Although American children see many food ads each year, they
have done so for decades, since long before the dramatic
upswing in obesity.
Today's kids actually watch less television than previous
generations, and have many more commercial-free choices. They
see fewer food ads, but they weigh more. Even our dogs and cats
are fat, and it's not because they're watching too much
advertising.
[Laughter.]
Mr. Muris. My fourth point is that, coupled with almost
certain Congressional requests for new rules, lowering the
barriers to agency rulemaking will transform the FTC. It would
be a major mistake for formal rulemaking to be a substantial
component of FTC consumer protection.
The agency tried this in the 1970s, with disastrous
consequences. Over 15 months, the Commission proposed 16 rules
to transform entire industries, usually without a clear theory
of why there was a law violation, and, at best, a shaky
empirical foundation. Of course, such rules took a long time.
Nevertheless, at least 15 rules got to the Commission under
Magnuson-Moss procedures, some in only a few years.
The procedures currently required for rules force the
Commission to be clear about its theories and focus its
evidence on the key questions. As in the 1970s, the FTC will
fail in its mission to protect consumers if it seeks to become
the second most powerful legislature in Washington. The ability
of rulemaking participants to designate disputed factual issues
and cross-examine witnesses is very useful to test the
Commission's theories. Properly focused, the procedures are
workable, and, in many rules, they were done in just a few
years.
My fifth point is that the FTC already can obtain civil
penalties in many cases. Further, the FTC currently can obtain
all the monetary relief possible in fraud cases, already,
through its existing 13(b) authority. Automatic civil penalty
authority in every case would result in over deterrence
sometimes, and unnecessarily complicate FTC efforts to expand
the law in new areas. Moreover, because there is no sure way to
limit the expansion of FTC authority to consumer protection
cases, it would create an additional arbitrary and unfair
distinction between the two Federal antitrust agencies, the
Department of Justice being the other. Those firms subject to
FTC review would face a different remedial regime, not because
there's something different about the industries, but merely
because of the unfortunate accident of falling under the FTC,
not the DOJ.
My sixth point is that, if this committee does reauthorize
the FTC, it should address another arbitrary and unfair
distinction between the two antitrust agencies, namely the
different standards the FTC has, and easier standards when
seeking to adjoin a merger. Both the FTC and DOJ enforce the
same statute, but the FTC has an easier time. That's
fundamentally unfair.
Finally, I believe that a separate third-party liability
section in the FTC Act is both unwise and unnecessary. It's
unwise, because it creates a uniform standard where uniformity
is inappropriate. A new section is unnecessary, because the FTC
already can attack third-parties in appropriate circumstances.
The standards for third-party liability should be developed
case by case, under the FTC's current unfairness jurisdiction.
Thank you. I would be glad to answer your questions.
[The prepared statement of Mr. Muris follows:]
Prepared Statement of Hon. Timothy J. Muris, Foundation Professor,
George Mason University School of Law, and Of Counsel, O'Melveny &
Myers LLP
Chairman Pryor, Ranking Member Wicker, and members of the
distinguished Subcommittee, my name is Tim Muris. I am Foundation
Professor at the George Mason University School of Law, and Of Counsel
at O'Melveny & Myers LLP. Most relevant for today's hearing, I have
held four positions at the Federal Trade Commission (FTC), most
recently as Chairman from 2001-2004. Also I am the only person ever to
direct both of the FTC's enforcement arms--the Bureau of Consumer
Protection and the Bureau of Competition. I believe strongly in the
importance of the FTC as a consumer protection agency. Serving as
Chairman was the greatest honor of my professional career, and I am
especially proud of our accomplishments, such as our work in fostering
competition in healthcare, developing and strengthening the anti-fraud
program, and promoting and protecting the privacy of Americans,
including creation of the National Do Not Call Registry.
Because most of the issues raised by the efforts to expand the
FTC's authority are in the agency's consumer protection mission, most,
but not all, of my testimony discusses that mission. I address seven
points:
1. The FTC has an important, albeit limited, role in our
economy. The Commission works best when it acts as a referee,
not the star player.
2. Using its existing statutory authority, the Commission ranks
as one of the world's preeminent competition and consumer
protection agencies.
3. Under its existing statutory authority, the Commission has
embraced some new, aggressive, and in some cases controversial,
initiatives that would greatly expand its impact on the
economy.
4. The so-called ``Magnuson-Moss'' rulemaking procedures are
reasonable; their elimination would result in a major
regression for the FTC. Coupled with almost certain
Congressional requests for new rules, lowering the barriers to
agency rulemaking will transform the FTC, threatening to place
the Commission in the untenable posture of the 1970s, during
which time it sought to be the second most powerful legislature
in Washington, proposing dramatic, usually harmful, changes
over wide-ranging sectors of the economy.
5. The FTC already can obtain civil penalties in many cases,
notably those involving Commission order and rule violations.
Further, the FTC currently can obtain all the monetary relief
possible in fraud cases through its existing Section 13(b)
authority. Civil penalties would add nothing to the FTC's
arsenal in such cases. Nevertheless, a majority of the
Commission seeks automatic civil penalty authority in all
cases. Such authority would represent another fundamental
change in FTC law, resulting in over-deterrence in some
circumstances, and unnecessarily complicating efforts to expand
FTC law to new areas. Moreover, because there is no sure way to
limit this expansion of FTC authority to consumer protection
cases, it would create an additional, arbitrary, and unfair
distinction between the two Federal antitrust agencies, the
Department of Justice and the FTC. (Given that the FTC and the
DOJ divide the economy between the two agencies in making
enforcement decisions, those firms subject to FTC review would
face a different remedial regime, not because there is
something different about the industry, but merely because of
the historical accident of falling under FTC review, and not
the DOJ.)
6. If this committee does reauthorize the FTC Act, it should
address another arbitrary and unfair distinction between the
FTC and the DOJ, namely the different, and easier, enforcement
standards that the FTC has recently obtained for itself in
seeking to enjoin proposed mergers. Although both the FTC and
the DOJ enforce the same merger statute, Section 7 of the
Clayton Act, a merger's legality can turn, not on its
underlying merits, but on which agency evaluates the
transaction.
7. Finally, creation of a separate third-party liability
section in the FTC Act is both unwise and unnecessary. The step
is unwise because it creates a uniform standard in an area
where uniformity is inappropriate. The new section is
unnecessary because the FTC already has the ability to attack
third parties in appropriate circumstances. Careful use of the
Commission's ``unfairness'' jurisdiction provides the best
vehicle to address third parties who facilitate violations by
others. The standards for third-party liability should be
developed, case-by-case, under the FTC's current authority.
1. The FTC Is a Referee in Our Economy, Not a Star Player
As a Nation, we use markets to organize and drive our economy. We
derive vast economic benefits from these markets and the competition
that helps markets function properly. These benefits should not be
taken for granted; they are not immutable. The Nation's consumer
protection policy can profoundly enhance these benefits by
strengthening the market. The policy also can reduce these benefits,
however, by unduly intruding upon the market and hampering the
competitive process. The Federal Trade Commission has a special
responsibility to protect and speak for the competitive process, to
combat practices that harm the market, and to advocate against policies
that reduce competition's benefits to consumers.
The FTC protects consumers in part through its responsibility to
prevent ``unfair or deceptive acts or practices.'' \1\ The FTC, and
other public institutions, operate against a backdrop of other consumer
protection institutions, most notably the market and common law. In our
economy, producers compete to offer the most appealing mix of price and
quality. This competition spurs producers to meet consumer expectations
because the market generally disciplines sellers who disappoint
consumers, and thus those sellers lose sales to producers who better
meet consumer needs. These same competitive pressures encourage
producers to provide truthful information about their offerings. Market
mechanisms do not always effectively discipline deceptive claims,
however, especially when product attributes are difficult to evaluate
or sellers are unconcerned about repeat business.
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\1\ 15 U.S.C. 45.
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When competition alone cannot punish or deter seller dishonesty,
another institution can mitigate these problems. Private legal rights
provide basic rules for interactions between producers and consumers.
Government also can serve a useful role by providing default rules,
which apply when parties do not specify rules. These rights and default
rules alleviate some of the weaknesses in the market system by reducing
the consequences to the buyer from a problematic exchange. Although
private legal rights provide powerful protections, in some
circumstances--as when court enforcement is impractical or economically
infeasible--they may not be an effective deterrent.
When consumers are vulnerable because market forces are
insufficient and the common law is ineffective, a public agency, such
as the Federal Trade Commission, can help preserve competition and
protect consumers. The FTC's consumer protection and competition
missions naturally complement each other by protecting consumers from
fraud, deception, and harmful restraints on competition without
restricting their market choices or their ability to obtain truthful
information about products or services. The Commission attacks conduct
that undermines competition, impedes the exchange of accurate
information, or otherwise violates the common law rules of exchange.
Because of its antitrust responsibilities, the agency is well aware
that robust competition is the best, single means to protect consumers.
Rivalry among incumbent producers, and the threat or fact of entry from
new suppliers, prompt firms to satisfy consumers. In competitive
markets, businesses prosper by surpassing their rivals. In turn, this
competitive market has important implications for the design of
consumer protection policies to regulate advertising and marketing
practices.
Without a continual reminder of the benefits of competition,
consumer protection programs can impose controls that ultimately
diminish the very competition that increases consumer choice. Some
consumer protection measures--even those motivated by the best of
intentions--can create barriers to entry that limit the freedom of
sellers to provide what consumers demand. While I was Chairman, for
example, the Commission participated in a court challenge to a state
law that banned anyone other than licensed funeral directors from
selling caskets to members of the public over the Internet. While
recognizing the state's intent to protect its consumers, the Commission
questioned whether the law did more harm than good. In an amicus brief,
the FTC noted that ``[r]ather than protect[ing] consumers by exposing
funeral directors to meaningful competition, the [law] protects funeral
directors from facing any competition from third-party casket
sellers.'' \2\ The synergy between protecting consumers from fraud or
deception without unduly restricting their choices in the market or
their ability to obtain truthful information should undergird all of
the Commission's consumer protection initiatives.
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\2\ Memorandum of Law of Amicus Curiae Federal Trade Commission,
Powers v. Harris, No. CIV-01-445-F (W.D. Okla. Sept. 5, 2002),
available at http://www.ftc.gov/os/2002/09/okamicus.pdf.
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2. Under its Existing Authority, the FTC Has Become One of the World's
Preeminent Competition and Consumer Protection Agencies
With broad authority to protect consumers from fraudulent,
deceptive, and unfair practices and to preserve competitive markets by
prohibiting anticompetitive mergers and business conduct, the Federal
Trade Commission's actions affect the lives of every American. As the
only Federal agency with both consumer protection and competition
jurisdiction, the FTC has the unique ability to investigate the conduct
of numerous players across our ever-changing economy and stop unlawful
behavior that harms Americans. Particularly in difficult economic
times, the agency protects financially distressed individuals who fall
victim to fraud and deception and stops anticompetitive practices that
deter the lower cost products and services that result from vigorous
competition.
During the past 2 years alone, the Commission has targeted problems
in financial services as a primary area for helping consumers.\3\ In
particular, the agency has focused on deceptive practices in mortgage
servicing, subprime credit, foreclosure rescue, fair lending, debt
relief, credit repair, debt collection, advance fee loans, payday
lending, and credit card marketing.\4\ In addition, the FTC has
targeted deceptive health, safety, and weight loss claims;
telemarketing fraud; fraud against small business; and business
opportunity schemes.\5\
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\3\ See Federal Trade Commission, The FTC in 2009 45 (Mar. 2009).
\4\ See id. at 46-48; Financial Services and Products: The Role of
the Federal Trade Commission in Protecting Consumers Before the Senate
Comm. On Commerce, Science, & Transportation, 110th Cong. 4-9 (2010)
(Statement of the Federal Trade Commission).
\5\ See, e.g., Final Order, FTC v. Roex, Inc. et al., No. SACV09-
0266 (C.D. Cal. May 20, 2009) (Marketers of dietary supplements and
devices agree to pay $3 million to settle FTC charges of deceptive
advertising); Final Order, FTC v. Advantage Credit Repair, et al., No.
08-CV-5994 (N.D. Ill. Oct. 27, 2009) (Credit repair scammers settle FTC
charges).
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The Commission has been very successful in addressing fraudulent,
deceptive, and unfair practices. For example, from March 2008 through
February 2009, the Commission filed 64 Federal district court actions
and secured 83 judgments and orders requiring defendants to pay more
than $371 million in consumer redress or disgorgement of ill-gotten
gains.\6\ During this same time, the Department of Justice, on behalf
of the FTC, obtained 15 civil penalty orders and $9.6 million in
assessed civil penalties, of which nearly $8.3 million has been
collected.\7\
---------------------------------------------------------------------------
\6\ See The FTC in 2009 supra note 3 at 45-46.
\7\ Id. at 46-48; Statement of the Federal Trade Commission supra
note 4 at 4-9.
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Besides the high status accorded to fraud, deception, and
unfairness cases, the FTC also places a very high priority on consumer
privacy and the protection of personal information. The FTC enforces
the FTC Act, the Safeguards Rule under the Gramm-Leach-Bliley Act, and
the Fair Credit Reporting Act to protect consumers from threats to the
security of their personal information. Using these various statutes
and the Safeguards Rule, as of March 2009, the FTC brought 25
enforcement actions that challenged inadequate security practices by
firms that mishandled sensitive consumer information.\8\
---------------------------------------------------------------------------
\8\ The FTC in 2009 supra note 3 at 56.
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On the competition side, the FTC scrutinizes industries that have a
significant effect on consumers' daily lives, including health care,
energy, technology, and consumer goods and services.\9\ Challenging
alleged anticompetitive mergers has been a key priority. The Commission
reviews premerger notification filings and other information to
determine if a transaction may substantially lessen competition. From
March 2008 through February 2009, for example, the FTC filed six
preliminary injunctions and administrative complaints challenging
proposed and consummated mergers that it believed raised competitive
concerns.\10\ The agency also identified competitive concerns in an
additional 16 proposed acquisitions during that time period that it
resolved through consent agreements with the merging firms.\11\ These
consent orders permitted the transactions to proceed after changes were
adopted in markets such as those involving generic and branded
pharmaceuticals, specialty chemicals, medical devices, electronic
public records services, and consumer goods and technology.\12\
---------------------------------------------------------------------------
\9\ Id. at 15.
\10\ Id. at 12.
\11\ Id.
\12\ Id.
---------------------------------------------------------------------------
The Commission continues to be vigilant in challenging possible
anticompetitive conduct through filing actions in Federal court.
Examples of such challenges from March 2008 through February 2009
include actions to stop:
(a) The payments by branded drug makers to generic rivals to
agree not to market a lower-priced generic drug; \13\
---------------------------------------------------------------------------
\13\ Id. at 13.
(b) The use of Multiple Listing Service rules to prevent
discount real estate professionals from making their listings
available on popular websites listing homes for sale; \14\ and
---------------------------------------------------------------------------
\14\ Id.
(c) The use of joint fee negotiation by physician groups to
keep reimbursement rates high without providing benefits to
patients.\15\
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\15\ Id.
The FTC uses a variety of tools to accomplish its objectives,
including litigation, rulemaking, policy research and development,
competition advocacy, consumer and business education, hearings, and
the encouragement of self-regulatory initiatives.\16\ The Commission
also promotes sound policy initiatives by holding public workshops with
industry leaders and consumers. Recent workshops have included,
``Exploring Privacy: A Roundtable Series,'' \17\ held in March 2010;
``Horizontal Merger Guidelines Workshop,'' \18\ held in January 2010;
and ``Protecting Consumers in Debt Collection Litigation and
Arbitration: A Roundtable Discussion,'' \19\ held in December 2009.
---------------------------------------------------------------------------
\16\ Former Chairman Robert Pitofsky and I discuss the remarkable
range of FTC tools in Timothy J. Muris & Robert Pitofsky, More Than Law
Enforcement: The FTC's Many Tools--A Conversation With Tim Muris and
Bob Pitofsky, 72 Antitrust L.J. 773 (2005).
\17\ ``Exploring Privacy: A Roundtable Series'' explored privacy
issues posed by 21st century technology and business practices that
collect and use consumer data, including social networking, cloud
computing, online behavioral advertising, mobile marketing, and the
collection and use of information by retailers, data brokers, third-
party applications, and other diverse businesses.
\18\ ``Horizontal Merger Guidelines Workshop'' explored possible
updates to the Horizontal Merger Guidelines used by both the FTC and
the Department of Justice to evaluate the potential competitive effects
of mergers and acquisitions.
\19\ ``Protecting Consumers in Debt Collection Litigation and
Arbitration: A Roundtable Discussion'' examined consumer protection
issues in debt collection proceedings.
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Given this impressive agenda and workload, in 2009 the Global
Competition Review (``GCR'') gave the FTC its highest rating, five out
of five stars.\20\ The GCR stated that ``[f]ew agencies in the world
balance their antitrust and consumer protection duties as well as the
U.S. Federal Trade Commission. While many agencies struggle to be good
at one or the other, the FTC has mastered both.'' \21\ The agency does
not need new authority to continue this stellar performance.
---------------------------------------------------------------------------
\20\ Global Competition Review, Rating Enforcement 2009--United
States Federal Trade Commission (2009).
\21\ Id.
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3. Under its Existing Statutes, the FTC Already Is Embarking on Major,
Sometimes Controversial, Expansions of its Authority
As our economy evolves, so too should the FTC. Fraud, for example,
takes new forms, and the Commission must adapt to the new threats.
Moreover, the agency is currently considering using new remedies
against fraudsters that appear worthwhile, such as banning them from
certain activities in the future. Even without expanded statutory
powers, the Commission has embarked on many other new initiatives.
Whether or not one thinks these initiatives are wise, it is clear the
FTC does not feel constrained by a lack of authority to pursue them. I
discuss a few of the new activities in this section.
A. The Proposed ``Voluntary'' Guides for Food Marketing
Today, most adults are either obese or overweight, and the rate of
overweight children has increased rapidly. This alarming increase in
obesity is a complex public health issue that demands effective
response by parents, industry, physicians, consumer advocates, and
government.
Responding to a Congressional request for a report and
recommendations about guidelines for marketing food to children and
teens, the Commission, together with the Food and Drug Administration
(FDA), the Center for Disease Control, and the U.S. Department of
Agriculture released proposed guides that would ban advertising of
(among other products) many breakfast cereals, soups, and yogurts from
thousands of TV shows and other media.\22\ These foods, according to
the standards, should not be advertised on television and other media
when the audience has more than 20 percent teens or 30 percent
children.
---------------------------------------------------------------------------
\22\ Workshop, Federal Trade Commission, Sizing Up Food Marketing
and Childhood Obesity (Dec. 15, 2009).
---------------------------------------------------------------------------
The FTC has been down this road before. Prodded by consumer
activists in the late 1970s, the Commission sought to stop advertising
to children because of concerns that they did not understand the nature
of advertising, were eating too much of the wrong food, and were
suffering tooth decay and other health risks as result.\23\ After 3
years of work, 6,000 pages of transcript, 60,000 pages of comments, an
editorial in The Washington Post scolding the Commission for acting
like the National Nanny, and an increasingly exasperated Congress, the
Commission abandoned the rulemaking.
---------------------------------------------------------------------------
\23\ See FTC Staff Report on Television Advertising to Children
(Feb. 1978); Notice of Proposed Rulemaking on Television Advertising to
Children, 43 Fed. Reg. 17,967 (April 27, 1978).
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Today's proposal should fare no better. It is impractical,
ineffective, and (were it to become law) illegal. It's impractical
because, although kids see many food ads on children's programming,
many ads they see air on programs that are not directed to them.
Moreover, a ban would be ineffective because there is no reason to
think that the ads kids see make them obese. Although American children
see thousands of food ads each year, they have done so for decades--
since long before the dramatic upswing in obesity. Today's kids
actually watch less television than previous generations and have many
more commercial-free choices. They see fewer food ads, but they weigh
more. Even our dogs and cats are fat, and it is not because they are
watching too much advertising.
Finally, a ban would be illegal. Food is not illegal to sell to
those under 18. Our First Amendment requires government to demonstrate
that restrictions on truthful, non-misleading commercial speech for
legal products meaningfully advance a compelling interest. Because a
children's advertising ban would be ineffective,\24\ it would fall far
short of that test. Moreover, many of the restricted foods actually
meet existing government standards--such as those under WIC, the
Special Supplemental Nutrition Program for Women, Infants, and
Children.\25\ Among the foods that the government is encouraging
children to eat, but that the proposed standards would prevent
advertisers from marketing to families, are milk, cheese, eggs, most
breakfast cereal, and peanut butter. In any event, the government
certainly cannot legally restrict truthful ads when the majority of the
audience are adults.
---------------------------------------------------------------------------
\24\ The Institute of Medicine found insufficient evidence to
conclude that advertising caused obesity in either kids or teens. See
IOM, Food Marketing to Children and Youth: Threat or Opportunity?
(2006).
\25\ ``[T]he WIC Program--serves to safeguard the health of low-
income women, infants, & children up to age 5 who are at nutritional
risk by providing nutritious foods to supplement diets, information on
healthy eating, and referrals to health care.'' See http://
www.fns.usda.gov/wic/aboutwic/.
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One difference between the current proposal and the old
rulemaking--called Kid Vid--is that this time the agencies are
suggesting that the standards be adopted ``voluntarily'' by industry.
Yet, can standards suggested by a government claiming the power to
regulate truly be ``voluntary''? Moreover, at the same workshop that
the standards were announced, a representative of one of the same
activist organizations that inspired the 1970s efforts speculated that
a failure to comply with the new proposal would provoke calls for rules
or legislation.\26\ And, it would be a risky proposition for
advertisers all to adopt the Commission's standards voluntarily, as
joint restraints on advertising are well known to impair
competition,\27\ and these restraints would hardly pass antitrust
muster.\28\
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\26\ See Jared Favole, Federal Group Proposes Curbs on Marketing
Food to Kids, WSJ.com, Dec. 16, 2009, available at http://
online.wsj.com/article/SB126092800862493091.html (``The foods and
beverages that could be affected if the proposed marketing restrictions
became law include most sodas, candies, cookies, cereals and some types
of yogurt, said Margo Wootan, Director of Nutrition Policy at the
Center for Science in the Public Interest.'').
\27\ Numerous studies have demonstrated the role of advertising in
competitive markets. Some are collected in William MacLeod, et al.,
Three Rules and a Constitution: Consumer Protection Finds Its Limits in
Competition Policy,'' 3 Antitrust L. J. (2005). For an example in the
food industry, see C. Robert Clark, Advertising Restrictions and
Competition in the Children's Breakfast Cereal Industry, 50 J. L. &
Econ. (Nov. 2007), which found that cereal prices and shares of leading
brands were higher in Quebec Canada, which banned advertising to
children under 13, than in other Canadian provinces where the
advertising is allowed.
\28\ See Food Marketing to Children and Youth: Threat or
Opportunity? supra note 24.
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Attacking food advertising may offer the illusion of progress in
the fight against childhood obesity. But in the end, Americans must eat
less and exercise more. That said, advertising can play a role in
fighting obesity. One FTC study showed that when the government changed
its position and permitted cereal advertisers to make truthful claims
about the relationship between fiber intake and reduced cancer risk,
consumers and sellers responded.\29\ Consumers increased their
consumption of high-fiber cereals, the market share for high-fiber
cereals increased, and more high-fiber cereals found a place on
grocers' shelves.
---------------------------------------------------------------------------
\29\ Pauline Ippolito & Alan Mathios, Health Claims in Advertising
and Labeling: A Study of the Cereal Market (1989) (FTC Bureau of
Economics Staff Report) (``Study of the Cereal Market'').
---------------------------------------------------------------------------
We need to harness that same power to help fight obesity. Year
after year, manufacturers have shown great ingenuity in pitching foods
to kids as tasty and fun; their challenge now is to develop and promote
healthy foods, too. Major marketers (representing over three quarters
of all ads kids see) have already undertaken initiatives to market
nutritious foods and healthy lifestyles. Under the auspices of the
Council of Better Business Bureaus, the companies also made individual
commitments to do so, and we have seen big shifts in advertising to
kids, and major reformulations of the foods advertised to them.
B. Changes in Advertising Substantiation
Changing the advertising substantiation doctrine is another
significant new initiative. The Commission has long required that
advertisers possess a ``reasonable basis'' to substantiate their
advertising claims. Since its inception, the substantiation doctrine
has employed a flexible approach for determining the amount of evidence
an advertiser needs to substantiate a particular claim.\30\ Recognizing
the importance of the free flow of information to help markets best
serve consumers' needs, the Commission has developed a balancing test
to assure that information flows both freely and truthfully, without
unnecessarily chilling advertisers' ability to provide consumers with
important information.\31\
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\30\ Pfizer, Inc., 81 FTC 23 (1972).
\31\ FTC Policy Statement Regarding Advertising Substantiation,
appended to Thompson Med. Co., 104 FTC 648, 839 (1984), aff'd, 791 F.2d
189 (D.C. Cir. 1986).
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Thus, to support health-related claims for foods, the Commission
has traditionally required that companies have ``competent and reliable
scientific evidence.'' \32\ That standard requires tests or other
studies using ``procedures generally accepted in the profession to
yield accurate and reliable results.'' \33\ Clinical testing is
sometimes required because there is no other method that professionals
believe yields accurate and reliable results. In other cases, however,
other forms of evidence are generally accepted as reliable. There are,
for example, no clinical trials of parachutes--and no serious doubt
about whether they actually work to reduce risk.
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\32\ Bureau of Consumer Protection, FTC, Dietary Supplements: An
Advertising Guide for Industry 9 (1998).
\33\ Id.
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In recent investigations, however, the staff has been seeking to
replace that flexible standard with the same kinds of evidence that the
Food and Drug Administration has traditionally required to approve new
drugs. These proposed standards would require two well-controlled
clinical trials to substantiate certain claims even if experts
generally accept other methods as reliable. Moreover, they would
apparently prohibit more limited claims that accurately disclose the
limitations of the available evidence. An advertiser could not report,
for example, that a single well-conducted clinical trial supports a
claim until a second study came to the same conclusion. Courts have
consistently rejected such blanket prohibitions on truthful speech as
violations of the First Amendment.\34\
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\34\ See Pearson v. Shalala, 164 F.3d 650 (D.C. Cir. 1999);
Whitaker v. Thompson, 248 F. Supp. 2d 1 (D.D.C. 2002).
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Abandoning the flexible substantiation standard is a bad idea. The
current approach lets the Commission strike the appropriate balance
between the risks of mistakenly allowing false claims and the risks of
mistakenly prohibiting truthful ones. When the consequences of false
claims are high, as they are when an unsafe new drug is allowed on the
market even though effective alternatives are available, a high
substantiation standard is appropriate. But the risks of mistaken
claims about foods are vastly lower. Consumers may pay a few pennies
more or give up a better tasting product, costs that are purely
economic.
In contrast, mistakenly prohibiting truthful claims about the
relationship between diet and disease creates risks to public health.
Consumers who do not know about the relationship between saturated fat
consumption and heart disease, or about the relationship between fiber
and cancer, or the relationship between folic acid and neural tube
birth defects may suffer serious health consequences. When experts in
the field believe that reliable studies indicate the likely truth of
these relationships, there is good reason to allow such claims, even if
the evidence does not meet the standard that would be required for a
new drug.
The empirical evidence is clear that excessive restrictions on
truthful advertising harm consumers.\35\ They lead to higher product
prices and less incentive for sellers to improve their products.
Moreover, excessive restrictions have a disproportionate effect on
those who are not as good at finding information from other sources.
The well-educated, two-parent household may find their information
elsewhere, but too often the less-educated, single-parent household
will not. Much of the evidence for these conclusions is developed in a
series of reports by the FTC's Bureau of Economics, beginning with a
ground-breaking study of the impact of health claims on the market for
cereals.\36\ Applying FDA-like standards in cases in which experts
regard other methods as reliable is simply bad policy.
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\35\ See J. Howard Beales & Timothy J. Muris, State and Federal
Regulation of National Advertising (1993), especially Chapter 2.
\36\ Ippolito and Mathios, Study of the Cereal Market, supra note
29.
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Finally, repudiation of the Commission's flexible standard is not
necessary to facilitate enforcement of FTC orders. Although the
Commission does not win every case, it wins the overwhelming majority
of those it brings. That fact alone makes clear that a more specific
standard is not necessary to simplify enforcement. ``Fencing in'' order
provisions that cover more products or more claims from a company that
has violated the law are entirely appropriate, and widely used. There
is no reason, however, to require past violators to meet a higher
burden to substantiate the likely truth of their claims. A more
specific requirement would not ``fence in'' proven violators; rather,
it would ``wall off'' truthful claims that would be quite valuable to
consumers.
C. Behavioral Advertising
Increasingly, advertising supports the provision of free Internet
content. The amount of money available to fund that content, and hence
the quality of information available online, will depend on the
advertising rates. The higher the rates, the more (and better) content
consumers will receive. Behavioral advertising, which uses information
about an anonymous consumer's browsing behavior to infer which ads are
most likely to appeal to that consumer, promises to raise the rates
that advertisers are willing to pay. Inappropriate restrictions on such
ads could significantly impair the advertising-based model for
financing Internet content.
The FTC is evaluating its approach to privacy, and is considering
preventing behavioral advertising unless consumers affirmatively agree
(i.e., opt in) to accept such ads.\37\ The analytical framework that
the FTC currently employs was the result of a similar review undertaken
when I became Chairman in 2001. That review led the Commission to shift
its focus to the adverse consequences of the use and misuse of
sensitive consumer information. Consequently, the Commission launched
the National Do Not Call Registry and filed several cases involving
failure to protect sensitive personal information.
---------------------------------------------------------------------------
\37\ Stephanie Clifford, FTC: Has Internet Gone Beyond Privacy
Policies?, N.Y. Times, Jan. 11, 2010.
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The consequences model remains a powerful basis for guiding FTC
privacy policy. Under that model, the Commission can protect consumers'
subjective preferences for anonymity, just as it protects subjective
preferences for products that are ``Made in America.'' (Advertising
misrepresenting that a product is made in America would violate the FTC
Act. Moreover, customs and tariff rules may require disclosure of
origin information for reasons unrelated to consumer
misrepresentation.) For the Commission to protect consumer preferences,
however, they must be preferences that are actually reflected in
marketplace behavior. Subjective preferences only can be known from
consumer behavior in the marketplace. They cannot be inferred from
survey results if consumers can ignore the consequences of their own
answers. Precisely because they are subjective, we cannot infer that
because some consumers care about a particular attribute that such an
attribute is worth the costs to others.
The question is one of approach. Of course, the Commission should
protect known subjective consumer preferences, whether for products
made in America or for privacy. Such preferences are important drivers
of a market economy. It is another thing altogether, however, to argue
that because some consumers have a preference, the Commission should
require all sellers to satisfy that preference. That argument is simply
wrong. Assuring the accuracy of claims that a product is made in
America enhances consumer sovereignty--it lets consumers choose what
matters to them and what does not. Requiring all sellers to offer
American-made products--or even to disclose that their products are not
made in America--is another matter altogether. It imposes the costs of
admittedly real preferences of some on many who do not share them. The
fact that a particular product characteristic, whether related to
privacy or product attributes, is important to me is a very good reason
for protecting affirmative claims about that characteristic. It is a
very bad reason for imposing that preference on everyone else.
For consumers who independently value anonymity, an opt-out regime
protects them because for these consumers, the benefits of opting out
exceed the minimal costs.\38\ Consumers who are willing to opt out
reveal that they, in fact, have a preference for anonymity.
---------------------------------------------------------------------------
\38\ Of course, the ability to opt out should be prominently
disclosed and easy to use.
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An opt-in regime, however, does not reveal consumer preferences in
the same way. Because most consumers apparently think that little is at
stake in deciding whether to allow information sharing, they are not
willing to incur even small costs to exercise choice. Therefore, an
opt-in regime will protect ``privacy'' on which they place little
value, while denying them the benefits of information sharing--
including, perhaps, some of the Internet content they desire.
Opt-out is clearly superior to opt-in in this context. It protects
those who care about preserving anonymity in commercial transactions,
while allowing the benefits of information sharing and advertiser-
supported content for those who do not care. An FTC decision to require
opt-in for behavioral advertising would adversely affect consumers and
their use of the Internet.
D. Endorsements and Testimonials
Many advertisers use testimonials from satisfied customers to tout
the product's benefits. The available evidence indicates that consumers
discount the performance claimed in testimonials. Most consumers
believe that their results will differ from those claimed and that a
variety of factors influence the results they will achieve.\39\
---------------------------------------------------------------------------
\39\ See Comments Of Kelley Drye & Warren On The Commission's
Guides Concerning The Use Of Endorsements And Testimonials In
Advertising, In re Guides Concerning the Use of Endorsements and
Testimonials in Advertising, Commission File No. P034520 (Mar. 2,
2009), available at http://www.ftc.gov/os/comments/endorsementguides2/
539124-00016.pdf.
---------------------------------------------------------------------------
In 1972, the Commission published Guidelines for endorsements and
testimonials that have provided valuable guidance to advertisers using
such techniques.\40\ Nevertheless, there were some problems that were
apparent in certain testimonial advertising. For example, testimonials
were frequently used for essentially fraudulent products with a
ritualistic disclaimer that the results were not typical. Such a
disclaimer should not protect fraud. A second problem occurs when the
testimonials, even for non-fraudulent products, portray results that
are so extreme that almost no one will realize them.
---------------------------------------------------------------------------
\40\ FTC Guides Concerning the Use of Endorsements and Testimonials
in Advertising, 16 C.F.R. 255 (1980).
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Rather than narrowly addressing these problems, the revised
Guidelines the Commission recently issued are overbroad.\41\ The
changes have created confusion among advertisers, endorsers,
celebrities, bloggers, and the media regarding what conduct complies
with Section 5 of the FTC Act. Accompanying this confusion is the fear
that the Commission may soon have the power to impose civil penalties
the first time it decides an advertiser failed to follow its guidance.
---------------------------------------------------------------------------
\41\ Guides Concerning the Use of Endorsements and Testimonials in
Advertising, 16 C.F.R. pt. 255 (Dec. 1, 2009).
---------------------------------------------------------------------------
Contrary to consumer expectations, the tendency at the Commission
now is to treat a testimonial as a representation of the average or
typical performance that consumers can expect.\42\ If advertisers meant
to communicate that the results in a testimonial were those that most
people receive, they could say so directly, and thereby avoid the
discounting that consumers apply to claims made in testimonials.
---------------------------------------------------------------------------
\42\ David C. Vladeck, Director, Bureau of Consumer Protection,
Federal Trade Commission, A Look Forward With the FTC: Advertising and
Marketing Enforcement Challenges (Feb. 3, 2010).
---------------------------------------------------------------------------
An additional problem with the new Guidelines involves
``endorsers,'' especially those in the new media, such as bloggers. The
Commission warned advertisers that they would be responsible for media
over which they had no control:
An advertiser's lack of control over the specific statement
made via these new forms of consumer-generated media would not
automatically disqualify that statement from being deemed an
``endorsement'' within the meaning of the Guides.\43\
---------------------------------------------------------------------------
\43\ Guides Concerning the Use of Endorsements and Testimonials in
Advertising, Overview of the Commission's Review of the Guides (Dec. 1,
2009), available at http://www.ftc.gov/os/2009/10/
091005endorsementguidesfnnotice.pdf.
---------------------------------------------------------------------------
After severe criticism in the blogosphere, the Commission has
sought to temper the implications of this statement. Although company
sponsorship and support of blogs raise different issues, merely
providing free samples of a product to a blogger should not render the
manufacturer liable for the blogger's conclusions. There is no reason
to think that product reviews online are any different from a book or
movie review for which the reviewer did not pay for the product.
4. Magnuson-Moss Procedures Should Be Retained \44\
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\44\ Although within the Commission these procedures are uniformly
referred to as ``Magnuson-Moss,'' in fact, the procedures are contained
within Title II of the Magnuson-Moss Warranty--Federal Trade Commission
Improvement Act of 1975. Only Title I involved the Magnuson-Moss
Warranty Act, but I use here the conventional designation of Magnuson-
Moss procedures.
---------------------------------------------------------------------------
Proposals to expand the Commission's rulemaking authority should be
considered in the historic context of the Commission's purpose and
mission.
A. The Role of FTC Rulemaking
As I discussed above, the Commission has relied on the development
of common law principles, supplemented with occasional rules and
guides. The cornerstone of the FTC's consumer protection mission is the
fraud program, discussed in more detail below, through which the
Commission has returned hundreds of millions of dollars to defrauded
consumers.
Although many do not think of them as such, these common law
principles are rules, providing a crucial part of the institutional
framework that helps our market economy to function. In most
circumstances, these common law rules provide both clear guidance to
the business community and an adequate basis for FTC enforcement
actions.
The common law process is well suited to develop new policy. For
example, the Commission has used this process to formulate general
rules to protect the security of sensitive consumer information. Using
both its deception and unfairness authority, the Commission has brought
cases addressing information security, as the growth of the Internet
and new technologies have created new vulnerabilities. Attempting to
write a rule defining the scope of liability in advance could have
stymied the natural development of this common law process, leading to
uncertain results.\45\
---------------------------------------------------------------------------
\45\ Although the FTC promulgated the Safeguards Rule at the same
time as it was initiating information security cases, the rule was
primarily useful in establishing a structure for remedies. Adopted
under GLB, the rule set out a flexible, process-oriented approach to
providing information security. Because Congress had specified
liability for financial institutions that failed to protect sensitive
information, the rule did not require a theory of who was liable under
Section 5 and under what circumstances. Those theories were developed
through the common law process in individual cases, and most of the
Commission cases have involved industries not covered by GLB.
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Rules seeking to address fraudulent or other practices often are
very difficult to write. Unlike the Federal Communications Commission,
the Securities and Exchange Commission, or other regulatory bodies, the
FTC is not a sector-specific regulator. Thus, the agency generally
lacks industry-specific knowledge, expertise, and routine contacts with
regulated entities and congressional committees with jurisdiction over
those industries.\46\ Instead, in its law enforcement experience, the
Commission deals with pathology. It is familiar with bad actors, who
have demonstrated their unwillingness to comply with basic legal
principles.
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\46\ Of course, the agency and its staff have become quite
knowledgeable about certain sectors of the American economy, including,
for example, the downstream parts of the oil industry, certain aspects
of health care, and credit reporting agencies. For credit reporting
agencies, the FTC is the regulator, and pursuant to the FACT Act, has
promulgated numerous rules in the last few years. These rules, and many
others, were promulgated pursuant to congressional direction.
---------------------------------------------------------------------------
By their nature, however, rules also must apply to legitimate
actors, who actually deliver the goods and services they promise.
Remedies and approaches that are entirely appropriate for bad actors
can be extremely burdensome when applied to legitimate businesses, and
there is usually no easy or straightforward way to limit a rule to
fraud. Rather than enhancing consumer welfare, overly burdensome rules
can harm the very market processes that serve consumers' interests. For
example, the Commission's initial proposal for the Telemarketing Sales
Rule was extremely broad and burdensome, and one of the first acts of
the Pitofsky Commission was to narrow the rule.\47\ More recently, the
Commission found it necessary to re-propose its Business Opportunity
Rule, because the initial proposal would have adversely affected
millions of self-employed workers.\48\
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\47\ Telemarketing Sales Rule, 60 Fed. Reg. 8313 (Feb. 14, 1995)
(codified at 16 C.F.R. pt. 310 (1995)).
\48\ Business Opportunity Rule, 73 Fed. Reg. 16110 (Mar. 26, 2008).
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Of course, rulemaking can be appropriate. For example, the
Commission sometimes can provide ``rules of the game'' that reduce
consumer harm in the future. The Commission can establish new default
rules and procedures for transferring rights when it is otherwise
difficult to do so. Thus, the Commission's Mail Order Rule provides
that, unless the parties agree otherwise, the merchandise must be
delivered within 30 days. While seeking to facilitate the exercise of
consumer choice, the agency also is highly cognizant of the need to
avoid unduly shackling market forces.\49\ For example, this balance
undergirds the FTC's approach to unsolicited telemarketing calls,
through which consumers decide whether or not they wish to receive such
calls and express their preferences effectively through the Do Not Call
Registry. Once these new rules of exchange are established, if
transaction costs are low, parties can more easily transfer these
rights when a different allocation is important to them.\50\
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\49\ See, e.g., Comment of the Staff of the FTC before the
Department of Health and Human Services Food and Drug Administration,
In re Food Labeling: Health Claims; Dietary Guidance, Docket No. 2003-
0496 (Jan. 26, 2004), available at http://www.ftc.gov/os/2004/
040126fdacomments.pdf.
\50\ See Ronald H. Coase, The Problem of Social Cost, 3 J. L. &
Econ. 1, 15-16 (1960) (``Once the costs of carrying out market
transactions are taken into account it is clear that such a
rearrangement of rights will only be undertaken when the increase in
the value of production consequent upon the rearrangement is greater
than the costs which would be involved in bringing it about.'').
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It would be a major mistake for rulemaking to be a substantial
component of FTC consumer protection. The FTC went down this road once
before, with disastrous consequences. In the 1970s, using its
unfairness authority under Section 5 without meaningful standards, the
Commission embarked on a vast enterprise to transform entire
industries. Over a 15-month period, the Commission issued a rule a
month, usually without a clear theory of why there was a law violation,
with only a tenuous connection between the perceived problem and the
recommended remedy, and, at best, a shaky empirical foundation.\51\
This enterprise foundered because of the internal inadequacies of the
Commission's procedures and because of intense opposition from both
parties in Congress.
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\51\ For similar criticisms of the FTC's rulemaking binge, see the
extensive, contemporaneous studies by Barry Boyer, Report to the
Administrative Conference of the U.S., Trade Regulation Rulemaking
Procedures of the Federal Trade Commission (1979); and Teresa Schwartz,
Regulating Unfair Practices Under the FTC Act: The Need for a Legal
Standard, 11 Akron L. Rev. 1 (1977). See also Timothy J. Muris, Rules
Without Reason--The Case of the FTC, 6 Regulation 20 (Sept./Oct. 1982).
---------------------------------------------------------------------------
As it did before, the FTC will fail in its mission to protect
consumers if it seeks to become the second most powerful legislature in
Washington. This is surely an unsuitable task for five unelected
representatives, not closely supervised by the White House or a Cabinet
department.
Regardless of the procedures, rulemaking is a resource-intensive
activity that inevitably draws resources away from enforcement. While I
was Chairman, the agency was pursuing subprime lending cases involving
failure to disclose adequately key terms of the transaction. In 2005,
however, as more and more dubious loans were made, the agency diverted
substantial resources to rulemakings to implement the FACT Act. The FTC
asked for rulemaking authority in one narrow area (risk-based pricing);
it ended up with statutory mandates for more than a dozen separate
rules and studies. Whatever their value, those rules and studies
consumed resources the Commission could have productively employed on
cases.
B. Magnuson-Moss Procedures Are Appropriately Tough, But Usable
Rulemaking is an exercise in generalization. The FTC should
determine whether a problem occurs often enough to justify a rule,
whether the problem has a common cause in a sufficient number of cases
to justify the remedy, and whether that remedy can correct the problem
without imposing excessive costs. Because the FTC cannot generalize
simply from its own experiences or from the horror stories of others,
it should rely on projectable evidence such as surveys of consumers and
econometric studies of industry behavior.
The Magnuson-Moss procedures force the Commission to be clear about
its theories and focus its evidence on the key questions. Otherwise,
the procedures can make the rulemaking almost interminable, as Chairman
Leibowitz recently testified.\52\ The ability of rulemaking
participants to propose disputed factual issues and cross-examine
witnesses on those issues the presiding officer designates as disputed
is very useful in testing the Commission's theories. Properly focused,
Magnuson-Moss procedures are workable.
---------------------------------------------------------------------------
\52\ Financial Services and Products: The Role of the Federal Trade
Commission in Protecting Consumers Before the Senate Comm. On Commerce,
Science, & Transportation, 110th Cong. (2010) (Statement of the Federal
Trade Commission).
---------------------------------------------------------------------------
The Commission's recent experience in the Business Opportunity
Rulemaking is a reminder of the useful aspects of the Magnuson-Moss
procedures. The Commission proposed a wide-ranging rule, apparently
aimed at fraud, but that instead would have adversely affected millions
of self-employed workers and the consumers they serve. Based on the
public comments and the need to proceed under Magnuson-Moss, the
Commission has now sensibly proposed a much more targeted rule that
addresses fraud without regulating legitimate businesses.\53\ Although
the Commission may have retreated without the threat of hearings and
cross examination, those threats undoubtedly helped to influence the
Commission's deliberations.
---------------------------------------------------------------------------
\53\ Business Opportunity Rule supra note 48.
---------------------------------------------------------------------------
The FTC has successfully used Magnuson-Moss Rulemaking in the past.
Several of the rules proposed in the 1970s were eventually promulgated.
Some rules, like the two involving eyeglasses, were well conceived
initially and concluded expeditiously. More recently, the Commission
has used these procedures to amend the Franchise Rule.
The Commission's most prominent rulemaking endeavor, the creation
of the National Do Not Call Registry, could have proceeded in a timely
fashion under Magnuson-Moss procedures. It took 2 years from the time
the rule was first publicly discussed until it was implemented.
Although it would have been necessary to structure the proceedings
differently, there would have been little, if any, additional delay
from using Magnuson-Moss procedures.
C. Magnuson -Moss Procedures Should Be Retained \54\
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\54\ The Administration's proposal would do more than just change
the procedures used in rulemaking. It also would eliminate the
requirement that unfair or deceptive practices must be prevalent, and
eliminate the requirement for the Commission's Statement of Basis and
Purpose to address the economic effect of the rule. It also changes the
standard for judicial review, eliminating the court's ability to strike
down rules that are not supported by substantial evidence in the
rulemaking record taken as a whole. The current statutory restrictions
on Commissioners' meeting with outside parties and the prohibition on
ex parte communications with Commissioners also are eliminated. These
sensible and important protections should be retained.
---------------------------------------------------------------------------
The problems that resulted from FTC rulemaking in the 1970s are not
just that the agency needed ``better'' regulators. Instead, the problem
is one of incentives and constraints. We are entering a period of
unusual consumer activism. Numerous groups are pressing the Commission
for immediate action, whether or not the proposal is well considered.
In the short run, Congress may push hard for action as well. Without
the constraints of the Magnuson-Moss procedures, the potential for
mischief and long run harm to the Commission and to consumers is
enormous. Although Congress and the courts may eventually restrain the
Commission, it would be far better to avoid these costs from the
beginning.
It is true that part of the problem from the 1970s has been
addressed with the Commission's adoption of the Deception Policy
Statement and the codification of the definition of unfairness.
Nonetheless, the Commission's authority remains extremely broad. The
procedural safeguards of Magnuson Moss create a strong need for the
Commission to develop clear theories and strong incentives to develop a
firm evidentiary base early in the rulemaking proceeding. When these
requirements are met, Magnuson Moss rulemaking is workable.
In some areas, the FTC has engaged in rulemaking, pursuant to
congressional direction, using APA procedures. Congressional directives
avoid a significant part of the problems that bedeviled the FTC in the
1970s, as they provide explicit political ``cover'' for the specific
rulemaking at issue. That cover may subside, however, as the political
tides shift or as the specific parameters of the proposal prompt fierce
industry resistance. Moreover, congressional directives often remove
the question of what constitutes a violation, which proved to be one of
the most contentious issues of many 1970s rulemakings. Even with
congressional authorization, I would retain Magnuson-Moss procedures
when a rulemaking is major and when Congress has not specifically
defined the violation.
5. Broad Expansion of FTC Civil Penalty Authority Is Unwise
A. Automatic Civil Penalties Are Both Unnecessary and Harmful
In most of its consumer protection matters for which monetary
relief is appropriate, the FTC already has authority to obtain money.
Using the extraordinary equitable powers of Federal district courts,
the Commission routinely obtains ex parte asset freezes, injunctions,
and redress for consumers. The Commission also can obtain disgorgement
of ill-gotten gains, and in its fraud program, discussed in detail
below, the Commission has used these powers extensively, and
successfully.
The Commission also has used these equitable remedies to recover
substantial sums from legitimate companies that engaged in significant
violations of the law. Moreover, the money recovered usually is paid as
redress to consumers injured by the illegal conduct, rather than to the
Treasury. For example, the agency obtained significant financial
recoveries in many of its subprime lending cases, including $215
million from Citigroup \55\ and $60 million from Famco.\56\ It obtained
substantial monetary relief in the form of restoring inadequately
disclosed fees in its gift card cases.\57\ And just last week it
obtained $12 million in refunds for consumers to settle allegations of
deceptive advertising of identity theft protection services.\58\
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\55\ Order, FTC v. Citigroup Inc., No. 01 CV-0606 (N.D. Ga. Sept.
19, 2002).
\56\ Order, FTC v. First Alliance Mortgage Co., No. SACV 00-964
(C.D. Cal. Mar. 21, 2002).
\57\ E.g., FTC Order, In re Kmart Corp., No. 062 3088 (Mar. 12,
2007); FTC Order, In the Matter of Darden Restaurants, Inc., et al.,
No. 062 3112 (Apr. 3 2007).
\58\ Order, FTC v. Lifelock, Inc., (D. Ariz., Mar. 9, 2010).
---------------------------------------------------------------------------
The Commission should not, however, have the authority to obtain
civil penalties in all cases. Faced with the threat of substantial
civil penalties, firms may become too cautious to avoid any possibility
of a law violation. The statutory cap on penalties at $16,000 per
violation may not sound huge, but the way the FTC counts violations
magnifies the impact. In one case, for example, the court regarded each
instance of a direct mail advertisement sent to consumers as a separate
violation.\59\ It is easy to argue that a separate violation occurs
each time an advertisement containing a deceptive claim is aired
(ordinarily hundreds or thousands of times in a campaign); it is
plausible to argue that each consumer who sees the message constitutes
a separate violation. Thus, a direct-mail advertising campaign sent to
10 million consumers is potentially subject to a civil penalty of up to
$160 billion. In practice, FTC civil penalties are obviously far
smaller, but the potential for substantial liability may lead cautious
firms to avoid conduct that would actually benefit consumers.
---------------------------------------------------------------------------
\59\ U.S. v. Reader's Digest Ass'n, 662 F.2d 955, 960 (3d Cir.
1981).
---------------------------------------------------------------------------
Consider, for example, advertising cases. As discussed above, the
economic evidence is clear that advertising offers important benefits
for consumers. When advertising is restricted, prices rise because
markets are less competitive. There is less incentive for product
improvements, because producers find it more difficult to tell
consumers about the change and to explain the benefits of the product
change. Differences between demographic groups are larger, because
advertising makes information widely available to everyone in a form
that is remarkably easy to use.
If the risk of substantial civil penalties makes advertisers too
careful about providing information, these benefits of advertising may
be reduced. There are, of course, advertising violations that are
crystal clear, and as noted above, the Commission has obtained monetary
relief in such cases. Many cases, however, are judgment calls about
whether admittedly imperfect evidence is sufficient to substantiate a
particular claim. Such cases may turn on disagreements between
qualified experts, with different views about the state of the science
or the appropriate methods for testing a particular claim. Civil
penalty liability may make advertisers considerably less willing to
make such claims, because the consequences of agreeing with the wrong
expert could be large. Consumers, however, will benefit from hearing
different points of view from different products, or from products in
different categories, enabling them to make their own choices about
which expert to believe. The risk of large civil penalty liability may
discourage that marketplace debate.
Obviously, we do not want companies to stretch the truth when doing
so would be profitable. But it should be equally obvious that we also
do not want companies to suppress the truth to avoid the risk that the
FTC will second guess their judgment and impose civil penalties. If the
claims are egregious, the Commission already has ample authority to
seek financial sanctions against violators, and has done so
successfully.
A second difficulty of across-the-board civil penalty authority
stems from the Commission's role in developing and extending common law
principles. The case-by-case process is well suited to developing new
policy, and the Commission has used it effectively to develop common
law principles of consumer protection in new areas. For example, the
Commission recently formulated general rules to protect the security of
sensitive consumer information. Using both its deception and unfairness
authority, the Commission has brought numerous cases in this century
addressing information security.\60\
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\60\ See, e.g., FTC Order, Eli Lilly & Co., No. C-4047 (May 8,
2002) (deception); FTC Order, Microsoft Corp., No.C-4010 (May 15, 2001)
(deception); FTC Order, BJ's Wholesale Club, Inc., No. C-4148 (Sept.
20, 2005) (unfairness); FTC Order, Cardsystems Solutions, Inc., No. C-
4168 (Sept. 5, 2006) (unfairness).
---------------------------------------------------------------------------
Before the Commission began pursuing information security cases,
companies were not on notice that failure to maintain reasonable and
appropriate security precautions to protect sensitive information would
subject them to liability, let alone to civil penalty liability. The
fact that the Commission lacks the authority to impose civil penalties
in such cases makes it easier to establish new legal principles,
because it encourages both the Commission and the respondent to focus
on reasonable standards for future conduct.\61\ Indeed, the vast
majority of the Commission's efforts to expand consumer protection to
new areas occur through consent agreements. For example, virtually none
of its information security cases have been litigated. Civil penalty
liability would increase a company's incentive to defend the choices it
had made, even when it is perfectly willing to agree to new standards
of conduct.\62\ This result would retard, rather than advance, the
Commission's important mission of developing appropriate standards of
consumer protection in areas it has not previously addressed. It would
waste resources in litigation about past conduct that would be better
spent on establishing appropriate standards for future behavior.
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\61\ Of course, the Commission could decide not to seek civil
penalties, but doing so when such penalties are available would subject
the agency to serious second-guessing by Congress, the press, and
consumer groups.
\62\ As the General Counsel of the respondent in one information
security case expressed it, the company was willing to be a martyr for
privacy, but did not want to be Joan of Arc.
---------------------------------------------------------------------------
Given that the FTC's information security standards are now well
known (although there are of course disputes at the margin), there may
be a case for civil penalty authority in such cases, because
establishing either harm (and therefore the basis for consumer redress)
or ill-gotten gain is difficult. In fact, the Commission has only
rarely obtained financial relief in its information security cases.\63\
If there is a case for civil penalties, however, it is a narrow one,
based on the nature of the particular violation, and not at all
generalizable to most Section 5 violations.
---------------------------------------------------------------------------
\63\ See U.S. v. ChoicePoint Inc., No. 1:06-cv-0198-JTC (N.D. Ga.
Oct. 14, 2009).
---------------------------------------------------------------------------
It is crucial to recognize that the Commission's ability to impose
sanctions is not the only consequence for companies subject to FTC
orders. Even before the FTC obtained financial relief in advertising
cases, academic studies found that an FTC complaint about deceptive
advertising led to a significant reduction in the stock market's
valuation of the company. Peltzman, for example, found a 1 to 2 percent
reduction in the stock market valuation of a company in the month
before an FTC deceptive advertising complaint, and an additional 2
percent loss in the month after a complaint.\64\ FTC economists found
an even larger effect.\65\ These losses are themselves a substantial
deterrent to violating the FTC Act. As Peltzman noted, ``the overall
message of the results is that the salary of the copywriter or lawyer
who avoids entanglement with the FTC in the first place is a bargain.''
\66\
---------------------------------------------------------------------------
\64\ Sam Peltzman, The Effects of FTC Advertising Regulation, 24
J.L & Econ. 403 (1981) (``The story the stock market appears to be
telling is that an FTC complaint implies essentially a wiping out of
the brand's advertising capital.'').
\65\ Alan Mathios & Mark Plummer, The Regulation of Advertising by
the FTC: Capital Market Effects, 12 Res. L. & Econ. 77 (1989).
\66\ Peltzman note 63 at 419.
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Since these studies, other players able to impose significant
financial penalties have also entered the scene. Class actions under
state deceptive practices laws, virtually nonexistent when the academic
studies were done, have increased substantially, and continue to grow.
State attorneys general often also weigh in, and frequently seek
monetary relief.
There is simply no reason to suspect that widespread violations by
legitimate companies subject to the Commission's jurisdiction are
occurring or will occur because of inadequate financial sanctions. The
Commission has not offered any persuasive examples of why it needs
automatic civil penalty authority.
B. Civil Penalties Are Not Needed For Fraud Cases
Preventing fraud is a crucial part of the Commission's support of
the market system and the common law. More than half of the
Commission's budget and staff is devoted to consumer protection, with a
significant focus on fraud. Fraud is essentially theft. Fraud distorts
market forces, limiting the ability of consumers to make informed
choices. Fraud leads to inefficiency, causing consumers to allocate
their resources unproductively. Fraud also reduces consumer confidence
and reduces the efficacy of legitimate advertising, diluting the amount
of useful information to guide consumers' choices. This effect also
raises costs for legitimate competitors, who must offer more assurances
of performance to overcome consumers' wariness.
The costs of fraud to consumers are enormous. Fraud takes many
forms from fraudulent credit repair services, to unauthorized billing,
to deceptive weight loss products. A 2007 FTC survey showed that an
estimated 13.5 percent of U.S. adults, approximately 30.2 million
consumers, were victims of one or more of the frauds covered in the
survey, and that an estimated 48.7 million incidents of these frauds
had occurred during the previous year.\67\
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\67\ FTC Staff Report, Consumer Fraud in the United States: The
Second FTC Survey s-1 (Oct. 2007) available at http://www.ftc.gov/opa/
2007/10/fraud.pdf.
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The victims of fraud are as varied as the form of the fraud. For
example, the AARP has shown that investment fraud victims are more
likely to be male, 55-61, more financially literate, college-educated,
higher income, and more optimistic.\68\ Lottery fraud victims are more
likely to be female, over 70 years old, less financially literate, less
educated, and have lower incomes.\69\
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\68\ FTC Fraud Forum, Presentation, Day One: Panel 1 (Doug Shadel,
State Director, AARP Washington, Advances in Fraud Prevention
Research), at slide 31 (Feb. 25, 2009), available at http://
www.ftc.gov/bcp/workshops/fraudforum/index.shtm#presentations.
\69\ Id. at slide 32.
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Because fraud is often national in scope, and scarce Federal
criminal law enforcement resources are used primarily against drug
trafficking, terrorism, and other crimes, fraud will go largely
unchecked without the active leadership of the Nation's consumer
protection agency. We created the FTC's modern anti-fraud program in
1981 when I was Director of the Bureau of Consumer Protection. The
development of a vibrant anti-fraud program at the FTC is a major
success story. Fortunately, the legal tools for such a program already
existed; in 1973, Congress had amended the FTC Act in Section 13(b) to
allow the Commission to sue in Federal district court and obtain strong
preliminary and permanent injunctive relief, including redress for
defrauded consumers.\70\
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\70\ The Commission uses the ``second proviso'' of 13(b), ``in
proper cases the Commission may seek, and after proper proof, the court
may issue, a permanent injunction.'' Trans-Alaska Pipeline
Authorization Act, Pub. L. No. 93-153, 408(f), 87 Stat. 576 (1973).
See, e.g., John Villafranco, Looking Back on the Muris Years in
Consumer Protection: An Interview With Timothy J. Muris, Antitrust 80,
82-83 (Summer 2004).
---------------------------------------------------------------------------
Before the shift to Federal court, the Commission's consumer
protection work relied on its administrative process. Most
investigations relied upon voluntary production of requested documents
and information from the investigated targets, who had every incentive
to delay. This process had obvious drawbacks for addressing fraud.
Federal district court cases proved much more effective, enabling the
Commission to bring fraudulent schemes to an immediate halt, to take
the targets by surprise so that money might be available for redress,
and to prevent destruction of records showing the extent of the fraud
and identifying injured parties.
Almost from the inception of the 13(b) program, the Commission
has not only halted fraudulent schemes, but also pursued consumer
redress and other potent equitable remedies to benefit consumers. Very
early in the 13(b) consumer protection cases, the Commission
obtained, as ancillary to issuance of permanent injunctions,
provisional remedies such as a freeze of assets, expedited discovery,
an accounting, and the appointment of a receiver on the ground that
these remedies would insure the effectiveness of any final injunction
ordered.\71\
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\71\ FTC v. H.N. Singer, Inc., 668 F.2d 1108 (9th Cir. 1982) is a
seminal case establishing the Commission's authority to seek, and the
district courts' power to grant, all the traditional equitable remedies
inherent in the authority granted by 13(b) to obtain permanent
injunctions. Singer was the first 13(b) case to attack a business
opportunity scam.
---------------------------------------------------------------------------
To use this approach effectively, the agency employed modern
investigative techniques geared for speed and stealth. The agency also
developed professional investigators trained to uncover fraudulent
schemes, determine ownership and control of such schemes, trace assets,
develop evidence, preserve evidence for trial, and testify in court.
More recently, Commission investigators have become experts in Internet
investigative techniques and have provided training for thousands of
local, state, Federal, and international criminal and civil law
enforcement offices.
Once launched, the fraud program grew in importance and success.
Each succeeding FTC Chairman has expanded its scope and improved its
operation. By 2004, when my tenure as Chairman ended, there had been a
total of 78 sweeps, resulting in 2,200 law enforcement actions.\72\ Not
surprisingly, as the number of filings increased, so has the amount of
consumer redress ordered. In Fiscal Year 2003, for example, nearly $873
million in consumer redress was ordered in 98 judgments.\73\
---------------------------------------------------------------------------
\72\ David R. Spiegel, Chasing the Chameleons: History and
Development of the FTC's 13(b) Fraud Program, 18 Antitrust 43 (Summer
2004).
\73\ FTC, Federal Trade Commission Performance Report--Fiscal Year
2003 (Mar. 2004).
---------------------------------------------------------------------------
Because of the ability to obtain consumer redress, and because
virtually all of the money paid to the fraudsters is obtained illegally
and thus eligible for redress, the FTC already has the authority to
obtain all of the monetary relief available in these cases. The
effective limit on the FTC's ability to recover money in cases of fraud
is the money available, not any lack of authority to recover the funds.
Expanded civil penalty authority is simply unnecessary in fraud
cases.\74\
---------------------------------------------------------------------------
\74\ Many fraudsters should be jailed, and the Commission also has
taken important steps to improve its cooperation with criminal law
enforcement agencies. While Chairman, we established a Criminal Liaison
Unit to coordinate with criminal law enforcement agencies across the
country to encourage criminal prosecution of consumer fraud. The unit
identifies criminal law enforcement agencies that may bring specific
types of consumer fraud cases, educates criminal law enforcers in areas
of FTC expertise, coordinates training with criminal authorities to
help the FTC prepare cases for referral and parallel prosecutions, and
provides Special Assistant United States Attorneys to help prosecute
the worst FTC Act violators. Between October 1, 2002, and July 31,
2007, 214 individuals were indicted in telemarketing fraud cases
resulting from referrals from the Criminal Liaison Unit. (Prepared
Statement of The Federal Trade Commission Before the Senate Committee
on Commerce, Science and Transportation, U.S. Senate, July 31, 2007,
available at http://www.ftc.gov/os/testimony/P034412telemarket.pdf.)
Another important expansion of the FTC's consumer protection
efforts involves Spanish language media. The agency uses its full
powers to prosecute fraud and deception occurring in the media, and has
brought numerous cases against fraud and other illegal marketing
practices that targeted the Hispanic community. That effort continues.
---------------------------------------------------------------------------
C. Automatic Civil Penalties Are Unnecessary in Antitrust Cases
Although largely unnoticed, this committee's reauthorization bill
in the last Congress and the House-passed version last year also would
allow for automatic civil penalties in antitrust cases. The Senate
Commerce Committee did so by its express terms.\75\ At first glance,
the House bill does not appear to do so, because it provides for civil
penalties only in cases involving ``unfair or deceptive acts or
practices.'' Within the FTC, antitrust cases are traditionally thought
of as involving ``unfair methods of competition.'' Yet, there is no
prohibition, legal or otherwise, that prevents the agency from
designating antitrust cases as involving ``unfair or deceptive acts or
practices,'' and, in fact, the Commission has recently done so in its
actions against Negotiated Data Solutions and Intel.\76\ Moreover, the
FTC has proposed unfair acts or practices rules involving practices
most practitioners would regard as antitrust issues, including
restraints on advertising and restrictions on the form of operations
businesses could take.\77\
---------------------------------------------------------------------------
\75\ FTC Reauthorization Act of 2008, S. 2831, 110th Cong. (2008)
(``The Commission may commence a civil action to recover a civil
penalty in a district court of the United States against any person,
partnership, or corporation which violates this Act . . ..'').
\76\ FTC Order, Negotiated Data Solutions, No. C-4234 (Sept. 22,
2008); FTC Order, Intel Corp., No. 9341 (Jan. 19, 2010).
\77\ Advertising of Ophthalmic Goods and Services, 43 Fed. Reg.
23992 (June 2, 1978); (``Eyeglasses I''); Ophthalmic Practice Rules, 54
Fed. Reg. 10285 (Mar. 13, 1989) (``Eyeglasses II'') (the rule regarding
advertising restrictions was mooted when the Supreme Court protected
such advertising under the First Amendment of the U.S. Constitution.
The D.C. Circuit struck down the commercial practices rule for reasons
unrelated to the antitrust/consumer protection distinction) (see Am.
Optometric Ass'n v. FTC, 626 F.2d 896 (D.C. Cir. 1980)).
---------------------------------------------------------------------------
Automatic civil penalties in antitrust cases are both unnecessary
and unwarranted. Indeed, a unanimous FTC explicitly stated in 2003 that
monetary relief (in the form of disgorgement) was inappropriate for
most of its antitrust cases.\78\ The FTC said that it would ``continue
to rely primarily on more familiar, prospective remedies,'' \79\ and
would not seek monetary relief when it would result in injured persons
receiving duplicative recoveries or cause defendants to make multiple
payments for the same injury. As the agency stated: ``although a
particular illegal practice may give rise both to monetary equitable
remedies and to damages under the antitrust laws, when an injured
person obtains damages sufficient to erase an injury, [the FTC does]
not believe that equity warrants restitution to that person.'' \80\
Because private, treble actions follow most FTC antitrust cases,
monetary relief is simply unnecessary as a routine part of the FTC's
antitrust arsenal.
---------------------------------------------------------------------------
\78\ Federal Trade Commission, Policy Statement on Monetary
Equitable Remedies in Competition Cases, 68 Fed. Reg. 45,820 (Aug. 4,
2003).
\79\ Id.
\80\ Id.
---------------------------------------------------------------------------
6. Congress Should Restore Equality Between FTC and DOJ Merger
Standards
Both the FTC and the DOJ enforce Section 7 of the Clayton Act,\81\
which determines the legality of mergers. Mergers or acquisitions of a
certain size \82\ (and not subject to an exemption) must be notified to
the FTC and the DOJ, and the parties must observe a waiting period,
prior to consummation of the transaction. Either the FTC or the
Antitrust Division of the Department of Justice (but not both) can
investigate a merger and seek to enjoin it in Federal district court.
Unfortunately, a few recent court decisions provide the FTC with a
lower preliminary injunction standard than the standard for the DOJ.
Because of this lower standard, it is now possible for the FTC to
obtain a preliminary injunction to block a merger with evidence that
would be insufficient for the DOJ to obtain the injunction. Because
most preliminarily enjoined deals cannot, as a practical matter,
survive the months (much less years) of delay attendant upon an FTC
administrative proceeding, the FTC's relative ease in obtaining a
preliminary injunction means that it can permanently foreclose more
mergers than its counterpart.
---------------------------------------------------------------------------
\81\ 15 U.S.C. 18.
\82\ 15 U.S.C. 18(a).
---------------------------------------------------------------------------
This result is fundamentally unfair. Because the FTC and DOJ divide
merger review between them pursuant to an ad hoc agreement, the
legality of some mergers today depends not on their underlying merits,
but instead on which agency reviews them. In other words, the flip of a
coin (to resolve a dispute between the two agencies over which agency
should review the merger) could determine whether a merger survives
antitrust scrutiny.
Moreover, the FTC's advantage results from a judicial misreading of
Congressional intent. Under the public interest test the courts apply,
the DOJ must prove a likelihood of success to obtain a preliminary
injunction:
The proper test for determining whether preliminary relief
should be granted in a Government-initiated antitrust suit is
whether the Government has shown a reasonable likelihood of
success on the merits and whether the balance of equities tips
in its favor . . . once the Government demonstrates a
reasonable probability that 7 has been violated, irreparable
harm to the public should be presumed. To warrant that
presumption, the Government must do far more than merely raise
sufficiently serious questions with respect to the merits to
make them a fair ground for litigation.\83\
---------------------------------------------------------------------------
\83\ U.S. v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980)
(emphasis added).
In some circumstances, the DOJ does not need to meet this standard.
If the DOJ wants to use a lesser likelihood-of-success standard,
however, it must--like private litigants--prove that the equities are
strongly in its favor.\84\
---------------------------------------------------------------------------
\84\ See, e.g., United States v. Gillette, 828 F. Supp. 78, 96
(D.D.C. 1993) (``given the strength of plaintiff's irreparable injury
argument, plaintiff need only make a lesser showing on likelihood of
success'' but ``[a]s plaintiff has failed to demonstrate any likelihood
of success, the court may not enter a preliminary injunction on this
balance''); United States v. UPM-Kymmene, Oyj, No. 03-2528, 2003 WL
21781902 (N.D. Ill. July 25, 2003) (describing a sliding scale analysis
that balances the harm to the parties against the Government's
likelihood of success).
---------------------------------------------------------------------------
Once the FTC acquired the right through section 13(b) of the FTC
Act to seek an injunction against mergers, it was initially held to a
quite similar standard. Under section 13(b), the FTC is entitled to a
preliminary injunction ``[u]pon a showing that, weighing the equities
and considering the Commission's likelihood of ultimate success, such
action would be in the public interest.'' \85\ As one court commented:
``The case law Congress codified [in section 13(b) of the FTC Act] . .
. permits the judge to presume from a likelihood of success showing
that the public interest will be served by interim relief.'' \86\ Like
the DOJ, a lesser showing on likelihood of success was held to be
appropriate only with a ``requisite showing on the equities'': \87\
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\85\ 15 U.S.C. 53(b).
\86\ FTC v. Weyerhauser Co., 665 F.2d 1072, 1082 (D.C. Cir. 1981)
(quoting H.R. Rep. No. 624, at 31 (1973), reprinted in U.S.C.C.A.N. at
2533).
\87\ FTC v. Beatrice Foods Co., 587 F.2d 1225, 1229 (D.C. Cir.
1978) (citing FTC v. Lancaster Colony Corp., 434 F. Supp. 1088
(S.D.N.Y. 1977)).
[I]f [the FTC] shows that the newly-minted ``equities'' weigh
in its favor, a preliminary injunction should issue if the FTC
has raised questions going to the merits so serious,
substantial, difficult and doubtful as to make them fair ground
for thorough investigation, study, deliberation and
determination by the FTC in the first instance and ultimately
by the Court of Appeals.\88\
---------------------------------------------------------------------------
\88\ FTC v. Lancaster Colony Corp., 434 F. Supp. 1088 (S.D.N.Y.
1977) (citing Hamilton Watch Co. V. Benrus Watch Co., 206 F.2d 738, 740
(2d Cir. 1953)).
Recent court decisions, however, have reduced the FTC's burdens.
Under Whole Foods, the FTC can now use the ``serious question''
standard without making an equitable showing in its favor. It can
enjoin a merger simply by demonstrating that there are ``questions
going to the merits so serious, substantial, difficult, and doubtful as
to make them fair grounds for thorough investigation.'' \89\ According
to Judge Brown, this means that the FTC is entitled to a preliminary
injunction unless it ``entirely failed to show a likelihood of
success.'' This conclusion departs from the statutory standard and its
legislative history, which requires the FTC, in the first instance, to
show likelihood of success. Further, the equitable burden has somehow
shifted to the merging parties, who now must demonstrate a ``balance
[of equities] against the FTC'' in order to hold the FTC to a ``greater
likelihood of success.'' \90\
---------------------------------------------------------------------------
\89\ See FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir.
2008); followed shortly thereafter by FTC v. CCC Holdings Inc., 605 F.
Supp. 2d 26 (D.D.C. 2009).
\90\ Whole Foods, 548 F.3d at 1035, 1041.
---------------------------------------------------------------------------
These changes had a notable and predictable impact on the outcome
in FTC v. CCC Holdings Inc. After finding that both the government and
defendants had adduced evidence in their respective favors--a ``tie''
so to speak--the Court still granted the preliminary injunction,
commenting that:
Whether the Defendants' argument that the unique combination of
factors in these markets negates the probability that the
merger may tend to lessen competition substantially, or whether
the FTC is correct that the market dynamics confirm the
presumptions that follow its prima facie case, is ultimately
not for the Court to decide. . . . The Defendants' arguments
may ultimately win the day when a more robust collection of
economic data is lain before the FTC. On this preliminary
record, however, the Court must conclude that the FTC has
raised questions that are so `serious, substantial, difficult
and doubtful' that they are `fair ground for thorough
investigation, study, deliberation and determination by the
FTC.'' \91\
---------------------------------------------------------------------------
\91\ CCC Holdings, 605 F. Supp. 2d at 67-68. O'Melveny & Myers, of
which I am Of Counsel, represented one of the merging parties.
This lower standard is much more like that imposed for summary
judgment--whether there are issues of fact that require a trial--than
the standard for a preliminary injunction.\92\ The court further found
that the defendants had not met their equitable burden--even though it
accepted that the evidence supported the combined company's ability to
offer an integrated product that incorporated the best features of each
company's portfolio, that the merging parties envisioned spending more
on research and development than they could spend individually, and
that the consumers would benefit from more innovative products.\93\
---------------------------------------------------------------------------
\92\ Id. at 36, n. 11 (``precedents irrefutably teach that in this
context `likelihood of success on the merits' has a less substantial
meaning than in other preliminary injunction cases'').
\93\ Id. at 76.
---------------------------------------------------------------------------
With these rulings, the DOJ and FTC no longer operate under the
same, or even similar, standards. The DOJ must still prove that it is
likely to succeed in blocking a merger to obtain a preliminary
injunction. Alternatively, if the DOJ shows that the equities are in
its favor, above and beyond the normal public interest presumption, it
may obtain a preliminary injunction by showing that it has raised a
``serious question'' meriting further investigation. In contrast, the
FTC can now invoke Whole Foods and CCC Holdings to access the ``serious
question'' standard without making a concomitant equitable showing.
Indeed, to avoid a preliminary injunction the merging parties in an FTC
case (but not a DOJ one) must demonstrate that the equities are
decidedly in their favor.
Thus, merging companies under FTC review have a more onerous burden
than those before the DOJ in preliminary injunction proceedings: they
must show that there is no serious question on the merits or, if there
is a serious question, that the preliminary injunction would
irreparably harm the public. Because there is no policy justification
for imposing a higher standard of proof on some industries and not on
others, and because this result is fundamentally unfair, this
difference in standards should be rectified. Congress should restore
its original intent and return the FTC standard to that of the DOJ.\94\
---------------------------------------------------------------------------
\94\ This committee may also wish to consider the recommendations
of the Antitrust Modernization Commission in 2007, which address the
issue discussed above, as well as the FTC's ability to challenge
mergers administratively while the DOJ can proceed only in Federal
court. See Antitrust Modernization Commission--Report and
Recommendations 129-132 (2007).
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7. Creation of a Separate Third-party Liability Section in the FTC Act
Is Both Unwise and Unnecessary
The step is unwise because it creates a uniform standard where
uniformity is inappropriate. For example, consider advertising
agencies, which the Commission has long held liable for deceptive and
unsubstantiated claims if they ``knew or should have known'' that the
claim was deceptive or unsubstantiated.\95\ The rationale for liability
is that the ad agency has considerable expertise in how consumers are
likely to interpret the communication, and can easily check with the
client to determine whether there is a reasonable basis for the claim.
Agencies are not, however, held responsible for evaluating all of the
scientific details that may stand behind the claim. If the
substantiation on its face supports the claim, the agency can rely on
the client for the details, but it is responsible if there are obvious
flaws in the substantiation.
---------------------------------------------------------------------------
\95\ See e.g., FTC Consent Order, Bozell Worldwide, Inc., (Jan. 13,
1999); FTC Consent Order, Jordan, McGrath, Case & Taylor, No. 96-3053
(June 26, 1996).
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Publishers are every bit as essential to the completed deceptive
advertisement as the advertising agency. If they are liable at all,
given the First Amendment concerns that such an action would raise, it
should be under a different and much more stringent standard than the
standard for ad agency liability. The publisher has no particular
expertise in determining the messages the advertisement is likely to
convey to consumers, and it has no expertise in evaluating the
substantiating evidence.
This conclusion does not mean that publishers cannot play a role in
policing fraud. During my tenure as Chairman, we launched a program to
address deceptive weight loss claims that were widespread in the
popular press. After a workshop to explore the scientific issues, we
developed a list of seven weight loss claims that were false on their
face. These claims, identified and explained in a pamphlet distributed
to publishers called Red Flag Bogus Weight Loss Claims,\96\ formed the
basis for a campaign to get publishers to reject advertisements
containing bogus claims.\97\ The campaign reduced the incidence of
obviously false claims from 50 percent of weight loss ads in 2001 to 15
percent in 2004.\98\
---------------------------------------------------------------------------
\96\ Available at http://www.ftc.gov/bcp/edu/pubs/business/adv/
bus60.pdf.
\97\ Timothy J. Muris, Chairman, FTC, Remarks at the Cable
Television Advertising Bureau: Do the Right Thing (Feb. 11, 2003).
\98\ 2004 Weight-Loss Advertising Survey: A Report From the Staff
of the Federal Trade Commission (April 2005), available at http://
www.ftc.gov/os/2005/04/050411weightlosssurvey
04.pdf.
---------------------------------------------------------------------------
A new section establishing third-party liability is unnecessary
because the FTC already has the ability to attack third parties in
appropriate circumstances. Careful use of the Commission's
``unfairness'' jurisdiction, which Congress codified in 1994,\99\
provides the best vehicle to address third parties. If a third party
can prevent a violation that injures consumers at low net cost, it is
straightforward to argue that the failure to do so is an unfair
practice. Unfair practices derive from substantial injury to consumers,
that consumers cannot reasonably avoid, the third party can prevent the
violation at low cost, and the injury is not outweighed by
countervailing benefits. The extent to which the third party knows of
the violation will of course be relevant in determining the costs of
avoiding injury, but it is not necessarily the only factor. The
unfairness analysis focuses the inquiry on the benefits and costs of
liability for a particular practice, which is precisely where the focus
should be.
---------------------------------------------------------------------------
\99\ 15 U.S.C. 45(n).
---------------------------------------------------------------------------
In a recently proposed rule aimed at fraud in certain mortgage
practices, the FTC would impose third-party liability, using its
existing authority.\100\ As in this proceeding, the standards for
third-party liability should be developed under current law.
---------------------------------------------------------------------------
\100\ Mortgage Assistance Relief Services, 74 Fed. Reg. 26,130
(June 1, 2009).
---------------------------------------------------------------------------
Conclusion
Once again, thank you for the opportunity to testify today. I would
be glad to answer any questions.
Senator Pryor. Thank you.
And I want to thank Senator Wicker for helping me manage
this hearing.
But, thank you very much.
Let me start, if I might, with Ms. Pridgen. You mentioned,
in your written testimony, that there are checks and balances,
in the APA process and elsewhere, that would be sufficient to
protect the interests of all parties, while providing FTC with
the tools it needs to protect consumers. Which checks and
balances are you talking about? And, you know, how will they
protect interested parties?
Ms. Pridgen. Well, what I was saying was that, under the
APA rulemaking, the agency has to provide notice of the
proposed regulation, and they have to allow comments from all
interested parties. It's my understanding that the FTC and
other agencies don't rely solely on written comments, but also
have open roundtable-type hearings to gather information. The
main difference would be, instead of having a trial-type arena,
where you have 100 attorneys examining 100 witnesses, and 100
other attorneys cross-examining those witnesses, you have a
more informal roundtable discussion, where the facts can be
gathered.
APA rulemaking is subject to judicial review. Not only can
a rule be overturned if it's arbitrary and capricious, it can
be overturned if it goes beyond the statutory mandate of the
agency. And also, courts can review regulations, under the
Constitution; and that would be particularly relevant, in terms
of the FTC, if they were to regulate in the area of
advertising. Commercial advertisers do have some limited First
Amendment rights, and the court would be there to provide a
check on that.
As far as impact on businesses is concerned, there are--the
Regulatory Flexibility Act, the Congressional Review Act. And
then, also, a little-mentioned part of the FTC Act is, the FTC
Act already requires the Commission to act in the public
interest. That doesn't get mentioned much in FTC cases. But,
under state little FTC Acts or Unfair and Deceptive Trade
Practices Acts, the public-interest requirement is often used
in court cases to say that those statutes can't be used for
individual or trivial cases, that it has to be something that
affects the public at large. And so, I think that would be kind
of a substitute for the prevalency requirement in Mag-Moss.
Senator Pryor. OK.
Mr. Mierzwinski, let me ask you--in your testimony, you
wrote that you support a robust FTC, and you also support the
proposed Consumer Financial Protection Agency. So, tell me, in
your view, kind of, what's the interplay between them, you
know, what's the right combination of a--in your view, a strong
FTC and a strong Consumer Protection watchdog.
Mr. Mierzwinski. Thank you, Senator.
And the reason that consumer groups and others--Professor
Elizabeth Warren came up with the idea--support a new Consumer
Financial Protection Agency is that we don't have an agency
that has one job: protecting financial consumers. The bank
regulators have at least two jobs; safety and soundness always
trumps the consumer role that they have. And we have numerous
cases and examples of the bank regulators ignoring their
consumer protection mission. As we heard earlier, the Federal
Trade Commission has numerous other missions, besides its
Division of Financial Practices.
The Federal Trade Commission is primarily a law enforcement
agency, however, and most of its actions are after a violation
has occurred. It doesn't--it has limited rulemaking authority,
as we've already heard. And we do support giving it more. But,
it doesn't have that examination authority, that prudential
supervision authority that we want to give the CFPA. We want to
make it one-stop shopping for consumers. But, on the other
hand, on the enforcement side, we think that they can work
together with concurrent jurisdiction over enforcement. More
than one cop on the beat is usually a good thing. My office is
on Capitol Hill, as yours are, and we're patrolled both by
Metro and by the Capitol Police. There's no problem with that.
We see the same issue here. The Federal Trade Commission and
the CFPA or the CFPB, in Senator Dodd's bill, can work together
on the enforcement side.
Senator Pryor. Mr. Muris, I'd like to ask you a follow-up
to something you said in your opening statement, and I just
want to make sure I got this right. I think you said that
rulemaking should not be part of--I don't remember if you said
``oversight'' or ``enforcement''----
Mr. Muris. No, I--no. Formal rulemaking shouldn't be a
major part of FTC consumer protection.
Senator Pryor. OK.
Mr. Muris. You want me to----
Senator Pryor. Yes. I----
Mr. Muris. I'm sorry. I didn't mean to
Senator Pryor. Well, I----
Mr. Muris.--cut you off.
Senator Pryor. No, no. That's really, you know, what I'm
asking. And one of the concerns I have about Magnuson-Moss is--
you've heard the witnesses today say that--and Mr. Rosch
earlier said this--that when you get into this, I guess they
call it a trial or this hearing phase, it sounds like it's a
kind of a morass of a procedure could literally take years to
get through. And with all the cross-examinations and all the
panels--and I'm not sure I understand it--you've been there,
and you know how it works--you know, I'm concerned about that
process. That sounds very inefficient and ineffective. But, at
the same time, I am curious about your views about whether
rulemaking should really be part of what FTC does.
Mr. Muris. Well, it should be a part. But, as I testified
last summer before most of what the FTC does is enforce what
are already rules. We just don't think of them as rules.
They're the common-law principles of----
Senator Pryor. Right.
Mr. Muris.--for example, ``Don't breach your contract.
Don't engage in fraud''----
Senator Pryor. I remember you saying that.
Mr. Muris. Right.
Senator Pryor. Right.
Mr. Muris. Right. And so, those are rules. I believe in
enforcing them. I believe it's most of what the FTC does.
That's why I used the word ``formal'' in terms of rulemaking. I
believe there are some necessary rules--we did the National Do
Not Call rule, my 15 minutes of fame in life. So, I'm certainly
not an opponent of FTC rules.
I do think the Magnuson-Moss procedures are workable.
You've been involved in trials. Many rules got through in 2, 3,
4 years. The problem of why so many rules took so long is the
FTC began them without knowing what they were doing. This whole
idea of the designation is not a big problem. In the notorious
children's advertising rule, they designated three disputed
issues of material fact. Three isn't a large number. If you
know what you're doing, you can manage the process.
And, as Ms. Woolley said, the FTC's an unusual and, in some
ways, unique agency. It has this broad jurisdiction over
everything. It's not an expert. So, I think these extra
procedures are useful and helpful.
Senator Pryor. Thank you.
Senator Wicker.
Senator Wicker. Thank you.
Continuing with Chairman Muris, Commissioner Rosch said
there were no Magnuson-Moss rules since 1978. Is that correct?
Mr. Muris. Well, that's literally not true. By my count,
there are at least 15 Magnuson-Moss rules that got to the
Commission. Some of them the Commission killed. Most of them
started before 1978, but there have been a few rules. But, it's
clear that the major binge of FTC rulemaking--of proposed
rulemaking--began before 1978, and that's what I was responding
to, for Chairman Pryor. That was a different agency.
Senator Wicker. Before 1974?
Mr. Muris. No, 1978. When Magnuson-Moss passed in 1975, you
had a splurge of rulemaking; some of them had already been
underway. You had 16 in 15 months. And that was a different
vision of the FTC. It was a vision of the FTC as the second
most powerful legislature in Washington, passing rules to
transform entire industries. The vision of the FTC that has
prevailed for the last 30 years is that the FTC's primary job
is a law enforcement agency enforcing these basic common-law
rules, supplemented by occasional formal rules.
What I'm worried about is, if you change Magnuson-Moss and
go to APA rulemaking that, unfortunately, as Congress has shown
in the past when it makes these changes, they come with
mandates to do many rules. When we did the Fact Act, a
Republican Congress gave us 15 or 16 new rules to do. I'm
worried about that. And I'm worried about the temptation to
send the FTC back to the 1970s.
Senator Wicker. The Magnuson-Moss statute did not change in
1978, did it?
Mr. Muris. It was 1975 that it passed.
Senator Wicker. OK. So, what I understand your testimony to
be is that, from 1975 to 1978 there was a spate of rulemaking.
Mr. Muris. Correct.
Senator Wicker. And then the tapering off of that
rulemaking was for reasons other than the statute----
Mr. Muris. Yes.
Senator Wicker.--we have.
Mr. Muris. Magnuson-Moss did not kill FTC rulemaking. A
change in enforcement philosophy killed FTC rulemaking.
Senator Wicker. So, the large number of rules that were
made early on, were made under the very statute that we're
operating under today, is that correct?
Mr. Muris. As I discussed, yes.
Senator Wicker. OK.
Mr. Muris. Yes, that's correct.
Senator Wicker. What about this issue that Commissioner
Rosch mentioned of not, after all this time, being able to know
what the word ``prevalent'' means?
Mr. Muris. I would like a real prevalence requirement--that
the problem is, at the Commission, they interpret it as having
two consent orders. And if you're in an industry with some bad
actors, you can have lots of consent orders, where most of the
industry is legitimate. I would support a prevalence
requirement that meant something. The current prevalence
requirement doesn't mean----
Senator Wicker. So, you----
Mr. Muris.--anything.
Senator Wicker.--have no objection to the Congress working
on tightening that definition up and being more helpful.
Mr. Muris. That's correct. But, the heart of Magnuson-Moss
is the designation of the disputed issues of material fact and
the cross-examination. ``Prevalence'' is not meaningful as
defined now.
Senator Wicker. OK. Chairman Pryor mentioned, in his
question, the testimony about the complicated procedures of
cases. And then his question actually went in a different
direction. But, let me follow up on that.
``Thirty-eight days of testimony, 7 years of proceedings,''
that was the testimony of Commissioner Rosch. Do you have any
reason to disagree with those facts? Was that factual
testimony, as far as you know?
Mr. Muris. I don't know the exact average. But, I do know
there's a big variance. I know the eyeglasses rules, for
example, in which I was involved, took around 3 years. I dare
say--I know Senator Pryor's prior record in enforcement, and he
would've done the rules a lot faster.
Senator Wicker. OK. Well, why would a case take 38 days and
7 years of proceeding?
Mr. Muris. Well, 38 days of hearings is not always a lot of
days. Seven years of proceedings was because they did not have
a clear theory of what they were doing. They believed, in those
days, that the Commission had this vast power to transform the
economy. And they were proposing rules with 500-page
statements, that--when you sorted them out, they didn't really
say, ``These are the three or four things we think are wrong.
These are why we think they're wrong. This is the empirical
evidence that supports why we think they're wrong.'' The
eyeglasses rules, on the other hand, which took 3 years, did
exactly the things that I said.
Senator Wicker. If we move forward and repeal, or
substantially change, the Magnuson-Moss safeguards, what's it
going to hurt? How's it going to hurt the average guy out there
in Arkansas and Mississippi?
Mr. Muris. The Commission has enormous power over vast
sectors of the economy. If you change rulemaking and give the
FTC instructions to do rules in food, to do rules in behavioral
advertising, to do rules in this, that, or the other thing,
you'll put the FTC on a course where, 5 years later, you know,
your constituents are going to be very unhappy and Congress is
going to say, ``Why are you doing all this?'' The Commission
can't be a competitor with the Congress in trying to legislate
for so much of the economy. And I don't think the Commission
can do it well. I think what it does well, and what it has done
well for 30 years, is enforce these common-law rules. And
that's made the Commission one of the most renowned agencies in
the world, and I think it deserves that rank. Most of their
work today continues on that. And I would hope it would
continue.
Senator Wicker [presiding]. Thank you.
And the Chair's allowed me to go over just a bit.
Mr. Mierzwinski, Ms. Pridgen seems to be saying, in her
testimony, that things have changed since 1974. Commissioner
Rosch says Magnuson-Moss was wrong from the outset. Which
position do you subscribe to?
Mr. Mierzwinski. Well, I think I subscribe to both. Things
have changed, and Magnuson-Moss was wrong. I think where things
have changed is, the Commission has, in fact, new duties and
new responsibilities, that weren't countenanced back then, that
it deserves greater powers to enforce against. But I think
Magnuson-Moss was wrong, because it imposed just a tremendous
regulatory burden on the agency. It slowed it down. It tied it
in knots. And it never really worked.
Senator Wicker. And then, for Professor Pridgen and Ms.
Woolley, and then Commissioner Muris, I understand, Professor,
that your testimony is that there are indeed safeguards against
overzealousness, above and beyond the generic Administrative
Procedures Act. Is that your testimony? And would you describe
those in a little more detail?
Ms. Pridgen. Yes. Well, first of all, the FTC has tried to
restrain itself with their unfairness and deception policies,
so that the Commission no longer views itself as a second
legislature. It has used cost-benefit analysis, it looks for
material consumer injury, it looks for deception against the
reasonable consumer. So, there are those things within the
agency itself.
The Regulatory Flexibility Act came into play, I believe,
in the early 1980s, which requires all agencies to have a
regulatory agenda, to submit a statement of impact on small
entities, and kind of a cost-benefit analysis there.
The Congressional Review Act requires regulations to be
submitted to Congress before they take effect.
Senator Wicker. Been used one time.
Ms. Pridgen. Well, it's there.
Senator Wicker. Ms. Woolley, would you like to comment?
Ms. Woolley. I would have to say that--going back to the
previous witness's testimony of the amount of time that APA
rulemaking authority takes, versus Magnuson-Moss--in some ways,
I would have to say that that's kind of evidence that Magnuson-
Moss is actually working. There have been--in the intervening
30 years, there have been many instances where Congress--many
instances where Congress has designate--has delegated APA
rulemaking authority to the Federal Trade Commission. Some of
the issues, that have been mentioned here already, include data
security and data-breach issues, identify theft. The--those
are--CAN-SPAM is another one--Those are all areas where the
Congress has been the decider and said, ``We think that these
are significant enough practices that--they've attracted our
attention, and we would like you, FTC, to issue rules on these
practices.'' And FTC has done that quite successfully.
So, I would argue that it's really Congress's role to
decide when FTC needs that authority, delegate it
appropriately, and then have FTC do its job.
Senator Wicker. Commissioner Muris, do you have anything to
add to that?
Mr. Muris. Yes. Let me give you a recent example why
Magnuson-Moss is helpful. The FTC, again, has experience with
fraud. And they decided to do a business opportunities rule
recently, because they had this experience with fraud. It
turned out that--and they didn't know this, and, there was no
reason that they should by their experience--they were
proposing a rule that would affect 13 million people in part-
time business--in your state, for example, there are Amway
agents and several part-time insurance agents--legitimate
business people, who work part-time who would've been hurt by
that rule. If the Commission had gone ahead, you would have
been deluged. I represented someone in this issue, and we were
able to threaten the Commission with Magnuson-Moss procedures.
They were never used. And the Commission--I hope it would have
pulled back anyway, but it did pull back. It--they said we
didn't mean this. We did not want to regulate all these
legitimate businesses. But, because the Commission isn't a
sector-specific regulator, like most of the other agencies
we're talking about, the Mag-Moss procedures provide this extra
check. And they worked there. Yet the Commission didn't even
have to use them. The threat, I think, was helpful.
Senator Wicker. Thank you.
Senator Pryor [presiding]. Thank you.
Mr. Muris, let me follow up with you on that sort of
general line. Just--not to spar with you, but just for
clarification, you said that Magnuson-Moss didn't change
because the statute changed, but it was a philosophy that
changed. But, I thought there----
Mr. Muris. Yes.
Senator Pryor.--there was a statutory change in 1980. Am I
wrong about that?
Mr. Muris. There were some changes in 1980. There was a
reauthorization fight, and the biggest change since 1975
happened in 1994, which was the codification of Unfairness.
Congress made it clear, in 1980, that the Commission could not
do the children's advertising rule under Unfairness. Yet, the
Commission when it killed the Children's Advertising Rule,
said, ``We could've done it anyway, under Deception, but we're
not going to do it.'' The Congressional opposition was a big
deal, but I don't think the statutory change--I think it was in
an Appropriations Act--was a big deal.
Senator Pryor. And you mentioned Do Not Call. How long did
that take you--the Commission to do?
Mr. Muris. The Do Not Call, from the time we first talked
about it publicly to the time it went into enforcement, was 2
years. I believe if we were just doing Do Not Call--I said this
in my testimony--and it was Magnuson-Moss, we would have had to
change how we did it, but we could have done it in 2 years.
Senator Pryor. So, in other words, it was done under APA.
Mr. Muris. Sure.
Senator Pryor. Yes. I just wanted to get that clear in my
mind, and also on the record.
Ms. Woolley, let me ask you a question about the DMA. And I
know you talked about this some in your testimony and in
questions since, but, give me--and I'm sorry I missed a little
bit of your testimony because of the vote--but, which proposed
reform, in--of the FTC concerns DMA the most? Is it the
Magnuson-Moss? And which part of Magnuson-Moss? The reform or--
--
Ms. Woolley. Thank you, Senator.
Senator Pryor.--you know.
Ms. Woolley. Yes. It is the Magnuson-Moss provision. Of the
four things that have been outlined today--aiding and abetting,
civil penalties, independent litigation authority, and APA
rulemaking authority--I would have to say APA rulemaking
authority is our primary concern. I don't want to diminish the
others, but that would be----
Senator Pryor. Right.
Ms. Woolley.--right at the top of the list.
Senator Pryor. And is it your view that your industry--at
least your industry does a good job of self-policing?
Ms. Woolley. Our self-regulatory program is--has been in
existence for 30 years, and does a very good job of policing
not only DMA members, who--when you become a DMA member, you
literally have to sign, on your application--membership
application, that you will adhere to our guidelines and
standards. But, because there are so many DMA members and they
represent such a large sector of the economy--as an example,
most Fortune 500 companies that market to consumers are members
of DMA--because we represent such a large sector and such a
swath across the economy, our guidelines wind up being, in
essence, best practices for marketing. And our self-regulatory
program is--takes enforcement cases, not only against DMA
members, but against nonmembers, as well. We actually have an
exemption from the Federal Trade Commission that allows us to
prosecute business-to-business--the exemption is an antitrust
exemption and it allows us to prosecute business- to-business
complaints.
Senator Pryor. Now, when you say ``prosecute those
complaints,'' what's the remedy there?
Ms. Woolley. Well, let me explain that the process is a
quasi-judicial process. There is a notice that goes out to the
parties, and they have a certain amount of time to respond, and
the responses are reviewed and go out to the parties. And there
is a procedure for dealing with a complaint. The remedies, in
our ethics cases, are really--the point of it is really to turn
bad actors into good actors, and to stop the practice that's
going on. So, our complaint process is--our ethics process is
not focused on monetary damages or any of the other things that
the FTC would seek, in terms of remedies. We want to get the
practice out of the system and, as I say, turn bad actors into
good actors.
If we've got a recalcitrant party and we can't do that, we
refer cases to the FTC for enforcement. So--and the ultimate
remedy for a DMA member is that they are----
Senator Pryor. They lose their membership.
Ms. Woolley.--thrown out of membership, and we publicize
that.
Mr. Muris. Mr. Chairman, could I----
Senator Pryor. Yes, sir.
Mr. Muris.--add one sentence of clarification on what I
said before? I believe, in 1980 the Congress--somewhere in and
around there--may have also added ``prevalence'' and requiring
addressing economic effects. I don't think either of those had
a significant effect, but I think they're useful. Like I said
with ``prevalence,'' the effect is very minor.
Senator Pryor. Well, listen, I want to thank the panel. I
actually have several more written questions that I'll probably
submit to you, but, in the interest of time, I think what we
will do is hold the record open for--7 days? Two? For 2 weeks.
We'll hold the record open for 2 weeks. So, it's very
possible--and, in fact, probable--that you'll be getting
questions from the Committee staff, that the Senators are
submitting. So, we appreciate those coming back in the next--as
quickly as you can, but in the next couple of weeks.
And I want to thank you for your time, and your
preparation.
And I want to thank Senator Wicker for his participation,
and the other Senators that were here today.
So, with that, we'll adjourn the hearing.
And thank you very much.
[Whereupon, at 4:39 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. John D. Rockefeller IV,
U.S. Senator from West Virginia
Today's hearing reflects the Commerce Committee's ongoing
commitment to consumer financial protection and the important role of
the Federal Trade Commission (FTC). It is an important follow-up to the
full committee hearing we held on February 4th when we heard from FTC
Chairman Jon Leibowitz.
Today, members of the Subcommittee will hear a wider array of
viewpoints on proposed reforms to the FTC and its authorizing statute,
the Federal Trade Commission Act. I want to thank Senator Pryor for
presiding and for his excellent work as Chairman of the Subcommittee on
Consumer Protection.
As I said last month, we cannot forget how we got here: many of the
enormous economic problems we face today are a direct result of weak
consumer protections in the financial sector.
We have to do better for the American consumer. With family budgets
stretched thin, foreclosures up and unemployment still sky-high,
unscrupulous business practices continue to target consumers directly
when they can least afford it. The American people need to know there
is someone out there they can trust to stand up against those bad
actors.
The Federal Trade Commission is our Nation's premier consumer
protection agency. When credit repair companies defraud consumers, it
is the FTC that steps in to stop the scams and provide relief to
victims. When people are sold products or services under false
pretenses, billed for services they do not want, or have their identity
stolen, it is the FTC that takes action. Only the FTC has the
experience and expertise to regulate consumer protection across a broad
swath of the U.S. economy.
The Commission's core consumer protection mission embodied under
Section 5 of the FTC Act is to prevent and enforce against ``unfair or
deceptive acts or practices in or affecting interstate commerce.'' This
broad prohibition has served as the bedrock of consumer protection law
in the United States for over 70 years. Throughout its history, the FTC
has used its authority to enforce and regulate against unfair or
deceptive acts or practices to address a wide range of commercial
abuses--from abusive credit practices, to fraudulent debt relief scams,
to deceptive advertisements and marketing schemes.
Whenever and however the Senate addresses financial regulatory
reform and consumer protection in the coming weeks and months, I
believe this well-established authority must be kept firmly intact. We
cannot afford to compromise the FTC's core consumer protection mission
that has served the American public well.
What is more, we may need further reforms to the FTC and its
underlying statute, to ensure the Commission can fulfill its mission as
effectively as possible. During the full committee hearing we discussed
a number of long-sought reforms. Consumer advocates believe we need to
liberate the FTC from statutory limitations that have shackled the
Commission from aggressively and effectively addressing abusive
commercial practices.
At the top of the list: granting the FTC normal rulemaking
authority set forth under the Administrative Procedures Act. Currently,
the Commission must follow cumbersome Magnuson-Moss rulemaking
procedures, so difficult to navigate that it can take the FTC,
literally, 10 years to promulgate a rule involving any controversy. The
rulemaking process is so burdensome the Commission no longer devotes
any time or resources to it.
Critics argue that Magnuson-Moss's procedural hurdles are necessary
given the broad scope of ``unfair or deceptive acts or practices.'' And
they point to alleged Commission abuses of the past, specifically
during the late 1970s. But the statutory and regulatory landscape has
changed significantly since the turbulent 70s, and I am not sure the
criticism still stands.
Other proposed reforms include granting the Commission authority
to:
Independently seek civil penalties without approval from the
Justice Department;
Enforce against those who aid and abet unfair or deceptive
acts or practices and;
Seek civil penalties for general violations of the FTC Act.
All of these reforms were included in the House-passed version of
consumer financial protection legislation, and they deserve to be
considered in our Committee as well.
We can bring much-needed transparency to financial services by
fully preserving the FTC's enormously important role in protecting
consumers from unfair or deceptive practices and strengthening that
authority through legislative reforms. As Chairman of the Commerce
Committee with a fundamental commitment to consumer protection, I fully
intend to pursue the legislative options that best serve this goal.
Again, I want to thank Senator Pryor for presiding over this
important hearing. And I want to thank our witnesses for testifying
today. As the Committee continues to focus on consumer financial
protection, we will continue to call on their expertise and
perspective.
______
Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from
Texas
Thank you, Mr. Chairman, for scheduling this second hearing this
year to review the Federal Trade Commission (FTC) and the role it plays
in protecting consumers.
Last month, FTC Chairman John Leibowitz appeared before the
Committee and outlined a request for new authorities for the
Commission. Chairman Leibowitz stated that the significant expansions
of authority and jurisdiction are necessary in his judgment to protect
consumers. I look forward to working with my colleagues to consider
this request and to making sure that the FTC has the resources and
authorities that it needs to execute its vital consumer protection
mission. I would be remiss, however, if I did not say that I am
concerned about the potential for a significant increase in the
agency's regulatory footprint given the extremely broad jurisdiction it
has.
As we continue our work on consumer protection as it relates to the
FTC, I believe we need to remain mindful of the costs associated with
complying with new regulations and the difficult economic circumstances
of the country. Protecting consumers is a key responsibility of the FTC
and of this committee, and we can stay true, in my judgment, to that
goal while not complicating the efforts of thousands of businesses to
create new jobs by dramatically increasing their legal and operational
costs.
In evaluating whether, and how, to change the scope and extent of
FTC regulatory authority, I believe we must first ask whether there is
a particular exigency, or area of consumer harm, that is so pervasive
that the FTC's existing enforcement capabilities and rulemaking
processes are not sufficient to address the issue. Second, if there is
such an exigency, is the proposed legislative change broadly applied,
resulting in greater regulatory burdens across a wide range of
industries, or is it appropriately narrow to provide the FTC greater
ability to develop rules and carry out enforcement actions directly
relevant to that exigency. Third, we need to consider whether the FTC
has sufficient personnel in key areas of its responsibility to carry
out its enforcement and consumer protection mandates. Finally, we
should consider whether there are areas, such as Internet-based
commerce where the FTC lacks technical proficiency and experience such
that we should require it to proceed carefully through traditionally
deliberative rulemaking proceedings that allow extensive comment from
the public and the relevant industries.
This framework is how I will be looking at any potential
reauthorization of the FTC. I am pleased that this hearing will provide
concerned entities and knowledgeable parties the opportunity to express
their views on what could be a substantial variation of authority for
an already powerful Federal agency. I do wish, however, that we could
hear from more of the stakeholders and a broader segment of the public
interest community.
When Chairman Leibowitz testified before this committee last month,
he specifically requested the ability to use streamlined Administrative
Procedure Act-style rulemaking across the entirety of the Commission's
broad jurisdiction. He also requested the ability to collect civil
penalties for violations of the FTC Act, the authority to litigate
independently when seeking civil penalties, and the ability to pursue
parties the FTC believes ``aided or abetted'' violators of the FTC Act.
While I appreciate the Chairman's position, I will say at the outset
that I have very strong concerns about these requests, particularly
permitting the FTC to promulgate rules using the procedures outlined in
the Administrative Procedure Act (APA). We must not forget the reasons
why the more deliberative rulemaking process was established for the
FTC in the first place, it's rules apply to a significant range of the
Nation's economy and the impact of hastily crafted rules has the
potential for substantial, and costly, unintended consequences.
Congress expressed a desire for the FTC to proceed through additional
steps that allow for extensive comment and input to avoid these
unintended consequences.
Mr. Chairman, we all share the desire to ensure that the FTC has
all of the tools that it needs to protect consumers, particularly
during a difficult economic climate where some have sought to prey upon
vulnerable consumers. The key point, however, is to ensure the agency
has the authority it actually needs. I have not seen an indication that
the FTC actually needs these new authorities to address any existing or
ongoing activity. I will be looking for that demonstration as we move
forward and will apply the framework for evaluating the FTC's
appropriate structure and authority that I outlined earlier. I hope
that we will proceed carefully with potential legislation.
Thank you again, Mr. Chairman.
______
March 17, 2010
Hon. Mark Pryor,
Chairman,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Hon. Roger Wicker,
Ranking Member,
Subcommittee on Consumer Protection, Product Safety, and Insurance,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Chairman Pryor and Ranking Member Wicker:
We commend you for holding today's hearing on ``Financial Services
and Products: The Role of the FTC in Protecting Consumers, Part II.''
I appreciate the opportunity to submit for the hearing record this
statement on behalf of the Association of National Advertisers (ANA).
The focus of this hearing is on the powers of the FTC with regard to
financial products and services. That was also the focus of the full
Senate Commerce Committee hearing on February 4. As you know, the FTC
has very broad regulatory authority over many other sectors of the
American economy as well.
We have very serious concerns about several changes that have been
proposed in the broad consumer protection regulatory authority of the
Federal Trade Commission (FTC). Those changes were included in H.R.
4173, the ``Wall Street Reform and Consumer Protection Act of 2009,''
which passed the House of Representatives on December 11th. H.R. 4173
would make three critical changes in the regulatory authority of the
Commission: expedited rulemaking authority; expanded liability for
``aiding and abetting'' an unfair act or practice; and immediate civil
penalty authority.
We are also very concerned about the potential overlap between the
regulatory powers of the FTC and any new Federal agency or bureau
created to regulate consumer financial products and services. H.R. 4173
would create a powerful new independent Consumer Financial Protection
Agency (CFPA). Senator Chris Dodd (D-CT), Chairman of the Senate
Banking Committee, just introduced legislation that would create a new
Bureau of Consumer Financial Protection, to be housed at the Federal
Reserve. It is far from clear in either bill how the FTC would interact
with this new mega-regulatory agency in the financial arena. What would
these changes mean for the current authority of the FTC? How would
these agencies coordinate in order to avoid duplication and confusion
for both consumers and the business community?
Congress is considering one of the largest regulatory
reorganization efforts for the financial sector since the Great
Depression of the 1930s. However, due to its scope and complexity, we
believe critical aspects of this proposal, including the proposed
changes in FTC regulatory authority, have received inadequate focus and
analysis. We agree that our Nation's consumer protection regulatory
regime needs to be reformed. However, we are very concerned that this
legislation would dramatically transform the regulatory powers of the
FTC without any detailed hearings or opportunity for industry input.
Expedited Rulemaking Authority
H.R. 4173 gives the FTC authority to conduct across the board
rulemakings under the expedited Administrative Procedures Act (APA)
rather than under the present Magnuson Moss rulemaking procedures. This
would allow three commissioners to push through a sweeping new rule
affecting entire industries with limited opportunity for industry input
or thoughtful consideration.
Congress instituted the Magnuson-Moss rulemaking procedures in 1975
and expanded the Commission's powers in several areas, including the
ability to impose fines and seek injunctions against false or deceptive
acts. In light of the Commission's extremely broad powers over vast
segments of the Nation's economy, the Congress believed that expedited
rulemaking authority (180 days) could lead to a serious ``rush to
judgment'' allowing the FTC to make major, industry-wide regulatory
changes without adequate time for industry input and thoughtful
consideration.
Thus, the Magnuson-Moss rulemaking procedures include a number of
important checks and balances. These safeguards include: the
requirement that the Commission must identify a pattern of activity--a
prevalence, as opposed to one instance--before engaging in a
rulemaking; the requirement that a rule may be overturned by the courts
if it is not supported by substantial evidence taken as a whole; the
requirement that the Commission provide a statement as to the economic
effect of the rule.
All of these protections would be removed in the House bill. They
are all sensible requirements that should be maintained.
Senator Warren Magnuson (D-WA) and Congressman Frank Moss (D-CA)
were two of the leading consumer champions of their era and certainly
would never have pushed this legislation if they thought it would
handcuff the agency.
Timothy Muris, who served as Chairman of the FTC from 2001-2004,
testified at a July 14 hearing of the U.S. Senate Commerce Committee
Subcommittee on Consumer Protection, Product Safety, and Insurance to
strongly urge the Congress to retain the Magnuson Moss rulemaking
procedures at the FTC. Muris stated:
``The administration's [CFPA] proposal would do more than just
change the procedures used in rulemaking. It also would
eliminate the requirement that unfair or deceptive practices
must be prevalent, and eliminate the requirement for the
Commission's Statement of Basis and Purpose to address the
economic effect of the rule. It also changes the standard for
judicial review, eliminating the court's ability to strike down
rules that are not supported by substantial evidence in the
rulemaking record taken as a whole. The current restrictions on
Commissioners' meetings with outside parties and the
prohibition on ex parte communications with Commissioners also
are eliminated. These sensible and important protections should
be retained.''
The FTC is not an agency that has specific subject matter expertise
over a particular area of the economy, such as the SEC, the CFTA or the
EPA. Therefore, it is more important for the agency to follow the
detailed and focused procedures of Magnuson Moss when carrying out an
industry-wide rulemaking.
There has been no explanation why requirements to demonstrate a
substantial basis for a rule or to require a showing of prevalence
should make an FTC rulemaking unnecessarily cumbersome or time
consuming. When regulating whole industry sectors, careful deliberation
should be required.
We urge the members of the Senate Commerce Committee to either
uphold the Magnuson Moss provisions or keep some hybrid version of the
procedural safeguards in the Act.
Aiding and Abetting
H.R. 4173 would give the FTC the authority to go after companies or
persons that ``aid or abet'' a violation of the FTC Act. This would
have serious implications for advertising agencies, media companies and
other companies that play any role in the communication/sale/delivery
process. For example, if a television station knowingly accepts an ad
from a marketer and the FTC later decides that the ad was somehow false
or deceptive, the television station could also be subject to very
serious financial penalties. This also raises some serious practical
and constitutional concerns for marketers. If there is any ambiguity
about what is lawful, that may result in the chilling of speech because
the media will reject ads that are in fact truthful and nondeceptive
because of the blurring of the legal lines.
We are also very concerned that this change would import criminal
law concepts into a civil statute.
Immediate Civil Penalty Authority
H.R. 4173 would give the FTC general power to impose civil
penalties without any prior rule or order by the agency for any
violation of section 5 of the FTC Act, a sweeping scope of authority
the Commission has never had before.
Currently, the FTC is generally limited to recovering civil
penalties for violations of a rule or a final cease and desist order
with respect to an unfair or deceptive act or practice. For example,
unfairness is a very broad and evolving standard. Giving the FTC the
authority to immediately impose civil penalties, without any
understanding of or notice that particular conduct is ``unfair,'' could
impose serious multimillion dollar financial burdens on a business.
Honest companies could be faced with back-breaking burdens despite the
fact that they made every effort to stay within the strictures of the
FTC Act.
It is possible that these major revisions to FTC authority might be
appropriate after careful review. However, we believe it is
inappropriate to make such significant and fundamental changes to FTC
powers without full hearings and analysis, as an afterthought in a
legislative package focusing on financial regulatory reform.
Relationship between the CFPA and FTC
We are very concerned that there has not been adequate
consideration given to the potential overlapping jurisdiction of the
FTC and any new agency or bureau that is created to regulate consumer
financial products and services, broadly defined. This overlap and
potential confusion could have very serious consequences for both the
business community and consumers.
Under H.R. 4173, much of the regulatory authority that the Congress
has given to the FTC over financial products and services would be
transferred to the new Consumer Financial Protection Agency (CFPA),
with the FTC retaining backstop or residual authority in this area.
Under the new bill introduced this week by Senator Dodd, a number of
consumer financial protection functions of the FTC would be transferred
to the Bureau of Consumer Financial Protection. However, that bill also
provides that the FTC would continue to have authority to enforce
section 5 of the FTC Act, the Credit Repair Organizations Act and the
Telemarketing and Consumer Fraud and Abuse Prevention Act.
It is unclear which products and services would fall under the
jurisdiction of the CFPA or the Bureau and which would remain under the
jurisdiction of the FTC. For example, if an automobile company creates
a consumer lease program, are the terms of the lease subject to the
CFPA, the Commission or both? Cable television operators often provide
digital video recorders and modems under a lease that is part of the
monthly subscriber program. Does this convert the subscription to a
financial instrument subject to the CFPA?
Also, which agency would take the lead in protecting consumers?
Under the Dodd bill, the FTC would retain jurisdiction over the
telemarketing fraud law. However, if a financial product that is
subject to the jurisdiction of the CFPA is being sold through
fraudulent telemarketing, would the FTC have to defer to the new
Bureau?
We do not believe there has been sufficient consideration given to
these and a host of other concerns about the relationship and potential
overlap between the two agencies.
Conclusion
H.R. 4173 not only attempts to totally transform consumer financial
regulation. It also launches sweeping changes in the enforcement powers
of the FTC in areas having nothing ostensibly to do with financial
reorganization. These changes do not merely tinker at the margins of
the Commission's authority. Instead, they substantially impact critical
aspects of the FTC's functions and responsibilities.
Nevertheless, there has been no systematic examination of the
implications of these changes or an opportunity for thorough
examination by the numerous constituencies directly affected by these
proposals.
Overlapping jurisdiction and inconsistent standards could lead to
bureaucratic overregulation or confusion for companies that operate in
a national and global marketplace. We urge you to reject these proposed
changes in FTC authority.
Thank you for your consideration of our views.
Sincerely,
Daniel L. Jaffe,
Executive Vice President,
Association of National Advertisers (ANA).
______
Federal Trade Commission
Washington, DC, November 24, 2009
Hon. Christopher J. Dodd,
Chairman,
Committee on Banking, Housing, and Urban Affairs,
U.S. Senate,
Washington, DC.
Dear Chairman Dodd:
Thank you for undertaking the difficult task of seeking to improve
consumer protection for financial services. I want to bring to your
attention, however, five fundamental concerns I have with the November
10, 2009 discussion draft of the Committee's proposed legislation
relating to the creation of a new consumer financial protection agency.
First and foremost, as currently drafted, the proposed bill appears
to assume that, like other agencies whose consumer protection law
enforcement authority is transferred to the new agency, the FTC failed
to perform adequately its consumer protection law enforcement during
the recent financial crisis. That assumption is erroneous.
Before the financial crisis arose in the Fall of 2007, the FTC
worked to vigorously protect consumers in the financial marketplace,
including mortgages, through its law enforcement efforts. Since 1998,
the FTC has been at the forefront of the fight against deceptive
subprime lending and servicing practices, when it filed its case
against Capital City Mortgage, which allegedly took advantage of
African American consumers. In the past decade, the FTC has brought
dozens of actions focused on the mortgage lending industry, with
particular attention to entities in the subprime market, alleging that
mortgage lenders and servicers engaged in unfair or deceptive acts and
practices. Through these cases, the FTC has returned hundreds of
millions of dollars to consumers.\1\ In addition, the FTC convened a
May 2006 workshop on alternative mortgage products and engaged in
consumer education respecting the perils of certain kinds of
mortgages.\2\ The FTC also provided advice and developed prototype
mortgage disclosures for other Federal regulatory agencies.\3\
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\1\ See generally Hearing On Improving Consumer Protections In
Subprime Lending, Before the Before the Subcommittee On Interstate
Commerce, Trade, and Tourism of the Committee On Commerce, Science, and
Transportation, U.S. Senate (Apr. 29, 2008).
\2\ See, e.g., ``Home Equity Loans: Borrowers Beware,'' ``High-
Rate, High-Fee Loans,'' and ``Reverse Mortgages: Get the Facts Before
Cashing In On Your Home's Equity,'' available at www.ftc.gov/bcp/
conline/edcams/credit/coninfo.htm.
\3\ See, e.g., Federal Trade Commission Staff Comment to Jennifer
J. Johnson, Secretary, Board of Governors of the Federal Reserve Board
System, Regarding Proposed Illustrations of Consumer Information for
Subprime Mortgage Lending (Nov. 2007), (comment to the OCC; the Federal
Reserve Board; the FDIC; the OTS; and the NCUA), available at
www.ftc.gov/opa/2007/11/mortgage.shtm; Federal Trade Commission Comment
Before the Board of Governors of the Federal Reserve System, Docket No.
OP-1253: Unfair and Deceptive Practices in the Mortgage Lending Market,
Alternative Mortgage Products, and Informed Consumer Choice in the
Mortgage Marketplace (Sept. 2006), available at www.ftc.gov/opa/2006/
09/fyi0661.shtm.
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Second, as currently drafted, the proposed bill could be read to
prevent the FTC from adequately enforcing even Section 5, which is its
core consumer protection law enforcement statute. To be sure,
subsection (C) of section 1061(b)(5) purports to except from transfer
to the new agency the FTC's enforcement authority under Section 5.
However, subsection (A) of section (b)(5) transfers to the CFPA
exclusively ``all consumer protection functions of the Federal Trade
Commission,'' which are broadly defined to include all ``research,
rulemaking, issuance of orders or guidance, supervision, examination
and enforcement activities, powers and duties relating to the provision
of consumer financial products or services.'' 1061(a)(1). At a
minimum, that provision may be read to prevent the Commission from
conducting research or issuing guidance under Section 5 of the FTC Act,
as well as the enumerated consumer laws and other areas where the
Commission has traditionally conducted research, provided business
guidance, and marshalled consumer education efforts.
Third, ``consumer protection financial products or services'' is
also broadly defined.\4\ Thus, the proposed bill, as currently drafted,
could be read not only to strip the FTC of the authority that it
exercised to protect consumers during the recent financial crisis, but
actually to disable the FTC from enforcing its core consumer protection
statute against a broad spectrum of arguably ``financial'' scams
practiced by individuals and firms not normally considered as financial
institutions.
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\4\ Section 1002 (5) defines ``consumer financial product or
service'' as ``any financial product or service to be used by a
consumer primarily for personal, family, or household purposes.''
Section 1002 (14) defines ``financial product or service'' as meaning
``any product or service that, directly or indirectly, results from or
is related to engaging in one or more financial activities.'' Section
1002 (13)(0), in turn, includes within the definition of ``financial
activity,'' ``engaging in any other activity that the CFPA defines, by
rule, as a financial activity. . . .''
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Fourth, the proposed bill, as currently drafted, could be read to
hinder the role the Congress has heretofore given the FTC in vigorously
challenging violations of the Equal Opportunity Act, the Fair Credit
Reporting Act, the Fair Debt Collection Practices Act, the Truth in
Lending Act, the Home Ownership and Equity Protection Act, the
Electronic Funds Transfer Act, and the Gramm-Leach-Bliley Act.
Authority to enforce those other statutes would also be transferred to
the proposed new agency as the ``primary'' Agency having authority to
enforce them.\5\ Indeed, to the extent the FTC retains any authority at
all to enforce those statutes,\6\ it could apparently do so only after
first recommending that the new agency initiate an enforcement
proceeding itself, and initiating an enforcement proceeding only after
the new agency does not do so within 4 months of receiving the
recommendations. It goes without saying that with respect to cases
involving fraud, where immediate action is needed to stop consumer
injury and freeze assets for consumer redress, that waiting period
would severely impair the FTC's effectiveness.
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\5\ See, e.g., 1002 (12), 1011, 1022 (e)(1)(``[t]o the extent
that a provision of Federal law authorizes enforcement by the CFPA and
another Federal agency, the CFPA shall have primary authority to
enforce that provision of Federal law'').
\6\ See Section 1022 (e)(2) & (3). These provisions arguably could
affect both the FTC's ability bring a case solely alleging violations
of the enumerated consumer law statutes as well as its ability to
supplement a Section 5 case with violations of those statutes.
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Finally, the proposed bill, as currently drafted, could be read to
transfer to the new agency not only the FTC's authority, but also its
personnel and resources performing the transferred law enforcement
functions, on a mandatory basis. See Section 1061 (b)(5)(``all consumer
protection functions of the Federal Trade Commission are transferred to
the CFPA'').
I believe that the best solution to these problems would be to
amend the proposed bill to exempt completely the FTC from the
strictures of this legislation. Such a carve out would correct the
misimpression that the FTC did not exercise its consumer protection law
enforcement powers to the best of its ability during the recent
financial crisis. If and to the extent the Committee is concerned about
the FTC's authority to provide consumer financial protection, it should
supplement that authority as does the proposed financial consumer
protection bill offered in the House.
If these amendments are not adopted, however, I would like to offer
some proposed language on how to revise the proposed bill to address
the other issues I have highlighted. First, the seemingly different
scope of section 1061 (b)(5)(A) and section 1061 (b)(5)(C) can be
remedied by narrowing the transfer language in subsection (A) from
``all consumer protection functions of the Federal Trade Commission,''
to ``the consumer protection functions of the Federal Trade Commission
that are contained within the enumerated consumer laws.'' Likewise,
subsection (B) would be revised to narrow the scope from ``all consumer
protection functions of the Federal Trade Commission,'' to ``all
consumer protection functions that were contained within the enumerated
statutes, except as provided in Section 1022 (e).'' Subsection (C)
would then be unnecessary and should be deleted.\7\
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\7\ It may also be beneficial to add a savings clause to the
proposed legislation that would specifically articulate the intent that
`no provision of this title shall be construed as modifying, limiting,
or otherwise affecting the authority of the Federal Trade Commission
under the Federal Trade Commission Act or other laws other than the
enumerated consumer laws.''
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Second, the problems introduced by transfer of authority to the new
agency as the ``primary'' agency to enforce the enumerated statutes
should be eliminated by revising the proposed bill to remove the FTC
from the referral and backstop authority provisions in section 1022
(e), and to instead add a new subsection that would authorize the FTC
specifically to enforce such laws and rules and to notify the CFPA
prior to initiating an enforcement action, or as soon thereafter as
practicable. In addition, subsections of current Title H, Conforming
Amendments, should be amended to provide the FTC with at least
concurrent enforcement authority jurisdiction over the entities it has
historically regulated.
Third and finally, the mandatory transfer of the FTC's personnel
and resources should be avoided by exempting the FTC from the mandatory
transfer provisions of the proposed bill and any other Federal statute.
The following language could be added to avoid that unintended effect:
``Nothing in this title shall be construed to require a mandatory
transfer of any employee of the Federal Trade Commission to the
Agency.''
Thank you in advance for your consideration of these matters, and I
wish you the best as you mark up this bill.
Sincerely,
J. Thomas Rosch,
Commissioner.
cc: The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing, and Urban Affairs
U.S. Senate
______
Federal Trade Commission
Washington, DC, July 16, 2009
Hon. Barney Frank,
Chairman,
Committee on Financial Services,
U.S. House of Representatives,
Washington, DC.
Dear Chairman Frank:
I appreciate the opportunity to share my personal opposition to the
proposal to create a new consumer financial protection agency. I am a
Commissioner of the Federal Trade Commission (FTC), sworn in on January
5, 2006, to a term that expires in September 2012.\1\ Although I am a
Republican appointee, in the three-and-a-half years of my service as a
Commissioner, I have not hesitated to exercise my independence when I
believed that it was in the best interests of consumers to do so,\2\ I
also served as the Director of the FTC's Bureau of Consumer Protection
from 1973 to 1975, and in 1989 was a member of the American Bar
Association's Special Committee to Study the Role of the FTC. I have
nothing to gain or lose politically or personally by opposing the
proposal to create a new consumer financial protection agency (CFPA),
---------------------------------------------------------------------------
\1\ By law, the Commission is an independent regulatory agency. The
Commission is headed by five Commissioners, nominated by the President
and confirmed by the Senate, each serving a seven-year term. The
President chooses one Commissioner to act as Chairman. No more than
three Commissioners can be of the same political party. 15 U.S.C. 41,
The Commission is not an Executive Branch agency. It is instead
subject to oversight by a number of Congressional committees. See
Humphrey's Executor v. United States, 295 U.S. 602, 628 (1935).
\2\ I have previously described my own independence. See J. Thomas
Rosch, The Redemption of a Republican, FTC Watch, June 1, 2009, at 4,
available at http://www.ftc.gov/speeches/rosch/090601redemption.pdf. My
career predating my term as a Commissioner is described at http://
www.ftc.gov/commissioners/rosch/index.shtml.
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I. Summary of Position
The current system for protecting consumers against deception and
unfairness in the financial marketplace is broken. Authority and
responsibility to define and prevent deceptive and unfair practices are
both diffuse and under-utilized. The current consumer protection regime
gives authority and jurisdiction to a host of Federal agencies without
regard to whether those agencies have the expertise or experience (core
competency) to best perform the consumer protection functions assigned
to them. As a result, because some agencies have little or no core
competency to perform those functions and lack adequate resources to do
so, they therefore cannot fairly be (and generally are not) held
responsible for their failure to protect consumers adequately.
The proposal to create a brand new Executive Branch agency \3\ to
protect consumers of financial products and services would replace the
current flawed system with an even more fundamentally flawed system.
The proposed new agency has no track record in protecting consumers
from deceptive and unfair practices in the financial marketplace, and
the time, money and other resources necessary to implement the new
agency promise to be immense. As proposed, the new agency seemingly
would have unlimited jurisdiction, yet the extent to which the new
agency would be subject to Congressional oversight is completely
unclear. The public is simply asked to buy a pig in a poke. The only
thing about which the public can be certain is that creation of this
new agency would result in considerable delay in protecting consumers,
wasteful and inefficient consumer protection law enforcement, and very
substantial (if still indeterminate) costs to taxpayers.
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\3\ As proposed, the President would appoint all members of the new
agency's governing board, but in contrast to the FTC, which limits to
three the number of Commissioners from any one political party, all
members of the new agency's governing board could come from one
political party.
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The current broken system should be replaced instead with a system
that assigns exclusive authority and responsibility to perform consumer
protection functions to specific agencies based on the core competency
of the agency to perform those functions. In the case of the FTC, this
would mean that it would assume plenary authority and responsibility
for, among other things, defining and requiring the necessary and
appropriate consumer disclosures respecting financial products and
services. It would also mean assigning to the FTC plenary authority and
responsibility for protecting consumers against invasions of their
privacy, including protecting them from identity theft and securing
their other confidential data. These are functions where the FTC has
not only taken the lead, but where other Federal agencies have looked
to the FTC for guidance. Finally, it would mean that the FTC would be
provided with the resources and law enforcement tools to enable it to
perform those law enforcement functions by itself Taking these steps
would make it fair to hold the agency responsible for performing those
functions in a fashion that protects consumers.
In short, replacing the current balkanized system of financial
consumer protection with a brand new Executive Branch agency is very
poor public policy. The FTC is an independent agency that has the
expertise and experience to protect consumers in the realm of financial
products and services, and there is no reason to supplant it.
II. The Current System is Broken
No one can say that the current balkanized paradigm of consumer
protection law enforcement regarding financial products and services is
desirable. As matters now stand, for example, at least six different
Federal agencies are responsible for protecting consumers in the
financial marketplace,\4\ each having jurisdiction over only a specific
segment of the marketplace. For example, the FTC's jurisdiction reaches
only to non-bank financial companies, including non-bank mortgage
companies, mortgage brokers, and finance companies. Banks, thrifts, and
Federal credit unions are exempt from the Commission's jurisdiction
under the FTC Act but are instead subject to the jurisdiction of other
agencies.
---------------------------------------------------------------------------
\4\ These agencies are the Federal Trade Commission, the Federal
Reserve Board, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration.
---------------------------------------------------------------------------
Similarly, a host of Federal statutes--the Gramm-Leach-Bliley Act,
the Truth-in-Lending Act, the Fair Credit Reporting Act, the Home
Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair
Debt Collection Practices Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Credit Repair Organizations Act, and the
Electronic Funds Transfer Act--distribute to a number of Federal
agencies various consumer protection responsibilities and obligations
respecting only the financial institutions that they regulate.
Thus, the current framework does not accord authority and
responsibility based on any agency's core competency to perform that
agency's consumer protection function(s). Rather, the current framework
gives each Federal agency consumer protection authority and
responsibility for the specific institutions over which it has
jurisdiction in the financial marketplace. As a result, the current
framework entrusts some agencies with consumer protection functions
even though those agencies have little or no expertise in performing
those functions. Other agencies, recognizing their shortcomings, rely
on the agency which has demonstrated the highest degree of core
competency to perform the functions. For example, a number of agencies
in the past have looked to the FTC to determine the disclosures that
are necessary and appropriate to protect consumers in the financial
marketplace.\5\
---------------------------------------------------------------------------
\5\ See, e.g., Federal Trade Commission Staff Comment for the Board
of Governors of the Federal Reserve Board Regarding Truth in Lending,
Proposed Rule (April 2008), available at http://www2.ftc.gov/opa/2008/
04/frb.shtm; Federal Trade Commission Staff Comment to Jennifer J.
Johnson, Secretary, Board of Governors of the Federal Reserve Board
System, Regarding Proposed Illustrations of Consumer Information for
Subprime Mortgage Lending (November 2007), (comment to the OCC; the
Federal Reserve Board; the FDIC; the OTS; and the NCUA), available at
http://www.ftc.gov/opa/2007/11/mortgage.shtm; Federal Trade Commission
Comment Before the Board of Governors of the Federal Reserve System,
Docket No. 0P-1253: Unfair and Deceptive Practices in the Mortgage
Lending Market, Alternative Mortgage Products, and Informed Consumer
Choice in the Mortgage Marketplace (September 2006), available at
http://www.ftc.gov/opa/2006/09/fyi0661.shtm.
---------------------------------------------------------------------------
This patchwork quilt of jurisdiction results in wasteful
duplication in performing some consumer protection functions. Law
enforcement activities in the credit card industry illustrate this
inefficiency. In a Federal court complaint filed in June 2008, the FTC
alleged that CompuCredit Corporation, a company marketing Visa and
MasterCard credit cards to consumers in the subprime credit market,
engaged in deceptive conduct in connection with the marketing of credit
cards.\6\ CompuCredit ultimately settled with the FTC and agreed to
reverse fees charged to eligible consumers' accounts, estimated to
result in more than $114 million in credits.
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\6\ CompuCredit settled with the FTC and agreed to reverse fees
charged to eligible consumers' accounts to settle allegations that it
violated Federal law. It is estimated that the redress program will
result in more than $114 million in credits to consumer accounts. Press
Release, available at http://www.ftc.goviopa/2008/12/compucredit.shtm.
---------------------------------------------------------------------------
However, because CompuCredit also acted on behalf of some entities
regulated by the Federal Deposit Insurance Corporation (FDIC), in
addition to the FTC action, the FDIC also challenged the same
practices, and put CompuCredit under order extracting a civil money
penalty of $2.4 million.\7\ The need to engage in dual prosecutions
relating to the same consumer protection issues was inefficient, time-
consuming and a wasteful use of agency resources.
---------------------------------------------------------------------------
\7\ Id.
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Beyond that, because no one agency is given plenary authority or
jurisdiction or the resources to effectively protect consumers, no
single agency fairly can be held ultimately accountable for the
protection of consumers.\8\ Consequently, the current balkanized system
may result not only in the inefficient use of agency resources, but
also in under-enforcement of existing consumer protection statutes and
inadequate protection of consumers. For example, even though the FTC
may detect deceptive and unfair practices in the financial marketplace,
it can act only within its limited jurisdiction. Thus, despite the
FTC's success in challenging the inadequate disclosures made by
CompuCredit, the FTC was otherwise constrained from bringing such a
case against any depository institutions--such as banks that issue
credit cards.
---------------------------------------------------------------------------
\8\ See generally, Hearing On Improving Consumer Protections In
Subprime Lending, Before the Before the Subcommittee On Interstate
Commerce, Trade, and Tourism of the Committee On Commerce, Science, and
Transportation, U.S. Senate, April 29, 2008.
---------------------------------------------------------------------------
III. The Proposal to Create a New Agency is Fundamentally Flawed
The creation of a new Executive Branch consumer protection agency
will only make matters worse by compounding, rather than mitigating,
the enforcement problems that now exist. First and foremost, there is
no evidence that this proposed new agency has any core competency in
protecting consumers in the financial marketplace. It is entirely
untested and without any experience or expertise.
Second, the creation of a brand new Executive Branch agency will
come at a great financial cost to consumers. The resources necessary to
implement this proposal will be immense, including space requirements,
employees, infrastructure, and overhead. I have yet to see proponents
of the proposal offer even an estimate of the cost to American
taxpayers for this anticipated project. This proposal seems
particularly ill-advised in light of the current economic situation and
the fact that at least one existing Federal agency with proven
expertise (the FTC) stands ready, willing and able to better perform
most of the consumer protection functions that would be given to this
new agency. Indeed, it is ironic that a consumer protection proposal
should be so anti-consumer; as consumers, we generally demand to know
beforehand the costs and benefits of the products we purchase.
Third, it is anticipated that it will take at least eighteen to
twenty-four months for this new agency to become operational. This long
start-up time will entail considerable burden and delay in protecting
consumers in the financial marketplace--consumers that need immediate
assistance.
Fourth, the proposal creates an agency with virtually unlimited
jurisdiction and uncertain Congressional oversight. The definitions
that determine the extent of the new agency's exclusive or primary
authority are extremely broad:
The definition of ``financial activity'' includes a long
list of activities, and then allows the proposed agency to add
others to the list by rule.
Likewise, the definition of ``financial product or service''
includes any product or service that ``directly or indirectly''
``results from or is related to'' engaging in a financial
activity. The payment side of every business of every sort
could be so described and thus apparently become the
responsibility of the proposed new agency.
Specifically, because the granting of ``credit'' is
considered a ``financial product or service,'' the proposed new
agency would have authority over every transaction that
involves payment by means other than cash on the barrel head.
That is because ``credit'' is defined as including, among other
things, the right granted by a person to a consumer to
``purchase property or services and defer payment therefor.''
Fifth, the broad definitions of the new agency's plenary authority
would also severely impact the future operations of the FTC. For
example, in the proposal, a ``covered person'' is defined as one who
engages ``directly or indirectly'' in a financial activity in
connection with the provision of a consumer financial product or
service, or one who provides a material service to or processes a
transaction on behalf of such person. That definition would result in
the transfer to the new agency all of the consumer protection functions
that relate to financial products and services even if tangentially
offered by any entity. Such a transfer would not only include a
transfer of authority, but a transfer of staff, office space,
infrastructure and funding--critical components without which the FTC
would be crippled in exercising whatever enforcement authority remains.
Indeed, the exclusive authority of the proposed new agency would
extend beyond rulemaking to ``guidance, examination, and requiring
reports.'' Such expansive authority would threaten to atrophy the FTC's
ability to issue enforcement policy statements, business education
materials, consumer education, press releases explaining its cases and
other kinds of guidance relating to its retained authority over
financial matters.
Similarly, the proposal provides for the collection of financial
consumer complaints by the new agency. Yet, for years, the FTC has
developed and maintained an extensive database of consumer complaints
including complaints about financial products and services, obtained
from a myriad of sources and available to all interested law
enforcement agencies. That database would inevitably wither.
Finally, and perhaps most strikingly, the proposal does not even
appear to authorize the FTC to enforce the new agency's rules (although
it does authorize the states to enforce them). To be sure, there is a
provision for coordinating enforcement, but it provides that the FTC
must refer to the new agency any enforcement matter, then wait up to
120 days for the new agency to bring the case; the FTC can then only
bring a case if the new agency declines to do so. At worst, that is a
recipe for duplicative and wasteful exercise of the agencies'
prosecutorial discretion. At best, it is a recipe for delay. As noted
earlier, there is no estimate as to the size or cost of the new
agency's staff, but it is likely that it will be created at the expense
of the FTC.
This is not just parading horribles. The proposal would of course
provide the FTC with ``backstop enforcement authority.'' However, that
provision is at best a fig leaf for stripping the agency of its current
role as the primary agency responsible for protecting consumers in the
financial market.\9\
---------------------------------------------------------------------------
\9\ See Prepared Statement of Stephen Calkins On the Proposed
Consumer Financial Protection Agency: Implications for Consumers and
the FTC, Testimony Before the Committee on Energy and Commerce
Subcommittee on Commerce, Trade, and Consumer Protection, U.S. House of
Representatives, July 8, 2009, at 9-10, available at http://
energycommerce.house. gov/Press_111/20090708/testimony_calkins.pdf.
---------------------------------------------------------------------------
In sum, the creation of a new Executive Branch consumer protection
agency for financial products and services will introduce an even worse
situation than now exists. As with the creation of any new Federal
agency from whole cloth, the proposal guarantees that there will be
substantial delay in law enforcement while the new agency is
established, in addition to imposing substantial financial costs on the
public and sapping the vitality of the FTC as a consumer protection
agency.
IV. The Proposal to Create the CFPA Should Be Scrapped in Favor of
Entrusting Consumer Protection Authority and Responsibility on
the Basis of Core Competency
Plenary and exclusive authority and responsibility for consumer
protection functions in the financial market, as in other markets,
should be assigned to that agency which has the highest degree of
expertise, experience and core competency to perform those functions.
That agency is not inevitably the FTC. There are certain functions
which the FTC is ill-equipped to perform. For example, the monitoring
of the safety and soundness of financial institutions has never been
within the FTC's purview and it is strongly arguable that the FTC might
not be effective in performing that function. Likewise, the FTC lacks a
comparative advantage in terms of the experience and expertise required
to determine whether a particular financial product or service should
or should not be offered to the public.
On the other hand, the FTC has traditionally exercised particular
expertise and experience with respect to, among other things, the
fashioning of disclosures that are necessary and appropriate to protect
consumers both from a lack of sufficient information to make an
informed choice as well as from information overload. The Commission
has a long history of conducting empirical tests of the efficacy of
disclosures in a wide variety of commercial contexts.\10\ The
Commission has made the development and testing of disclosures
(especially mortgage disclosures) a key priority in its research
relating to financial services. Current statutory and regulatory
schemes related to financial services include a host of requirements
mandating that information be disclosed to consumers. Most recently,
the FTC's Bureau of Economics published a seminal research report
concluding that the current mortgage disclosure requirements do not
work and that alternative disclosures should be considered and
tested.\11\
---------------------------------------------------------------------------
\10\ For example, the FTC staff released a study showing that
broker compensation disclosures that the Department of Housing and
Urban Development had proposed confused consumers, leading many of them
to choose loans that were more expensive. See Federal Trade Commission,
Bureau of Economics Staff Report, The Effect of Mortgage Broker
Compensation Disclosures on Consumers and Competition: A Controlled
Experiment (February 2004). Another example is seminal empirical
research conducted by FTC staff on rent-to-own transactions, including
evaluating consumer disclosure requirements. See Federal Trade
Commission, Bureau of Economics Staff Report, Survey of Rent-to-Own
Customers (April 2000).
\11\ See Federal Trade Commission, Bureau of Economics Staff
Report, Improving Consumer Mortgage Disclosures: An Empirical
Assessment of Current and Prototype Disclosure Forms (June 2007),
available at http://www.ftc.gov/os/2007/06/
P025505mortgagedisclosurereport.pdf.
---------------------------------------------------------------------------
In fact, evidencing that core competency, other agencies (including
the Federal Reserve Board) have looked to the FTC for guidance in this
respect. Furthermore, the FTC has been the dominant force in
spearheading efforts to educate consumers about a wide array of
important financial issues.\12\
---------------------------------------------------------------------------
\12\ For example, the FTC distributes consumer education materials
on mortgage servicing, what consumers should do if they are having
trouble making mortgage payments, and how consumers can manage their
mortgage if their lender closes or files for bankruptcy. See http://
www.ftc.gov/bcp/edu/pubs/consumer/homes/rea10.shtm; http://www.ftc.gov/
bcp/edu/pubs/consumer/homes/rea04.shtm; http://www.ftc.gov/bcp/edu/pub
s/consumer/homes/rea12.shtm.
---------------------------------------------------------------------------
Another function as to which the FTC has been the lead agency has
been data security and protection of consumers from identity theft.
Because of its experience and expertise regarding consumer
expectations, the FTC has exercised primacy in that area. Specific
examples include the Commission's efforts to protect privacy and fight
identity theft through its law enforcement actions, its leadership on
the President's Identity Theft Task Force, and its extensive consumer
and business education and outreach activities.\13\ This discussion of
the FTC's core competencies is illustrative not exhaustive.
---------------------------------------------------------------------------
\13\See generally Prepared Statement of the Federal Trade
Commission On Protecting Consumer Privacy and Combating Identity Theft,
Testimony Before the Subcommittee on Crime, Terrorism, and Homeland
Security of the Committee on the Judiciary, U.S. House of
Representatives, Dec. 18, 2007, available at http://www.ftc.gov/os/
testimony/P065404idtheft.pdf.
---------------------------------------------------------------------------
Of course, the FTC cannot adequately perform these functions on a
plenary and exclusive basis (as it should do) without adequate
resources. Thus, the assignment of these functions to the FTC must be
accompanied by an adequate addition of staff to perform them, as well
as by safeguards against those resources being indirectly attacked by
superior wages at other Federal agencies.\14\
---------------------------------------------------------------------------
\14\ For example, the Securities and Exchange Commission and the
Federal Reserve Board have higher pay scales than comparable pay scales
at the FTC. Of course, reducing those pay scales is not the only way to
avoid this problem.
---------------------------------------------------------------------------
There is another compelling reason for entrusting certain functions
to the FTC on a plenary and exclusive basis rather than to a new
agency. Quite apart from its demonstrated superior core competency in
performing these functions, the FTC has long maintained a vibrant
competition mission. As former FTC Chairman Muris has pointed out, it
is imperative to the competition mission that the consumer protection
mission inform the competition mission. Otherwise, there is a danger
that competition will be distorted by unwise consumer protection
initiatives.\15\ This cross-fertilization is all the more important
today, when ``behavioral economists'' suggest that consumers are not
always rational in their behavior and that the best competition
missions are those which are coupled with an expert and experienced
consumer protection mission.\16\
---------------------------------------------------------------------------
\15\ See Prepared Statement of Timothy Muris On The Economy and
Fraud: Protecting Consumers During Downward Economic Times, Testimony
Before the Committee on Commerce, Science, and Transportation, U.S.
Senate, July 14, 2009, at 3-4, available at http://commerce.senate.gov/
public/_files/MurisJuly14Testimony.pdf.
\16\ See Economics Roundtable, Global Competition Review (March
2009).
---------------------------------------------------------------------------
V. Conclusion
In short, trading the current flawed balkanized system of consumer
protection for a new Federal Executive Branch consumer financial
protection agency, with all of its fundamental faults, is no way to
make sound public policy.
Sincerely,
J. Thomas Rosch,
Commissioner.
______
Response to Written Question Submitted by Hon. Tom Udall to
Hon. J. Thomas Rosch
Question. Mr. Rosch, Native American and rural communities face
different, but no less important, challenges in fighting consumer
fraud. How would you describe the quality of the FTC's outreach to
Native American and rural communities, especially regarding the current
economic crisis? Are there areas for improvement? If so, what are your
plans for implementing these improvements?
Answer. The agency has done a significant amount of outreach to
Native American and rural communities, but we can and will do more.
For several years, the FTC--particularly through our Regional
Offices--has partnered with the United States Department of the
Interior's Indian Arts and Crafts Board to undertake outreach
activities at various Native American and Alaska Native arts and crafts
events where we have provided a wide range of consumer protection
materials. Additionally, one of our Regional Offices has partnered with
state law enforcement and the AARP in Montana to do outreach in rural
parts of that state. Another Regional Office has done significant
outreach in Oklahoma, meeting with dignitaries of several nations and
with an Indian Legal Aid office in Oklahoma.
There is more that we can and will do in this area. One project we
are preparing to initiate in the near future is the development of a
database of tribal newsletters and newspapers so that we can send them
our consumer protection educational materials. Additionally, in the
next few months, FTC staff will be doing more outreach in this area.
The FTC is always looking for more partners, including partners
with connections to Indian Country, and would welcome additional
suggestions and ideas on ways to improve our outreach efforts.
In addition, the FTC produces, promotes, and disseminates
educational messages and materials to the widest possible audience
through multi faceted communications and outreach programs, and we have
focused extensively on issues relating to the current economic
crisis.\1\ These efforts involve the use of print, broadcast, and
electronic media, the Internet, special events, and partnerships with
other government agencies, consumer groups, trade organizations,
businesses, and other organizations. Additionally, our Office of
Congressional Relations supports individual Members of Congress who are
holding town halls on consumer issues and encourages them to put the
FTC's consumer education materials on their websites.
---------------------------------------------------------------------------
\1\ In March 2009, the FTC launched ftc.gov/MoneyMatters with
information to help people dealing with challenging economic times.
MoneyMatters offers short, practical tips, videos and links to reliable
resources for more information on topics like credit repair, debt
collection, job hunting and job scams, vehicle repossession, managing
mortgage payments and recognizing foreclosure rescue scams.
---------------------------------------------------------------------------
Given the size of our agency and our limited resources, our
strategy is to be ``wholesalers'' of information, rather than
``retailers.'' We work with an informal network of about 10,000
community based and special interest groups that distribute our
information to their members, clients and constituents. Most of the 10
million print publications we distribute each year then are ``re-
distributed'' through this network of local partners. In addition to
providing these groups with free publications, we encourage them to
reprint our materials in their newsletters, websites or other
communications channels.
______
Response to Written Questions Submitted by Hon. Roger F. Wicker to
Hon. J. Thomas Rosch
Question 1. Please provide a chronological breakdown of each step
in a rulemaking for a rule promulgated under the Magnuson-Moss process
that is required of the FTC under current law (with references for each
step to its specific location in statute).
A chronological breakdown of each step in the Mag-Moss rulemaking
process was submitted in response to the Questions for the Record
(``post-hearing questions'') sent to Chairman Leibowitz (see pages 1-2
of his response). For your convenience (and because it was submitted
pursuant to an extension which meant that it was submitted shortly
before the hearing), it is reproduced here with references to the
statute (or the implementing regulations, if applicable). By my count,
there are approximately 29 sequential steps in the Mag-Moss rulemaking
process.
------------------------------------------------------------------------
Description of Step Reference
------------------------------------------------------------------------
1 Prepare an Advance Notice of 15 U.S.C.
Proposed Rulemaking (``ANPR'') 57a(b)(2)(A)
describing the area of inquiry
under consideration, the objectives
the FTC seeks to achieve, and
possible regulatory alternatives
under consideration
------------------------------------------------------------------------
2 Submit the ANPR to House and Senate 15 U.S.C.
oversight committees 57a(b)(2)(B)
------------------------------------------------------------------------
3 Publish the ANPR in the Federal 15 U.S.C.
Register for public comment 57a(b)(2)(A)
------------------------------------------------------------------------
4 Receive public comments on the ANPR 15 U.S.C.
57a(b)(2)(A)(ii)
------------------------------------------------------------------------
5 Determine that there is reason to 15 U.S.C.
believe that the unfair or 57a(b)(3)
deceptive acts or practices at
issue appear are ``prevalent,'' on
the basis either of cease and
desist orders it has issued
regarding such acts or practices,
or if ``any other information
available to the Commission
indicates a widespread pattern'' of
such acts or practices
------------------------------------------------------------------------
6 Analyze comments received in 15 U.S.C. 57a(b)
response to the ANPR
------------------------------------------------------------------------
7 Prepare an initial Notice of 15 U.S.C. 57a; 5
Proposed Rulemaking (``NPR'') that: U.S.C. 553(c)
> Summarizes and addresses the ANPR 15 U.S.C.
comments; 57a(e)(3)(A)
> Sets forth specific proposed rule 15 U.S.C.
text and any alternatives under 57a(b)(1)(A),
consideration;
> Explains the legal and factual 15 U.S.C.
basis for the proposed rule; 57a(e)(3)(A)
> Invites interested parties to 15 U.S.C.
participate in the rulemaking 57a(b)(1)(B)
through submission of written data,
views, or arguments;
> Invites interested parties to
propose issues;
> Includes, if applicable, an 5 U.S.C. 601,
initial analysis under the 603; 44 U.S.C.
Regulatory Flexibility Act (``Reg 3506(c)(2)
Flex'') based on the anticipated
effects of the rule on small
entities and an analysis under the
Paperwork Reduction Act (``PRA'')
of any disclosure, reporting, or
record keeping requirements the
rule would impose; and
> Sets forth a preliminary 15 U.S.C. 57b-3(b)
Regulatory Analysis of anticipated
effects of the rule, both positive
and negative
------------------------------------------------------------------------
8 Submit the NPR to House and Senate 15 U.S.C.
oversight committees 30 days before 57a(b)(2)(B)
publishing it
------------------------------------------------------------------------
9 Publish the NPR in the Federal 15 U.S.C.
Register for public comment 57a(b)(1)(b); 5
U.S.C. 553(c)
------------------------------------------------------------------------
10 Receive public comments on the NPR, 15 U.S.C.
usually for 60 days or more 57a(b)(1)(b); 5
U.S.C. 553(c)
Provide an opportunity for a public 15 U.S.C.
oral hearing before a presiding 57a(b)(1)(c); 15
officer, and if any member of the U.S.C. 57a(c)
public requests such hearing:
------------------------------------------------------------------------
11 Appoint a presiding officer 15 U.S.C.
57a(c)(1)(A)
------------------------------------------------------------------------
12 Designate disputed issues of fact to 15 U.S.C.
be addressed at the hearing 57a(c)(2)(B)
------------------------------------------------------------------------
13 Decide petitions to designate fact
issues as disputed for the hearing
------------------------------------------------------------------------
14 Accord to (potentially numerous) 15 U.S.C.
interested persons, rights to 57a(c)(4)(A)
examine, rebut, and cross-examine
witnesses
------------------------------------------------------------------------
15 Determine which among those 15 U.S.C.
interested persons have similar 57a(c)(4)
interests
------------------------------------------------------------------------
16 Allow each group of persons with 15 U.S.C.
similar interests to choose a 57a(c)(4)
representative
------------------------------------------------------------------------
17 Appoint a representative if the 15 U.S.C.
group cannot choose one 57a(c)(4)
------------------------------------------------------------------------
18 Decide appeals from determinations 15 U.S.C.
on which persons have similar 57a(c)(4)(B)
interests
------------------------------------------------------------------------
19 Prepare and publish a second NPR 15 C.F.R. 1.12;
addressing all these issues
------------------------------------------------------------------------
20 Conduct the hearings 15 U.S.C. 57a(c)
------------------------------------------------------------------------
21 Make complete transcripts of all 15 U.S.C.
testimony and cross-examinations 57a(c)(5)
available to the public
------------------------------------------------------------------------
22 Analyze the record amassed, and 15 C.F.R.
prepare a staff report that 1.13(f)
summarizes and analyzes the record
and sets forth the final rule text
recommended for adoption by the
Commission
------------------------------------------------------------------------
23 If hearings have been held, the 15 U.S.C.
Presiding Officer must prepare a 57a(c)(1)(B) 15
report with a summary and analysis C.F.R. 1.13(g)
of the record amassed and
recommendations as to adoption of
final rule provisions
------------------------------------------------------------------------
24 Publish a Federal Register notice 15 C.F.R.
announcing issuance of the Staff 1.13(h)
Report and seeking comments on it
and on the Presiding Officer's
report, if any
------------------------------------------------------------------------
25 Receive public comments on Staff 15 C.F.R.
Report and Presiding Officer's 1.13(h)
Report for 60 days or more
------------------------------------------------------------------------
26 Obtain OMB approval for any 44 U.S.C.
disclosure, reporting, or record 3506(c)(2); 44
keeping requirement U.S.C.
3507(a)(2)
------------------------------------------------------------------------
27 Prepare a Final Rule and Statement 15 U.S.C.
of Basis and Purpose (``SBP'') that 57a(d); 5 U.S.C.
sets forth: 553(c)
> A summary and analysis of the 15 U.S.C.
record; 57a(e)(3)(a)
> The text of the recommended final 5 U.S.C.
rule; 706(2)(a)
> A determination that the practices 15 U.S.C.
addressed by the recommended final 57a(d)(1)(A)
rule are prevalent;
> An explanation of the legal and 15 U.S.C.
evidentiary basis for each 57a(e)(3)(a)
provision;
> A Final Regulatory Analysis, 5 U.S.C.
includes a Final Reg Flex, if 706(2)(a); 15
applicable; and U.S.C.
57a(d)(1)(C)
> An effective date not earlier than 5 U.S.C. 553(d)
30 days after publication in the
Federal Register
------------------------------------------------------------------------
28 Publish the Final Rule and SBP in 15 U.S.C.
the Federal Register 57a(b)(1)(D) 15
U.S.C. 57a(d)
------------------------------------------------------------------------
29 Submit a notification to Congress 5 U.S.C. 801;
pursuant to the Small Business Section 212 of
Regulatory Enforcement Fairness Act SBREFA, P.L. 104-
(``SBREFA''), initiating a period 121, Mar. 29,
during which Congress can 1996 (As Amended
invalidate the rule by legislation by P.L. 110-28,
and issue compliance guides if May 25, 2007)
required under SBREFA
------------------------------------------------------------------------
Question 1a. Include the average amount of time that each step in
the process takes based on historical rulemaking data. If sufficient
historical data to determine the average amount of time is not
available, please estimate how long it would take and provide an
explanation of how the estimate was determined.
Answer. I cannot submit ``historical rulemaking data'' respecting
the average amount of time spent on each step in the process because,
except for the instances described below, no new Mag-Moss rules have
been proposed for more than 30 years and because task-based timekeeping
records are no longer retained.
Based on my experience respecting the seriousness with which the
Bureau of Consumer Protection (``BCP'') staff took its responsibilities
when I was Director of that Bureau (from 1973-1975), I estimate that
steps 1-6 would have taken an average of approximately 2 years. Based
on my experience as an antitrust defense trial lawyer for nearly 40
years (from 1965-1973 and from 1976-2006), and on the hearing-related
steps that resemble pre-trial or post-trial steps, including motions
practice and appeals,\1\ I estimate that steps 11-25 would take an
average of approximately 3 years, taking into account petitions, and
interlocutory appeals on them, as well as continuances, holidays,
travel schedules and the extraordinary amount of pre-hearing
preparation and post-trial work required by steps 11-25. Based on my
experience with Administrative Procedure Act (``APA'') rulemaking since
my return to the Commission as a Commissioner (2006-present), I
estimate that steps 7-9, and steps 26-29 (which largely duplicate APA
rulemaking requirements) would take an average of approximately 2
years, for a total of 7 years on average.
---------------------------------------------------------------------------
\1\ The Mag-Moss hearing process is an adversarial process that can
be very similar to a multi-party trial. Determinations that would help
control the process are themselves subject to interlocutory Commission
review and/or to judicial review with the potential for reopening the
matter.
---------------------------------------------------------------------------
As I testified at the hearing, the Mag-Moss hearing process alone
(not including the extraordinary pre-hearing and post-hearing work)
consumed an average of 38 nonconsecutive days (566 days divided by 15
rules) with the longest hearing lasting 58 nonconsecutive days and 6 of
the hearings lasting 40 or more non-consecutive days.\2\ The Mag-Moss
rulemaking process in its entirety consumed an average of 7 years (102
years divided by 15 rules) with the longest proceeding lasting more
than 11 years and nine of the proceedings lasting more than 8 years.
---------------------------------------------------------------------------
\2\ See Chairman Leibowitz's response at 12-13 and accompanying
chart.
Question 2. Please provide a chronological breakdown of any
additional requirements that are performed during a Magnuson-Moss
rulemaking that result from FTC created rules and/or guidelines.
Answer. As stated on page 14 of Chairman Leibowitz's responses to
the post-hearing questions submitted to him, ``[i]n addition to the
statutory requirements, the implementing rules provide that FTC staff
shall make recommendations to the Commission in a report on the
rulemaking record'' (referring to steps 22 and 24-25 of the 29
sequential steps), that ``the public have an opportunity to comment on
both the staff report and the Presiding Officer's report'' (speaking to
step 25 of the 29 sequential steps), and that ``a procedure for oral
presentations to the Commission after the close of the hearing record''
be established (referring also to step 25 of the 29 sequential steps).
The most time-consuming of these is the staff report, which marshals
and analyzes the voluminous record that results from the hearing
process; while not specifically mandated by statute, such a report was
considered essential to the Commission's consideration of the record.
Question 2a. Identify when in the sequence of requirements outlined
in your response to question 1 each of these FTC created rules and/or
guidelines occurs.
Answer. As I testified, each of these additional implementing rules
was considered at the time to be necessary to carry out Congressional
intent under the Mag-Moss Act. The sequence of these requirements in
the Mag-Moss rulemaking process is described in the description of the
29 total steps in the Mag-Moss rulemaking process set forth in response
to Question 1.
Question 2b. Include the average amount of time that each of these
FTC created rules and/or guidelines take based on historical data. If
sufficient historical data to determine the average amount of time is
not available, please estimate how long it would take and provide an
explanation of how the estimate was determined.
Answer. The average amount of time that each of these FTC-created
rules and/or guidelines took, based on historical data, is not
available for the reasons described in my response to Question 1. Based
on my experience respecting the seriousness with which BCP staff took
its responsibilities when I was Director of that Bureau, I estimate
that it would have taken an average of 18 months to complete these
three tasks.
Question 3. Please repeat questions 1 and 2 for the Commission's
rulemaking process when a rule is promulgated under APA authority.
Answer. A chronological breakdown of each step in the APA
rulemaking process was submitted in response to the post-hearing
questions sent to Chairman Leibowitz (pages 3-4 of his response). For
your convenience (and because the responses were submitted pursuant to
an extension which meant that it was submitted shortly before the
hearing), it is reproduced here with references to the statute (or as
supplemented by FTC practice):
1. The rulemaking agency must prepare and publish in the
Federal Register a Notice of Proposed Rulemaking (NPR) that:
(a) sets forth either the terms or substance of the proposed
rule or a description of the subjects and issues involved; (b)
explains the legal and factual basis for the proposed rule
provisions; and (c) includes, if applicable, a Regulatory
Flexibility (Reg Flex) analysis based on the anticipated
effects of the rule on small entities, and an analysis under
the Paperwork Reduction Act (PRA) of any disclosure, reporting,
or record keeping requirements the rule would impose. In
addition, the proposed legislation would retain the current FTC
Act requirement that, for rules under the Act, the NPR also
must set forth a preliminary Regulatory Analysis of anticipated
effects of the rule, both positive and negative. 5 U.S.C.
553(b); 5 U.S.C. 603; 44 U.S.C. 3506(c)(2).
2. The agency then must accept public comments on the NPR for a
period of 30 days or more. 5 U.S.C. 553 (c) & (d).
3. The agency must also obtain OMB approval of any disclosure,
reporting, or recordkeeping requirements in the rule under the
PRA. 44 U.S.C. 3507(a)(2).
4. After considering the comments, the agency then must prepare
and publish in the Federal Register a Statement of Basis and
Purpose, setting forth the final rule provisions and ``a
concise general statement of their basis and purpose.'' This
statement provides a summary and analysis of the record; an
explanation of the legal and evidentiary basis for the rule
provisions adopted; a final Reg Flex Analysis, if applicable;
and an effective date for the rule. Also, under the current FTC
Act requirement that would be retained by the proposed
legislation, the Statement of Basis and Purpose of rules must
set forth a final Regulatory Analysis. 5 U.S.C. 553(c); 5
U.S.C. 604.
5. Subsequently, the agency submits a notification to Congress
pursuant to the Small Business Regulatory Enforcement Act
(SBREFA), initiating a period during which Congress can
invalidate the rule by legislation. The agency also commonly
issues compliance guides. 5 U.S.C. 801(a)(1).
6. The final rule can be challenged in Federal court and will
be set aside if the court determines that the Commission's
findings are ``arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law.'' 5 U.S.C.
706(2)(A).
By my count, and as set forth in the Chairman's response to post-
hearing questions, the APA statutory process requires six sequential
steps, with no required hearing, and the Commission, as a matter of
practice, has added four additional steps in some instances:
1. First, in many instances, the Commission has published an
Advanced Notice of Proposed Rulemaking (ANPR), providing even
earlier notice of the proceeding and opportunity to comment.
See, e.g., http://www.ftc.gov/opa/2009/05/decepmortgage.shtm
(ANPR issued by the Commission initiating its mortgage
practices rulemakings). Although they increase the time it
takes to promulgate the ultimate rule, ANPRs have proven useful
in situations where the Commission lacks sufficient experience
or knowledge in a particular area to formulate a proposed rule.
2. Second, in some cases, the FTC has held public workshops
during the course of the rulemaking proceeding, enriching the
record and providing additional opportunities for those who
might be affected by the rule to express their views, provide
data, and address the assertions of other participants in a
practical manner and forum. See, e.g., http://www.ftc.gov/opa/
2009/08/tsrforum.shtm (announcing public forum to discuss
proposed debt relief amendments to the Commission's
Telemarketing Sales Rule.)
3. Third, to further ensure that its decisions are fully
informed, the Commission routinely has conducted informal, but
extensive, outreach to affected parties. For example, the FTC
participated in or conducted a number of rulemakings as
required by the FACT Act. For most of these rules, the FTC
(with its sister agencies in some cases) solicited data and
opinions in addition to the formal request for comments, and
often on multiple occasions, from industry groups, legal
practitioners, consumer advocates, and others.
4. Fourth, the Commission has an ongoing program of reviewing
all of its rules periodically, seeking public comment on them,
and revising or repealing them as appropriate.
I do not have ``historical rulemaking data'' respecting the average
time spent on each of these steps in the APA process. Based on my
experience with APA rulemaking since my return to the Commission (which
represents the totality of my experience with APA rulemaking), I
estimate that those six sequential steps would take approximately 2
years or less to complete.
I should add several caveats. First, the dates submitted and my
estimates describe only the rulemaking requirements imposed by the APA,
as supplemented by the Commission's APA rulemaking practices. They do
not, in other words, describe the rulemaking that has occurred at other
agencies (like the SEC) that are authorized to conduct APA rulemaking.
Second, the Commission has engaged in APA rulemaking in a number of
instances. Some examples of APA rulemaking (as supplemented by the
Commission's practices) are described on page 11 of Chairman
Leibowitz's response: (1) APA rulemaking pursuant to the Telephone
Disclosure and Dispute Resolution Act of 1992; (2) APA rulemaking
pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention
Act (including the Do Not Call Amendments); (3) APA rulemaking pursuant
to the Children's Online Privacy Protection Act of 1998; (4) APA
rulemaking pursuant to the Fairness to Contact Lens Consumers Act; (5)
APA rulemaking pursuant to the Controlling the Assault of Non-Solicited
Pornography and Marketing Act of 2003; and (6) APA rulemaking pursuant
to the Omnibus Appropriations Act, 2009 (mortgage practices draft
rule). APA rulemaking has also been conducted pursuant to the Fair and
Accurate Credit Transactions Act of 2003 and the Gramm-Leach Bliley
Act.
By my estimate, APA rulemaking respecting those rules (excepting
the most recent mortgage practices rule, which has not been completed)
has taken an average of zero (0) hearing time and the proceedings have
taken less than 2 years. Where there have been statutory deadlines for
completing APA rules--sometimes deadlines of a year or less--the FTC
has met those deadlines in every instance.
Question 4. For every proposed rule since 1970 (under both
Magnuson-Moss and APA procedures), please identify each step in the
processes outlined in question 1 and 2, or 3 (as appropriate) that was
taken. In the description, please include the amount of time that was
spent on each step and the number of staff that were a part of
completing that step.
With respect to ``historical rulemaking data'' for the number of
staff members working on each step in the process, Chairman Leibowitz's
response to the prior post-hearing questions stated at page 12:
The records available do not include information sufficient to
respond to the request in full. Staff has gleaned from some of the
post-hearing staff reports illustrative staffing information:
Mobile Homes: At least 13 staff members worked on the post-
hearing staff report.
Used Cars: More than 14 staff members worked on the post-
hearing staff report.
Funeral Industry: At least 16 staff members worked on the
post-hearing staff report.
These numbers do not include the Presiding Officer (who was
obligated to produce a separate report) or his staff, Bureau management
reviewers, Office of General Counsel advisors, or the Commissioners'
offices.
I have no reason to doubt the above statement.
I cannot submit additional ``historical rulemaking data'' for the
time spent on each step in the Mag-Moss rulemaking process for the
reasons described in response to Questions 1 and 2. I do not have
``historical rulemaking data'' for the time spent on each step of the
APA rulemaking process. I have instead provided my best estimates of
the time spent on those tasks.
Based on my experience respecting the seriousness with which the
BCP took its responsibilities when I was Director of that Bureau, I
estimate that at least 13-16 staff members would have participated in
the tasks described in steps 1-6 of the 29 sequential steps of the Mag-
Moss procedures. Based on my experience as an antitrust defense trial
lawyer described in response to Question 1, I estimate that the hearing
officer and his staff, the stenographer, the staff members responsible
for preparing the proposed rule, and cross examining opponents of the
rule, as well as the staff members involved during the pre-hearing and
post-hearing phases would have been required to participate in steps
11-25 of the 29 sequential steps of the Mag-Moss procedures. Again,
based on my experience respecting the seriousness with which the BCP
staff took their responsibilities, I estimate that for the tasks
described in steps 11-25 at least 20 staff members would have been
necessary.
Based on my familiarity with the APA rulemaking since I have
returned to the Commission as a Commissioner, I estimate that
approximately 7-10 BCP staff members would have participated in the 6
steps in the APA rulemaking process, as supplemented by the
Commission's practices.
Question 4a. For each rule, please provide details on whether or
not the rule was completed. If not completed, please state what the
final outcome of the rulemaking was and why that decision was made.
Please also provide a summation of the total amount of time spent
working on each rulemaking by the Commission.
Answer. Of the 15 Mag-Moss rules proposed, 5 were finalized; the
Credit Practices Rule, the Funeral Industry Practices Rule, the
Ophthalmic Practices Rule, the Used Car Rule and the Home Insulation
Rule. In addition, Magnuson-Moss procedures were used to complete or
modify some rules that had been issued or begun pre-Mag Moss.\3\ The
other ten Mag-Moss rule proceedings were closed.
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\3\ It appears to me that the Mail Order Merchandise Rule was
initially proposed in 1971 under Section 6(g) of the FTC Act, but
completed at the end of 1975 after the Mag-Moss Act was enacted by
Congress. Similarly, it appears that the Franchise Rule was initially
proposed in 1971, but completed over 7 years later in 1978 as a Mag-
Moss rule. That makes sense to me. Prior to the Mag-Moss Act, the FTC
had the authority to challenge practices under Section 5 of the FTC Act
and to enact rules respecting those practices but did not have the
power to seek civil penalties for violations of either Section 5 or a
rule unless and until a respondent was held in contempt of a Commission
order respecting the same. Thus, a respondent effectively got ``two
bites of the apple'' (the first one being a violation of Section 5 or a
rule, for which there was no monetary penalty). One of the purposes of
the Mag-Moss Act was to enable the Commission to make rules that were
enforceable by civil penalties, thus giving a respondent only ``one
bite at the apple.''
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As you state in Question 14, former Chairman Muris has testified
that the reason for that was because there was a ``change in
enforcement philosophy.'' I have no reason to doubt his testimony.
After the change in Administration in 1980, former Chairman Muris was
appointed Director of BCP and I have no doubt that the issuance of Mag-
Moss rules was contrary to his ``enforcement philosophy'' and hence
that he recommended closing those pending rulemaking proceedings.
However, the Congress created the FTC as an independent agency,
providing that no more than three of its members should come from the
same political party, in order to avoid just such shifts in
``enforcement philosophy'' upon a change in Administration. Thus, the
explanation for closing the ten Mag-Moss rule proceedings proffered by
former Chairman Muris would describe the sort of ``independent'' agency
capture by an Administration that Congress intended to prevent.
Furthermore, former Chairman Muris' view that this ``change in
enforcement philosophy,'' not the time-consuming and burdensome nature
of the Mag-Moss rulemaking process, ``killed FTC rulemaking'' (see
Question 15) does not accord with the views of other BCP Directors. As
previously stated, I was the BCP Director in 1975, when most of the 15
Mag-Moss rules were proposed. At the outset, I felt the Mag-Moss
process was workable. However, after all of those rules had already
been in process for 3 or more years, and 12 of them for over 5 years,
and before the change in enforcement policy referred to, I became
convinced that my initial view was wrong. Instead, I came to realize
that Mag-Moss rulemaking proceedings were not viable. Also, two
subsequent Bureau Directors, for example, told me (when they were BCP
Directors) that they shared that view, and that was the reason for the
absence of Mag-Moss rulemaking.
Moreover, former Chairman Muris has acknowledged that when he was
Chairman, his ``enforcement philosophy'' did not prevent him from
championing the Do Not Call Rule. He further acknowledged that that
rule was promulgated using APA, instead of Mag-Moss, rulemaking
procedures. Although he claims that a Mag-Moss rule would not have
taken any more time to issue, his assertion is unsupported and contrary
to the way the Commission in fact proceeded.
Question 4b. For hearings, please note how long each hearing took
and how long was spent after the hearing reviewing the record. Please
identify the number of staff members who reviewed the hearing records.
There are zero (0) hearings required in the APA rulemaking process.
For my estimate of the time and staff resources spent on average in
reviewing the hearing record in a Mag-Moss proceeding (see step 22),
based on my experience as a BCP Director and my personal knowledge
respecting the seriousness with which the BCP staff performed their
responsibilities, I estimate the role of staff involved would accord
with the number of staff reported to have worked on that task in
connection with the Mobile Homes, Used Cars, and Funeral Industry
proceedings (13-15 staff members), and the time needed to perform that
task would have taken, on average, approximately 18 months.
Question 5. Please identify which specific requirements under the
FTC's Magnuson-Moss rulemaking process you believe are unnecessary or
overly burdensome. For each requirement identified, please explain why
you believe that requirement is unnecessary or overly burdensome.
I consider all but the 6 steps of the Mag-Moss rulemaking process
that are also required by APA rulemaking (i.e., publication of the
prescribed NPR; acceptance of public comments; obtaining OMB approval
of any disclosure, reporting or record keeping requirements in the
rule; publication of the prescribed Statement of Basis and Purpose;
notification to Congress pursuant to the SBREFA; and defending against
challenges) to be duplicative, unnecessary and burdensome. The
Commission has demonstrated repeatedly that it can fashion responsible
rules using the APA procedures, without engaging in the numerous other
time-consuming and burdensome steps required under Mag-Moss procedures.
A number of other agencies (including but not limited to the SEC) have
also demonstrated that APA rulemaking is sufficient to ensure due
process and fairness. Indeed, Congress itself does not generally
require hearings and proceedings that are as burdensome and time-
consuming as Mag-Moss rulemaking procedures before adopting important
legislation (such as the Patriot Act).
The justifications that have been proffered for such burdensome and
time-consuming Mag-Moss procedures do not stand up to serious
examination. It is said, for example, that Mag-Moss rules are necessary
because otherwise the FTC's broad jurisdiction would make it ``the
second most powerful legislature in Washington.'' \4\ Indeed, the
opposite is true. Each of the 15 Mag-Moss rules sought to define
specific ``rules of the road'' for businesses that otherwise would be
governed by a broad statute (Section 5 of the FTC Act). Similarly, it
has been said that rulemaking diverts the staff from doing what it
should be doing, which is to bring cases.\5\ I am a big fan of bringing
cases. But I am also a big fan of giving the businesses advance notice
of the specific ``rules of the road'' before they are sued.
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\4\ Testimony of Timothy F. Muris before the U.S. Senate Committee
on Commerce, Science, and Transportation, at 12-14 (July 14, 2009).
\5\ Id. at 14.
Question 6. With a Notice of Proposed Rulemaking, the APA process
removes the explicit requirement to provide the text and purpose for a
proposed rule, which is present under the Magnuson-Moss proceedings and
has helped ensure the FTC designates the issues it is pursuing at the
outset of a rulemaking. Do you believe this identification of issues is
an unnecessary step in the FTC's rulemaking process?
This question says that the APA process ``removes the explicit
requirement to provide the text and purpose for a proposed rule, which
is present under the Magnuson-Moss proceedings and has helped ensure
the FTC designates the issues it is pursuing at the outset of a
rulemaking.'' That is not how I read or interpret the APA. The APA
process specifically requires that the Notice of Proposed Rulemaking
(``NPR'') sets forth either the terms or substance of the proposed rule
or a description of the subjects and issues involved; explains the
legal and factual basis for the proposed rule provisions; and includes,
if applicable, a Regulatory Flexibility analysis based on the
anticipated effects of the rule on small entities, and an analysis
under the Paperwork Reduction Act of any disclosure, reporting, or
record keeping requirements the rule would impose. These are all
necessary steps occurring at the outset of the APA rulemaking process,
and I believe they adequately identify the issues. In any event,
however, the Commission's long standing practice in its APA rulemaking
is to include the text of the proposed rule in its NPR, and I do not
foresee any change in this practice.
Question 7. Do you believe it is beneficial to require a
demonstration of prevalence at the outset of a rulemaking to ensure
there is sufficient reason to pursue an industry wide rule? At what
point in a rulemaking do you believe the Commission should be required
to demonstrate the prevalence of a deceptive act or practice on which
it intends to enunciate a rule?
Answer. Requiring a demonstration of prevalence ``at the outset''
of a rulemaking proceeding to ensure that there is sufficient reason to
issue an industry-wide rule seems to me to put the cart before the
horse. A primary purpose of a rulemaking proceeding is to determine if
there is a sufficient reason to issue an industry-wide rule; requiring
that to be determined ``at the outset'' would oblige the FTC to
prejudge that key issue. Moreover, requiring a demonstration of
``prevalence'' to be shown at any point in the proceeding seems to me
to be imprudent for two additional reasons. First, ``prevalence'' is
largely in the eye of the beholder in that it is not defined in either
the statute or the case law. Second, requiring a demonstration of
``prevalence'' is contrary to the sage adage that even if bad apples do
not predominate, they may spoil an entire barrel: more specifically, a
rule that condemns specific ``deceptive or unfair'' business practices
protects not only consumers but also legitimate businesses that must
compete with the businesses engaging in those practices; indeed, that
is why the FTC's consumer protection mission is symbiotic with its
mission to protect against unfair competition. This is not to say I
would favor issuing a rule to address a small number of isolated
problems; business education and, if needed, enforcement action
ordinarily would be the appropriate answer to that situation.
Question 8. You stated the hearings usually take 38 days to
complete. Why do you believe that the removal of this relatively short
requirement (in the context of a multi-year rulemaking) will
significantly decrease the time the Commission spends on a rulemaking?
Answer. I do not consider 38 days of hearings to be a ``relatively
short'' requirement in the context of a multi-year proceeding. As I
testified, for nearly 40 years, I was an antitrust litigator for
defendants in the Federal courts. Many of the antitrust cases in which
I participated were ``multiyear'' proceedings. Yet, I never
participated in a trial that was as long as the average Mag-Moss
hearing (the closest I came was a 37 day jury trial in Chicago in the
early 2000s). And, the average 38 day Mag-Moss hearing time omits the
extensive time spent in preparing for, and analyzing the results of,
the hearing, which are integral parts of the hearing process. Judged by
other metrics--i.e., as previously discussed, the APA rulemaking
proceedings (which involve 0 hearing time) conducted by both the FTC
and other agencies, this is an inordinately long period of time. Nor
can the time-consuming and burdensome nature of the Mag-Moss rulemaking
process be justified by the breadth or the importance of the rule
proposed. As previously discussed, each of the proposed Mag-Moss rules
actually defined with specificity the applicable ``rules of the road''
under a broad statute; and those ``rules of the road'' were not any
more important than the subject matter of APA rules proposed by the FTC
and other like agencies, much less than legislation enacted by
Congress.
Question 9. Under Magnuson-Moss procedures, the hearing allows
every party to suggest disputed issues of fact. Do you believe that
allowing all parties to do so is unnecessary? If the Commission is
given full APA authority for all rulemakings, how can we be sure that
this and future Commissions will ensure that the concerns of all
parties related to potentially disputed issues of fact are heard and
considered?
Answer. Based on my experience as an antitrust litigator described
in response to Question 1, I believe requiring the FTC to consider the
disputed issues submitted by all parties is unnecessary. Rule 26 of the
Federal Rules of Civil Procedure, governing pre-trial proceedings in
Federal courts, does not require a Federal judge to consider the issues
submitted by all parties even though many of the antitrust cases in
which I participated were multi-party proceedings with potential
binding effects on the parties outside the scope of the particular
case. Moreover, these submissions cannot be viewed in isolation; they
are a prelude to cross-examination respecting each issue at the
hearing. Thus, this requirement has the potential to make the hearing
process extremely time-consuming and burdensome. Indeed, I know of no
other agency that faces such a requirement. The APA requirement
compelling an agency to consider all comments submitted, and to defend
any rule in the courts, has proved to ensure that the legitimate
concerns of all parties related to potentially disputed issues of fact
are heard and considered.
Question 10. In testimony, you referenced a recent attempt by the
Commission to carve out business opportunities from the Franchise Rule
as the only proposed rule under Magnuson-Moss requirements since 1978.
Please explain what occurred with that rulemaking, including the
ultimate result. Do you think the Magnuson-Moss procedures were too
burdensome in that case? Why or why not?
Answer. In 1995, the Commission conducted a regulatory rule review
of the Franchise Rule to ensure that it was continuing to serve a
useful purpose. In that review the Commission explored the issue of how
the Franchise Rule was applied to the sale of business opportunities.
At the conclusion of the rule review, the Commission determined to
retain the Franchise Rule with modifications but also decided to seek
additional comment on whether to address the sale of business
opportunities through a separate, narrowly tailored rule. To that end,
under Mag-Moss rulemaking procedures, in 1997 the Commission published
an ANPR, which jointly considered Franchise Rule modifications as well
as the bifurcation of the sale of business opportunities from the
Franchise Rule. In addition to soliciting written comments, the
Commission staff held 3 public workshops--held in Chicago, Dallas and
Washington, D.C.--specifically addressing business opportunity sales
issues.
In October 1999, the Commission announced its intention to conduct
a separate rulemaking to address business opportunity sales, but
proceeded to modify the Franchise Rule under Mag-Moss rulemaking
procedures first. As the Franchise Rule proceeding began to wind down
(the final rule was published in January 2007), the Commission began
Mag-Moss rulemaking proceedings relating to the sale of business
opportunities. In April 2006, the Commission published an NPR, which
included proposed language for the new Business Opportunity Rule.\6\
The comment periods for the NPR ultimately concluded at the end of
September 2006. The Commission received over 17,000 comments and
rebuttal comments.
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\6\ The initial comment period was 60 days, and was extended for an
additional month. The rebuttal period was extended twice--first to
accommodate the extension of the initial comment period, and then
extended an additional 6 weeks to allow more time for rebuttal
comments.
---------------------------------------------------------------------------
In March 2008, still proceeding under the Mag-Moss rulemaking
steps, the Commission issued a revised NPR, which proposed a more
narrowly-focused Business Opportunity Rule. The comment periods for
this NPR concluded in July 2008, and the Commission received 115
comments and rebuttal comments. A public comment period relating to the
Paperwork Reduction Act was conducted that October. The Commission held
a day-long workshop on June 1, 2009, to explore proposed changes to the
Business Opportunity Rule and the comment period for that hearing
closed at the end of June 2009. A Staff Report is currently being
drafted on the proposed Business Opportunity Rule and the Commission
anticipates seeking comment on that Report later this year.
The rulemaking proceedings described above illustrate the problems
that I believe are inherent to the Mag-Moss rulemaking process. The
proceeding to amend the Franchise Rule and bifurcate a separate rule
for business opportunity sales began in 1995 and has still not been
completed. Although not all of the delay in the Franchise Rule/Business
Opportunity rulemakings has been due to Mag-Moss rulemaking procedures,
I believe that much, if not most, of that delay has been.
There are too many unnecessary steps in the Mag-Moss rulemaking
process. For example, although the interested parties in the Business
Opportunity rulemaking waived a hearing, thereby eliminating the time
and resources required to conduct a hearing (as well as the pre-hearing
and post-hearing steps integral to such a hearing), four workshops--
three in 1997 and one in 2009--were conducted as an alternative.
Furthermore, Commission staff must still prepare a Staff Report and
seek comment (with the requisite comment period) on that Report.
In addition, Mag-Moss procedures require an unwieldy method of
amending rules such as the Franchise Rule. The primary reason behind
amending that Rule was to conform disclosure requirements with those of
the Uniform Franchise Offering Circular. This modification would reduce
costs on the business side of franchise sales by streamlining certain
requirements. Because it took almost 12 years to amend the Franchise
Rule, businesses lost out on 12 years of potentially reduced costs,
most of which arguably were passed on to purchasers of those
franchises.
Question 11. In testimony, you stated that you believe the
Commission should allow oral submissions during rulemakings. If the
Commission were given full APA authority, would you support adding this
as an additional requirement in statute?
Answer. I stated in my testimony that the FTC as a matter of
practice allowed oral submissions in some APA rulemaking proceedings.
See my response to Question 4. I do not recall testifying that the
Commission should allow such submissions in all APA proceedings, and I
do not consider that necessary. I do think it is advisable when a rule
is unusually novel or complex. However, I do not support adding that
requirement to the statute. It should be the exception, not the rule.
Question 12. In testimony, you stated that too strict a prevalence
requirement on rulemakings would hurt legitimate business. Please
explain why you believe this to be true.
Answer. See my prior response to Question 7 respecting a
``prevalence'' requirement above.
Question 13. Former Chairman Muris stated that the FTC's rulemaking
process has taken so long not because of the Magnuson-Moss procedures,
but because many times the FTC did not have a clear idea of what it
wanted to accomplish with a particular rule. Do you agree or disagree
with this statement? Please explain your response.
I respectfully disagree with my good friend former Chairman Muris.
It is not correct to assert that ``many times the FTC did not have a
clear idea of what it wanted to accomplish with a particular rule.''
Before any Mag-Moss rule was proposed, it was the subject of extensive
investigation by the staff; vetting by the Bureau of Consumer
Protection management; recommendation by the staff, the Bureau
management and other interested offices at the agency (like the Office
of Policy Planning and Evaluation (``OPPE'') and the Bureau of
Economics); and review and adoption by the Commissioners. This was in
addition to the 29 sequential steps of the Mag-Moss procedures. So in
the case of each of the 15 proposed rules, both the agency staff and
the Commission had a very ``clear idea of what [the Commission] wanted
to accomplish'' with respect to the rule.
Second, with respect, I was in a better position than former
Chairman Muris to speak to whether the Commission had a clear idea
about what it wanted to accomplish with the MagMoss rules it proposed
in 1975. As previously stated, I was the Director of BCP at the time
and, as such, I was involved in the investigation, vetting and
recommendation processes I have described for each of the Mag-Moss
rules proposed. By contrast, former Chairman Muris was a junior member
of OPPE when the rules were proposed: as he acknowledged in his
testimony last July, ``one of the first jobs I had out of law school
was that as a staffer at the Federal Trade Commission.'' \7\ Finally, I
do not recall any instance in which OPPE opposed any of the Mag-Moss
rulemaking proposals recommended by BCP in 1975. To the contrary, OPPE
enthusiastically supported a number of Mag-Moss rulemaking proposals in
1975, including at least one that the Commission rejected.
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\7\ Transcript of Hearing of the Consumer Protection, Product
Safety, and Insurance Subcommittee of the Senate Commerce, Science, and
Transportation Committee, at 20 (July 14, 2009).
Question 14. In his testimony, Mr. Muris stated that Magnuson-Moss
did not kill FTC rulemaking. A change in enforcement philosophy slowed
FTC rulemaking efforts. Do you agree or disagree with this statement?
Please explain your response.
Answer. See my prior response to Question 4.
Question 15. In her testimony, Ms. Woolley expressed concern that
providing the FTC with full APA authority, and the resultant removal of
Magnuson-Moss's procedural safeguards, creates a threat of new
regulatory burdens that would limit market innovation and reduce the
number of jobs the business community is able to create. Do you agree
or disagree with this statement? Please explain your response.
Answer. I respectfully disagree with Ms. Woolley. She did not
explain how or why innovation or the number of jobs in the business
community would be threatened. Nor did she link the FTC's use of APA
rulemaking procedures with any of these effects. Thus, I am at a loss
about what she had in mind.
______
Response to Written Questions Submitted by Hon. David Vitter to
Hon. J. Thomas Rosch
Question 1. The FTC is asking Congress to change a process enacted
three decades ago, specifically the rulemaking procedures created by
the Magnusson-Moss Act. In reviewing the prior testimony of Chairman
Leibowitz before this committee, there is little documentation on the
record of the specific problems the Commission incurred over the past
several decades in exercising its current rule-making powers. Likewise,
there are no recommended proposals offered by the FTC to fix any
specific problems with the procedures. We simply have the FTC's
proposal to replace the current process with APA authority for all the
FTC's rulemakings. On what specific grounds is the FTC asking Congress
to completely change the process required in one of the key statutes
that guides the Commission's actions? Is there any documented evidence
that the FTC can offer us today supporting this complete change in
procedure for the Commission? If specific problems can be identified
with the procedures of the Magnusson-Moss Act that have prevented the
FTC from carrying out its mission, can the FTC document those so that
this committee can work on addressing those specific concerns with
those procedures?
I respectfully submit that the ongoing experience respecting the
Mag-Moss rulemaking process (which is described in the responses to
post-hearing questions that Chairman Leibowitz and I have submitted)
speaks for itself. Mag-Moss rulemaking has 29 sequential steps and it
has resulted in hearings that have averaged 38 days in length and
proceedings that have averaged 7 years in length. With the exception of
the proposed Business Opportunity Rule, there has been no new Mag-Moss
rule proposed since 1978. That is more than 30 years in which not only
have consumers been without the protections afforded by a rule, but
also bad businesses in the barrel have had two bites at the apple in
most cases. Moreover, since a Mag-Moss rule is essential to the agency
obtaining civil penalties in most cases, the good businesses have not
only gone without ``rules of the road'' afforded by a rule, but have
not had the protection against unfair competition provided by rules.
Additionally, the FTC and numerous other agencies have demonstrated
that APA rulemaking not only is an extremely valuable and responsible
tool, but also that the APA procedures are more than adequate to ensure
due process and fairness.
Question 2. Businesses need greater certainty in order to have the
confidence to invest in growth and new jobs. The proposed expansion of
FTC powers creates a significant amount of uncertainty about how the
FTC may use these new powers to regulate businesses across the entire
economy. Before we take such a significant step, which may be difficult
to reverse, it seems prudent to understand at least the potential
economic impact that each of the FTC's proposed provisions could have
on our economy. Has the Federal Trade Commission completed an economic
analysis or impact report that it can share with the members of this
committee? If not, does the FTC plan to conduct a cost-benefit analysis
or otherwise assess what impact this proposal may have on our economy?
Answer. To be sure, businesses need as much certainty as possible.
That is why rules are essential and the delay that has occurred is
intolerable. As I testified, the Commission has routinely prepared and
included in the Statement of Basis and Purpose of each rule a
consideration of the costs and benefits associated with that rule,
which can and will be shared with the Committee.
______
Response to Written Question Submitted by Hon. Tom Udall to
Edmund Mierzwinski
Question. Mr. Mierzwinski, in your organization's experience, how
would you rate the quality and effectiveness of the FTC's efforts in
Native American and rural communities? What, if any, suggestions would
you have for improvement in services to these communities?
Answer. Senator Udall, your point about financial threats to Native
Americans and rural Americans is well-taken. Several years ago, on a
tour of predatory lending hot spots in New Mexico as part of a campaign
against payday lending, I visited Gallup. A legal services attorney who
I met with reminded me of what General William Tecumseh Sherman had
said in the 1870s: ``A reservation is a parcel of land inhabited by
Indians and surrounded by thieves.'' What he said in 1870 is true in
Gallup today.
As you know, sadly, the same could be said of our military bases.
But while the Congress in 2006 passed the Military Lending Act to
protect service families from predatory lending I am unaware of any
significant efforts to assist Native Americans, on or off the
reservation, or rural Americans, by the FTC or other agencies. I have
also spoken with private attorneys in New Mexico who have represented
Native Americans who face deplorable and outrageous violations of law,
including physical threats, by debt collectors.
Does the FTC have such outreach programs? Perhaps, but it is not
something I am aware of. Others I spoke with in response to your
question did not know of any programs for Native, rural or any other
under-served Americans. To be fair, perhaps there are outreach efforts
in the FTC's regional offices I do not know about.
The first step would be to study the problem more closely to
determine whether my anecdotal opinions are fair. You might ask the FTC
itself this same question or ask CRS or GAO for information. I would
suggest that you consider holding a field hearing in Gallup, or on any
of the reservations in your state. I would be glad to help you find
witnesses. Then, the correct approach might be to seek greater budget
authority for the FTC's field offices to conduct specific additional
outreach efforts to these under-served communities. Alternatively, it
might be a better solution--since the FTC does not have field offices
in each state--to consider a program where it makes grants to or
partners with state attorneys general offices or local legal services
offices to provide these services. I hope you find this helpful.
______
Response to Written Questions Submitted by Hon. Roger F. Wicker to
Hon. Timothy J. Muris
Question 1. Please explain why you believe the designation of
issues in a rulemaking is so important, and how the Magnuson-Moss
process ensures that the designation of issues is performed. What would
the effect on the designation of issues be if the Commission was
granted full APA rulemaking authority?
Answer. Probably the most important benefit of designating issues
is that it forces the Commission to be clear about its theories and
their factual predicates. A clear theory of why a rule provision is
needed makes clear which facts matter, and avoids the costs and delays
inherent in exploring every possibly relevant fact. The need to limit
the number of issues that must be explored is an important incentive
for the Commission to think through its proposals before it begins the
rulemaking process.
The process of designating issues under the Magnuson-Moss
procedures accomplishes other objectives. It is vital that rules,
especially far-reaching ones, be based on a sound factual record.
Designation identifies the key factual disputes that emerge from the
written comments. Moreover, the procedures ensure that these factual
predicates of the rulemaking proceeding are fully explored through
hearings and, if necessary, cross examination. Whether to adopt a rule,
and if so how to structure its regulatory requirements, depends on the
Commission's ultimate conclusions about the facts, and the designated
issues process causes the factual questions to be explored fully.
Under the Commission's rules, any participant in the rulemaking can
propose designated issues. The presiding officer or the Commission
itself then identifies the particular issues that will be the subject
of further exploration. Under the APA, there is no requirement to
designate issues. The Commission can identify the questions on which it
particularly seeks comment, and commenters can present their own view
of the facts.
Question 2. Please explain why you believe the right for parties to
cross-examine during the rulemaking is an important step that should be
retained.
Answer. Because the Commission is not expert on many of the facts
it must resolve, it is more dependent on the fact-finding process than
many other agencies. Cross examination, as all trial lawyers know, is
an extremely useful tool to identify weaknesses in the position a
witness has taken and to highlight the differences between the opposing
sides.
Question 3. Commissioner Rosch testified that the Magnuson-Moss
process was a mistake from its inception, and that the Commission was
not guilty of overzealous regulation warranting Congressional
restrictions on their rulemaking authority. Do you agree or disagree
with this statement? Please explain your response.
Answer. I disagree. The Magnuson-Moss procedures are tough, but
workable, and an important safeguard for an agency with the FTC's far-
reaching authority and lack of expertise.
Many of the early Magnuson-Moss rules were initially proposed
before the statute was enacted. When Congress codified the Commission's
rulemaking authority, the Commission simply re-proposed the rules under
the new procedures. Frequently, these proposals sought to restructure
entire industries, based on anecdotal evidence and poorly specified
legal theories. (The Commission itself ultimately rejected many
proposed rules.) Thus, the scope of the Commission's rulemaking
ambitions were already apparent when the statute was enacted, and
Congress appropriately concluded that special safeguards were necessary
to ensure that the Commission made its decisions after a thorough
exploration of the facts and issues.
Question 4. In your testimony, you discussed the Business
Opportunity Rule and how the threat of Magnuson-Moss procedures
prevented the Commission from moving forward. Please explain what
occurred in that situation, and how the Magnuson-Moss procedures
prevented the Commission from creating unintentionally burdensome and
unnecessary rules in that case.
Answer. The originally proposed Business Opportunity rule was
intended to do two things. First, it was envisioned as an easier way
for business opportunity sellers historically subject to the
Commission's Franchise Rule to provide consumers with the information
they need to make an informed decision about whether to purchase the
opportunity. Second, it sought to reach business opportunity areas,
such as work at home schemes, where fraud was widespread and the
Franchise Rule did not apply.
Because it knew more about the fraudulent operators who were the
subjects of frequent enforcement actions than it knew about legitimates
businesses, the Commission's initial proposal was overly broad, and
would have covered literally millions of self employed individuals, who
often worked part time. Comments on the initial proposal documented
these problems, and proposed numerous disputed issues of material fact
that it would be necessary to resolve if the Commission wished to
proceed. Based on the initial comments, the Commission re-proposed a
more limited rule that avoided overreaching. Although the Commission
may have retreated without the threat of hearings and cross
examination, those threats undoubtedly helped to influence the
Commission's deliberations.
Question 5. In his testimony, Commissioner Rosch stated that the
Magnuson-Moss rulemaking process is a ``prescription for doing
nothing'' and has brought rulemaking at the FTC to a halt. Do you agree
or disagree with this statement? Please explain your response.
Answer. As I testified at the hearing, it was a change in
enforcement philosophy, not Magnuson-Moss, that led to the reduced use
of rulemaking that has characterized the Commission in the last thirty
years. A bipartisan consensus has emerged that the Commission should
seek to enforce common law principles, often through law enforcement
actions in Federal district court. This approach has been extremely
productive, and has led to substantial recoveries for injured
consumers. Moreover, it has led to the development of the law through
case by case exploration of the issues in areas where rulemaking would
have been very difficult. For example, the Commission has developed
through its cases important legal principles governing privacy and
information security. Writing rules that specify in detail what
companies must do in this area would be very difficult, and potentially
counterproductive.
The notion that Magnuson-Moss proceedings must take ``forever'' or
an average of 8 years is, to say the least, misleading. If the
Commission is clear about its theories and the facts that are relevant
to those theories, there is no reason why rules under Magnuson-Moss
cannot be completed within 2 to 4 years, as occurred in the two
eyeglasses rules and would have occurred with the Do Not Call Rule had
we been required to use Magnuson-Moss.
Moreover, the historical average overstates the likely time for new
rules. Many 1970s rules were re-proposed after the statute was passed,
adding many months to the process. The controversial nature of several
proposals, which were poorly considered, led to a public outcry that
delayed the process. The election of Ronald Reagan brought rulemaking
proceedings to a halt, as the staff realized that the new leaders of
the Commission would likely have different attitudes toward many of the
rules. In fact, it was 11 months after the election before the new
Chairman, Jim Miller, took office, and several years after that before
final decisions were made to resolve many of the pending rules. Even in
the unhappy event that similarly ill-though out proposals were
introduced today, they would not likely encounter the unique set of
obstacles that delayed the early proposals.