[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE FTC AT 100: VIEWS FROM THE ACADEMIC EXPERTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, MANUFACTURING, AND TRADE
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 28, 2014
__________
Serial No. 113-122
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
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COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
RALPH M. HALL, Texas HENRY A. WAXMAN, California
JOE BARTON, Texas Ranking Member
Chairman Emeritus JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky Chairman Emeritus
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
JOSEPH R. PITTS, Pennsylvania FRANK PALLONE, Jr., New Jersey
GREG WALDEN, Oregon BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska ANNA G. ESHOO, California
MIKE ROGERS, Michigan ELIOT L. ENGEL, New York
TIM MURPHY, Pennsylvania GENE GREEN, Texas
MICHAEL C. BURGESS, Texas DIANA DeGETTE, Colorado
MARSHA BLACKBURN, Tennessee LOIS CAPPS, California
Vice Chairman MICHAEL F. DOYLE, Pennsylvania
PHIL GINGREY, Georgia JANICE D. SCHAKOWSKY, Illinois
STEVE SCALISE, Louisiana JIM MATHESON, Utah
ROBERT E. LATTA, Ohio G.K. BUTTERFIELD, North Carolina
CATHY McMORRIS RODGERS, Washington JOHN BARROW, Georgia
GREGG HARPER, Mississippi DORIS O. MATSUI, California
LEONARD LANCE, New Jersey DONNA M. CHRISTENSEN, Virgin
BILL CASSIDY, Louisiana Islands
BRETT GUTHRIE, Kentucky KATHY CASTOR, Florida
PETE OLSON, Texas JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia JERRY McNERNEY, California
CORY GARDNER, Colorado BRUCE L. BRALEY, Iowa
MIKE POMPEO, Kansas PETER WELCH, Vermont
ADAM KINZINGER, Illinois BEN RAY LUJAN, New Mexico
H. MORGAN GRIFFITH, Virginia PAUL TONKO, New York
GUS M. BILIRAKIS, Florida
BILL JOHNSON, Missouri
BILLY LONG, Missouri
RENEE L. ELLMERS, North Carolina
Subcommittee on Commerce, Manufacturing, and Trade
LEE TERRY, Nebraska
Chairman
JANICE D. SCHAKOWSKY, Illinois
LEONARD LANCE, New Jersey Ranking Member
Vice Chairman JOHN P. SARBANES, Maryland
MARSHA BLACKBURN, Tennessee JERRY McNERNEY, California
GREGG HARPER, Mississippi PETER WELCH, Vermont
BRETT GUTHRIE, Kentucky JOHN YARMUTH, Kentucky
PETE OLSON, Texas JOHN D. DINGELL, Michigan
DAVE B. McKINLEY, West Virginia BOBBY L. RUSH, Illinois
MIKE POMPEO, Kansas JIM MATHESON, Utah
ADAM KINZINGER, Illinois JOHN BARROW, Georgia
GUS M. BILIRAKIS, Florida DONNA M. CHRISTENSEN, Virgin
BILL JOHNSON, Missouri Islands
BILLY LONG, Missouri HENRY A. WAXMAN, California, ex
JOE BARTON, Texas officio
FRED UPTON, Michigan, ex officio
C O N T E N T S
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Page
Hon. Lee Terry, a Representative in Congress from the State of
Nebraska, opening statement.................................... 1
Prepared statement........................................... 2
Hon. Marsha Blackburn, a Representative in Congress from the
State of Tennessee, opening statement.......................... 3
Hon. Janice D. Schakowsky, a Representative in Congress from the
State of Illinois, prepared statement.......................... 3
Hon. Henry A. Waxman, a Representative in Congress from the State
of California, prepared statement.............................. 112
Witnesses
Howard Beales, Professor, The George Washington University School
of Business.................................................... 5
Prepared statement........................................... 8
Answers to submitted questions............................... 113
Daniel Crane, Associate Dean for Faculty and Research and the
Frederick Paul Furth, Sr. Professor of Law, University of
Michigan School of Law......................................... 27
Prepared statement........................................... 29
Answers to submitted questions............................... 122
Geoffrey Manne, Founder and Executive Director, International
Center for Law and Economics................................... 43
Prepared statement \1\....................................... 45
Answers to submitted questions............................... 128
Christopher Yoo, John H. Chestnut Professor of Law,
Communication, and Computer and Information Science, and
Director, Center for Technology, Innovation and Competition,
University of Pennsylvania Law School.......................... 65
Prepared statement........................................... 67
Answers to submitted questions \2\........................... 142
Robert Lande, Venable Professor of Law, University of Baltimore
School of Law.................................................. 71
Prepared statement........................................... 73
Answers to submitted questions............................... 143
Paul Ohm, Associate Professor, University of Colorado Law School. 89
Prepared statement........................................... 91
Answers to submitted questions \3\........................... 147
----------
\1\ The attachment to Mr. Manne's statement is available at:
http://docs.house.gov/meetings/if/if17/20140228/101812/hhrg-113-
if17-wstate-manneg-20140228-sd002.pdf.
\2\ Mr. Yoo did not answer submitted questions for the record by
the time of printing.
\3\ Mr. Ohm did not answer submitted questions for the record by
the time of printing.
THE FTC AT 100: VIEWS FROM THE ACADEMIC EXPERTS
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FRIDAY, FEBRUARY 28, 2014
House of Representatives,
Subcommittee on Commerce, Manufacturing, and Trade,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 9:34 a.m., in
room 2123 of the Rayburn House Office Building, Hon. Lee Terry
(chairman of the subcommittee) presiding.
Members present: Representatives Terry, Lance, Blackburn,
Harper, Guthrie, Kinzinger, Bilirakis, Johnson, Long,
Schakowsky, McNerney, Barrow, and Waxman (ex officio).
Staff present: Charlotte Baker, Press Secretary; Kirby
Howard, Legislative Clerk; Nick Magallanes, Policy Coordinator,
CMT; Brian McCullough, Senior Professional Staff Member, CMT;
Gib Mullan, Chief Counsel, CMT; Shannon Weinberg Taylor,
Counsel, CMT; Michelle Ash, Democratic Chief Counsel; and
William Wallace, Democratic Professional Staff Member.
OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEBRASKA
Mr. Terry. Good morning, everybody, and thank you for being
here to our second installment on our review of the FTC at 100.
Today's theme is basically outsiders looking in as opposed to
the insiders looking out, which was our first hearing. But
before we get into the details, I want to thank Gib Mullan for
his years of service on our subcommittee. He is going back to
his roots, going back to the Consumer Protection Council or
Consumer Protection Safety Commission and he will be counsel
over there. So Gib, I just really appreciate the great work you
have done for this subcommittee in the last 3 years, two
different chairmen with two different personalities, and you've
managed both well, so thank you for your service. Yes, this is
his last day, then he goes and gets a real job. And starting
the clock. Well, so good morning, and the FTC at 100 years.
This was an agency that was built, established in 1914 when
there was a great deal of consternation in our country about
some of the larger businesses that seemed to have--well, not
seemed, were monopolies, and abuses to consumers ensued when
there was total control over a certain market by one business;
whether it was Standard Oil or American Tobacco. And that was
the reason for the FTC's commission. And today we are looking
at whether those missions of 1914 are still relevant today, and
I think most consumers, citizens, and people on this committee
say, yes, those are relevant, but is the FTC doing what they
need to do. And it is a different society in 2014, and today we
are an economy not of big manufacturers that become the
monopolies, but a country of innovators in technology, and
data, and privacy, and so many other issues that frankly
weren't part of the culture or infrastructure on which the FTC
was built.
So are their standards appropriate? Are the tests to
determine if there is consumer harm appropriate? Are they even
at a hearing from your opinions to those long-standing tests of
harm? How do they quantify this today? And frankly I think
there is another outside competing and adding to the layer of
complexity in how they do their job with the Consumer Finance
Committee that's been put in, and the reality is that those two
committees now share jurisdiction, but you have the CFPB that
virtually has no tests and no standards, and in reality it
looked like the FTC is trying to compete to make sure that they
have equal status in the sense that they don't have any
standards or tests. I want to see if that is your collective
interpretation of how the FTC is working in the modern world.
[The prepared statement of Mr. Terry follows:]
Prepared statement of Hon. Lee Terry
Welcome to our second hearing examining the Federal Trade
Commission in its one-hundredth year. I want to thank all of
the witnesses for coming today to share the academic
perspective on how we can modernize the FTC.
When the FTC was established in 1914, American voters
expected policymakers to ``bust the trusts.'' Stung by the
recent abuses of Standard Oil and American Tobacco, Americans
wanted a new cop on the beat to take on the behemoths of
business. The FTC was therefore established to fill this role.
Like many other federal agencies, the FTC finds itself in
an era that doesn't necessarily fit its original design.
Standard Oil and American Tobacco have been replaced by Apple
and Google. Increasingly, the economy the FTC oversees crosses
international borders--and is defined by a constant and
ubiquitous interconnection over the Internet. And it's not just
people, but their devices that are connected. Five years ago,
the number of ``things'' connected to the Internet surpassed
the number of people. Some predictions say that by 2015, there
will be 25 billion devices connected to the Internet--ranging
from sensors in the soil that track growing conditions for
farmers to chips in pills that notify a doctor when a patient
has taken her medicine. This is the ``Internet of Things,'' and
it presents countless economic advantages, but also unique
privacy concerns. Innovations like this underscore the
difficulty the FTC faces in trying to apply its original
principles.
The spirit of consumer protection was the fundamental
driver in the creation of the FTC 100 years ago and that
continues to be the case even though the activities it oversees
have changed. The FTC certainly has a role to play in
preventing business practices that harm consumers. But
something that the subcommittee could explore today is whether
the FTC's design already allows for greater flexibility to
better protect consumers than other agencies within the federal
government.
The FTC's Section 5 authority, for example, prohibits
``unfair and deceptive acts'' as well as ``unfair methods of
competition.'' These broadly defined standards allow for a
fairly nimble agency to account for business practices as they
evolve.
Nonetheless, there are dangers in this flexible approach.
For example, there is little definition as to what constitutes
``unfair methods of competition.'' The Supreme Court affirmed
that the provision applies to activity that is not yet deemed
illegal under antitrust law. As a result, businesses have a
hard time figuring out exactly what an ``unfair method of
competition'' really is.
The temptation for ``mission creep'' is difficult to resist
for any federal agency, and I believe the FTC is no exception.
I believe this could be remedied by having the commission focus
its efforts on protecting consumers. Otherwise, the commission
is an arbiter of business models--where it can pick one
business model over another and I believe that government
shouldn't be picking winners and losers.
As we start thinking about how to modernize the FTC, I
believe there are a few important principles to keep in mind.
First, we should aim to sharpen the commission's guidance to
provide clearer signals as to what is a prohibited business
practice. Second, we should maintain the commission's
flexibility to update this guidance--which means maintaining
broad overarching authority. Third, I believe the commission
should re-commit itself to basing its decisions on consumer
welfare effects--and those decisions should be supported by
empirical evidence.
As we continue this series of hearings, I look forward to
fleshing these out.
Mr. Terry. So at this point, Marsha, do you have an opening
statement?
Mrs. Blackburn. Yes, I do.
Mr. Terry. And I yield to the gentlelady from Tennessee.
OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TENNESSEE
Mrs. Blackburn. And first, I want to thank Gib Mullan for
all of his service to our committee. The past two Congresses
Gib has really worked tirelessly with us on a host of issues
for consumer product safety and working with me on everything
from the Reform Act to buckyballs to a host of manufacturing
issues. And so, Gib, we are really going to miss you. We
appreciate the leadership that you have brought to the
committee and the due diligence that you have done on behalf of
the committee and of our constituents, so we thank you for
that.
The FTC is turning 100 in less than a year, and we are
pleased to have all of you with us and to look at their role
and to see how they are enforcing their core mission. A few of
the questions that I am going to touch on today, how can
Congress and the FTC work better to maximize consumer welfare?
Are there regulatory jurisdictions that overlap between the FTC
and other agencies? And how do we address these duplications
and redundancies? How can we best harmonize regulations so that
the industry does not have duplicative costs? And what should
the balance be between regulation and enforcement?
So, Mr. Chairman, I thank you for the hearing, and I yield
the balance of my time.
Mr. Terry. Well, I thank you, and now recognize the Ranking
Member of the committee from the great state of Illinois.
OPENING STATEMENT OF HON. JANICE D. SCHAKOWSKY, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Ms. Schakowsky. Thank you, Mr. Chairman. You know, in
thanking and congratulating Gib Mullan, I want to say that I
think too often we don't thank the staff for the incredible
work that they do. Most people around here do understand the
absolutely critical role, the essential role of our staff--and
Gib has really shown his professionalism and I think has
contributed to what has been remarkably bipartisan nature of
this committee. So, Gib, I really want to wish you well as you
go to the Consumer Product Safety Commission, and hope to see
you in that capacity as well. Thank you.
So to the hearing, this is our second in our series on the
Federal Trade Commission's first 100 years and the future of
the agency. So I am very eager to hear from our witnesses about
your perspective on the FTC at 100 and where the commission
ought to be going.
The FTC is an important cop on the beat, protecting both
public and business against unfair, deceptive, fraudulent, or
anti-competitive practices through its consumer protection and
anti-trust authorities.
I began my career in public service as a consumer advocate
fighting successfully to get expiration dates posted on food
packaging. And I view the FTC through the lens of how effective
it is in making sure consumers are respected, well-informed,
and fairly treated.
The FTC has been effective in many areas of consumer
protection. For example, last year, it successfully
strengthened the Children's Online Privacy Protection Act to
reflect the rapidly changing nature of what is considered
personal information. And it also defended consumers from
companies that failed to reasonably protect consumer data such
as the Web-connected camera company TransNet, whose poor
security allowed hackers to spy on consumers and their kids in
their homes.
As commerce continues to change, as the Chairman so clearly
talked about, and expand, the FTC has had to adapt to a new
economy. As our social network shopping, banking, and other
forms of communication and business move to the Internet, the
FTC has changed, bringing more technology experts on board.
At the same time, its resources are as tight as ever. In
our December hearing with the commissioners, they pointed to
``resource constraints'' and the need to leverage those
resources through ``careful case selection.'' I am concerned
that we are asking one of the country's most important consumer
agencies to choose which criminals it will pursue or on which
crimes it will enforce the law. I hope we will work together to
ensure that the FTC has the resources it needs to maintain
consumer protection and a fair marketplace.
From a regulatory standpoint, I believe it is time to look
at ways to reduce barriers to FTC consumer protection rule
makings. The FTC's ability to move forward with important rule
making is much more limited than those at other agencies. I
also believe the FTC should have greater authority to pursue
civil penalties in the event of a failure to reasonably protect
consumers.
In the rapidly changing climate of commerce today, rule
making must be efficient, and penalty enforcement must be
meaningful. The growth of the Internet has presented us with
new questions about privacy rights and expectations. That is
why Chairman Terry and I decided to form the Privacy Working
Group, which is co-chaired by Congresswoman Blackburn and
Congressman Welch. The group is tasked with exploring the
current privacy landscape and considering possible solutions to
the challenges that we find.
As I said at the last FTC hearing, I am particularly
interested in the issue of privacy agreements. The FTC has the
power to hold companies to the privacy agreements they offer
their customers, visitors, and users, and it does hold bad
actors accountable. But tthere is no law requiring that
baseline privacy protections are promised to consumers. And the
FTC can't enforce what is not promised.
I look forward to hearing from our witnesses as to whether
a minimum online privacy standard would be beneficial. Again I
look forward to hearing from our witnesses about what we can do
to enable the FTC to continue its progress and increase its
effectiveness in the future. I yield back.
Mr. Terry. Does anyone else on our side, the Republican
side, have a statement? Well, Billy said no, and the others are
ignoring us. So I am going to say no. Do you have--Mr.
McNerney? All right, so we are going to go right to our
witnesses. This is a distinguished panel of academics who have
great experience with the FTC and can provide us that view, the
expert view now from the outside looking into the FTC. And we
appreciate all. I am going to introduce all of you now, and
then we will just go from my left to your right along the
panel. Many of you have testified before before us, so you know
how it works.
So our first witness, Mr. Howard Beales, Professor of the
George Washington University School of Business. Daniel Crane,
Associate Dean for Faculty and Research at the Frederick Paul
Furth, Senior Professor of Law, University of Michigan School
of Law. Thank you for being here. Geoffrey Manne, Founder and
Executive Director, International Center for Law and Economics.
Christopher Yoo, John H. Chestnut Professor of Law,
Communication and Computer and Information Science, Director,
Center for Technology, Innovation and Competition, University
of Pennsylvania Law School. I certainly like the Big 10 theme
occurring here. Robert Lande, venerable Professor of Law,
University of Baltimore School of Law. Thank you. Paul Ohm,
Associate Professor of University of Colorado Law School, and I
will make no comments, sarcastic comments about the University
of Colorado.
We do appreciate you being here, and we will start with Mr.
Beales. As you know, you have 5 minutes. If you go over 5
minutes, I will start lightly tapping just to remind you to
jump to the conclusion. If you get to 6 minutes, I will start
pounding really hard. So with that, Mr. Beales, you are
recognized for your 5 minutes. And once again to all of you,
thank you for being here.
STATEMENTS OF HOWARD BEALES, PROFESSOR, THE GEORGE WASHINGTON
UNIVERSITY SCHOOL OF BUSINESS; DANIEL CRANE, ASSOCIATE DEAN FOR
FACULTY AND RESEARCH AND THE FREDERICK PAUL FURTH, SR.
PROFESSOR OF LAW, UNIVERSITY OF MICHIGAN SCHOOL OF LAW;
GEOFFREY MANNE, FOUNDER AND EXECUTIVE DIRECTOR, INTERNATIONAL
CENTER FOR LAW AND ECONOMICS; CHRISTOPHER YOO, JOHN H. CHESTNUT
PROFESSOR OF LAW, COMMUNICATION, AND COMPUTER AND INFORMATION
SCIENCE, AND DIRECTOR, CENTER FOR TECHNOLOGY, INNOVATION AND
COMPETITION, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL; ROBERT
LANDE, VENABLE PROFESSOR OF LAW, UNIVERSITY OF BALTIMORE SCHOOL
OF LAW; AND PAUL OHM, ASSOCIATE PROFESSOR, UNIVERSITY OF
COLORADO LAW SCHOOL
STATEMENT OF HOWARD BEALES
Mr. Beales. Chairman Terry, Ranking Member Schakowsky, and
members of the committee, thank you for the opportunity to
testify today. I am Howard Beales, Professor of Strategic
Management and Public Policy at the George Washington School of
Business. In addition to publishing a number of academic
articles on the FTC, I have held a variety of positions at the
agency, most recently as Director of the Bureau of Consumer
Protection from 2001 to 2004.
In my testimony today, I will focus on the FTC's consumer
protection mission, recognizing that it is closely related to
the commission's role in protecting competitive markets because
markets organize and drive our economy.
Consumer protection policy can profoundly enhance the
economic benefits of competition by strengthening the market or
it can reduce these benefits by unduly hampering the
competitive process. By and large, the FTC has done an
excellent job in its consumer protection mission. Recognizing
that generally strong performance, I want to highlight today
some areas where it is harming consumer welfare.
First and most importantly, the commission has lost its way
in its approach to advertising regulation. Virtually any
communication is subject to misinterpretation, and advertising
is no exception. However straightforward the message and
however careful the execution, some consumers are likely to
misinterpret it. In fact, academic studies of communications
find 20 to 30 percent of the audience misunderstand some aspect
of whether it is advertising or editorial content.
To address this problem, the 1983 Deception Policy
Statement focused on the meaning of an advertisement to the
average listener or the general populous or the typical buyer.
A footnote acknowledged that an interpretation may be
reasonable if it is only shared by a significant minority of
consumers. The commission's recent POM opinion, the footnote
swallows the standard. The most commission claims is the
advertisement convey challenges claims to at least a
significant minority of reasonable consumers.
The commission relied entirely on its own reading of the
advertising. When balancing the protection of a minority of
consumers against the interests of others who would like to
learn about emerging science, however, the need for extrinsic
evidence is acute. There is no reasonable way to strike the
balance without some sense of roughly how many consumers fall
into each group.
Moreover, it is essential to determine whether that
significant minority is greater than the 20 or 30 percent who
are likely to misunderstand any message. Good survey evidence
can address precisely that question. What is needed is a deeper
appreciation of the fact that consumers who correctly interpret
a message are harmed when the commission prohibits claims that
some misunderstand.
The commission's approach to ``up to'' claims is a case in
point. Although most reasonable consumers surely understand
that saving up to a certain amount is different from saving at
least that amount. The FTC issued warning letters asserting
that the two claims are exactly the same. An ``up to'' claim is
only allowed if all or almost all consumers experience that
result. That is a standard that suppresses valuable
information.
Second, the commission is requiring excessive amounts of
evidence to substantiate advertising claims. The core principle
of substantiation has always recognized the uncertainty
surrounding many claims and balanced the benefits of truthful
claims against the cost of false ones. Consider, for example,
the Kellogg's claim about the relationship between diets high
in fiber and the risk of cancer. If the claim is true, waiting
for the results of clinical trials would impose substantial
costs on consumers who would lose important information about
the likely relationship between fiber consumption and cancer
risk.
On the other hand, if the claim is false, the consequence
of consumers are only giving up a better tasting cereal or
paying a little bit more for a higher fiber product. The far
more serious mistake is to prohibit truthful claims.
The commission's recent cases reflect a move toward a more
rigid standard modeled on the drug approval process, requiring
two randomized clinical trials for claims about the
relationship between nutrients and disease. This standard is
excessive in most cases and likely to deprive consumers of
valuable, truthful information.
There are ways of learning about the world other than
clinical trials. There are, for example, no randomized trials
of parachutes, but few would jump out of an airplane without
one. Nor are there randomized trials about the adverse effects
of tobacco consumption.
Indeed, much of what we know about the relationship between
diet and disease is based on epidemiology, not randomized
trials.
The commission says nothing has changed because the
requirement for two clinicals is just fencing in really.
However, the reason the commission offers for this second test
is universally true. The second test might yield a different
result. As former Chairman Potofsky has written, advertising
regulations should seek reliable data, not abstract truth.
Knowing that precisely one clinical trial supports an important
health-related claim is valuable to consumers. The commission
should return to its traditional balancing test.
Second, the commission should restrict its privacy
enforcement actions to practices that cause real harm. There
may be subjective preferences that some consumers have to stop
practices that they think of as creepy. And those preferences
should be protected when they are expressed in the marketplace.
I think it is analogous to kosher where some people have a
preference that is very real and should be protected. But the
people who have that preference are the people who need to make
the choice. It shouldn't be the commission making the choice
for them or requiring all sellers to cater to the preferences
of a few consumers when others don't share that preference.
Anchoring privacy enforcement and harm is a way to do that,
and I think it is something the commission should retain.
Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Beales follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. Thank you very much. Mr. Crane, now you are
recognized for your 5 minutes.
STATEMENT OF DANIEL CRANE
Mr. Crane. Chairman Terry, Ranking Member Schakowsky, and
members of the subcommittee, thank you for this opportunity to
appear before you today. I am Daniel Crane of the University of
Michigan. My comments will concern the FTC's continuing and
original mandate to guard against unfair methods of
competition.
I wish to make three broad points. First, over the course
of its first 100 years, the FTC has not followed the original
congressional design, which contemplated that the commission
would be an expert, politically independent agency exercising
quasi-legislative and quasi-judicial functions.
Second, the FTC has nonetheless emerged as a successful law
enforcement agency. Third, the FTC's 100 birthday is an
opportune moment to consider options for modernizing the agency
in light of its actual functioning.
The FTC was a product of progressive era belief in
regulation by technocratic experts. In 1935, in upholding the
FTC's independence and the president's removal power, the
Supreme Court articulated the statutory features that justified
the commission's independence. The FTC was to be nonpartisan
and politically independent from other branches of government.
Its responsibilities were not executive but rather quasi-
judicial and quasi-legislative. The FTC was to be a uniquely
expert body. The original statutory design also contemplated
that the commission would collaborate with the Justice
Department in enforcing the anti-trust laws, for example, by
sitting as a chancellor in equity.
As a historical matter, almost none of this has worked out.
Though the commission may be politically independent from the
executive branch, social science research shows that it is
highly inclined to the will of Congress. This may create a
desirable separation of powers, but it does not create the kind
of pure political neutrality envisioned during the progressive
era. As competition capacity, the commission has not been a
rule-making authority almost at all. Indeed a 1989 study by the
American Bar Association suggested that it would be
inappropriate for the commission to have such a role.
The commission may in theory exercise an adjudicatory
function, but that too is largely illusory. First, the
commission more frequently brings anti-trust actions in court
than through internal adjudication. Second, when it does
adjudicate internally, it is questionable whether there is an
impartial adversarial contest.
Between 1983 and 2008, for example, the FTC staff won all
16 cases adjudicated by the commission, leaving the real
contest to happen in the court of appeals.
What about expertise? Yes, the FTC has considerable
expertise on economics and particular industries, but not
greater expertise in the justice department. The FTC is thus
expert but not uniquely expert compared to other governmental
bodies.
Finally the statutory provisions designed to encourage
collaboration between the FTC and Justice Department have been
almost entirely neglected. Instead of collaborating on
enforcements, the two agencies essentially allocate cases
depending on their experience with particular industries or
political factors.
In sum, the FTC's action behavior as an institution bears
little resemblance to the design that ostensibly justifies its
independence as an agency. This does not mean, however, that
the FTC is a failed institution. To the contrary, the FTC today
is largely an effective law enforcement agency, an agency that
enforces the anti-trust laws on essentially equal terms with
the anti-trust division. Although there would be considerable
sense in consolidating anti-trust enforcement in a single
agency, the political will for such a move is probably lacking.
It is therefore appropriate to focus on more modest reforms
that could improve the functioning of the agency in light of
what it actually is and does. Let me briefly propose four such
reforms.
First, as several commissioners have recently proposed, the
FTC should adopt guidelines to limit its powers to prosecute
unfair methods of competition that would not be already covered
by the Sherman or Clayton Acts. This is important to prevent
the FTC from having excessive discretion to make up competition
rules on the fly while serving an essentially prosecutorial
function.
Second, under existing case law, the FTC can obtain a
preliminary injunction against mergers in order to pursue
administrative action on a lower standard of proof than a
substantial likelihood of success on a merits criterion
applicable to the Justice Department. Given that both agencies
exercise essentially the same law enforcement function, there
is no reason for the FTC to enjoy an advantage that the Justice
Department does not.
Third, the two agencies should be encouraged to enter into
a formal public agreement allocating anti-trust enforcement
authority, which would enhance clarity and transparency in case
allocation. The agencies entered into such an agreement in 2002
but then rescinded it under pressure from Congress.
Fourth and finally, under the unique appellate review
statute in place since 1914, a large corporate defendant may
appeal a commission order to essentially any of the 12
appellate circuits that it chooses. This creates a serious
disadvantage for the FTC insofar as defendants routinely pick
the court of appeals with the most favorable law on the
relevant issue which the Supreme Court rarely reviews. The
statute could be amended to reduce this appellate forum
shopping. Thank you very much. I look forward to your
questions.
[The prepared statement of Mr. Crane follows:]
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Mr. Terry. Well timed. Mr. Manne, you are now recognized
for your 5 minutes.
STATEMENT OF GEOFFREY MANNE
Mr. Manne. Thank you, Chairman Terry, Ranking Member
Schakowsky, and members of the committee. Thanks for the
opportunity to testify today. The FTC does much very well.
Compared to other regulatory agencies, it is frankly a paragon
of restraint and economic analysis. And this has long been true
especially of its anti-trust enforcement disciplined by the
courts and internal practice.
Not so much so for the commission's ambiguous and somewhat
cavalier use of Section 5. The FTC's essential dilemma is
clear. Very often, the challenged practice could either harm or
help consumers or both. Everyone agrees that wrongly deterring
the helpful can be just as bad as failing to deter the harmful.
Indeed, sometimes it may be much worse.
So, principled restraint is key to ensuring the FTC
actually protects consumers. Restraint requires two things;
objective economic analysis and transparent decisions
reviewable by the courts. Both are increasingly lacking at the
FTC. Consider the recent Nielsen-Arbitron merger. The FTC
imposed structural conditions claiming the merger would lessen
competition in the market for national syndicated cross-
platform audience measurement services. You will be forgiven
for not knowing that market existed because it doesn't exist.
The majority presumed to predict the future business models and
technologies of these companies. They assumed the merger would
also reduce competition in this hypothetical future market.
That is an economic question.
As Commissioner Wright noted in his dissent, without
rigorous economics, non-economic considerations, intuition, and
policy preferences may guide enforcement. That will hardly
benefit consumers. Economics' fundamental lesson is humility,
how little we know about the future, indeed how little we
understand about markets at the present. Economics is a
powerful tool for understanding that, but it isn't perfect.
But increasingly, major policy decisions increasingly rest
on theoretical ideas or non-economic evidence about what
companies intended to do, not actual effects, or the economics
is missing entirely.
Perhaps Nielsen is in outlier. In its Sherman and Clayton
Act cases, the FTC and the staff usually do apply economic
reasoning and are appropriately humble. Interestingly, of
course, those cases often come or almost always come before
courts. Not so in pure Section 5 cases.
The term ``unfair methods of competition'' is, as
Commissioner Wright has put it, as broad or as narrow as the
majority of the commissioners believes it is. The commission
has issued no limiting principles unlike its two policy
statements on consumer protection. There is broad agreement
that such guidelines would be helpful, an overwhelming
agreement that the UMC, the Unfair Methods Competition, should
be limited at minimum to cases where there is consumer harm.
The chairman even seems to agree, and yet with two
proposals from sitting commissioners, the chairman continues to
resist. Her argument boil down to maximizing the FTC's
discretion. Excess discretion is the problem at the FTC. The
FTC has pushed the boundaries of the law through consent
agreements with essentially no judicial oversight. And the
problem is most acute in consumer protection.
First let me say that in consumer protection cases, the
large majority of them are uncontroversial and require no
methodological overhaul. Deception cases like fraud or placing
unauthorized charges are bills are usually straightforward, but
the FTC is increasingly dealing with more difficult cases and
increasingly it is using its unfairness authority and
stretching its deception authority in exercises of unchecked
and opaque discretion to determine when ambiguous conduct harms
consumers.
The recent Apple case highlights the problem. The FTC
concluded that Apple's design of its billing interface
insufficiently disclosed to iTunes users when their kids, not
Apple, might make charges. Apple left parents' accounts open to
make more purchases for a brief window to balance convenience
for all users with unauthorized charges by children.
The economic framework to decide the case correctly was
built right into the statute, but still it didn't make it into
the majority's decision. Section 5N says nothing is unfair
under the act if the harm it causes is outweighed by
countervailing benefits to consumers or to competition. So you
would expect an unfairness case against Apple to balance harms
and benefits. Instead the majority treats Apple's design
decisions like cramming and assumes there is no redeeming
benefit through its design.
But as any user of Apple products can attest, design is
everything. Apple faces real tradeoffs here about exactly how
and when to notify customers that they may be charging
themselves. The FTC simply dismissed the countervailing
benefits that the statute clearly requires it to weigh.
The same is true of the agency's privacy and data security
cases. It is not clear what is really best for consumers. Of
course, stolen data can harm consumers but so can spending too
much protecting against it or limiting otherwise desirable
product features.
The outcome of the Apple case was possible only because it
never went before a judge. It was just a settlement. The only
balancing the commission had to do was to convince Apple to
settle instead of litigate. That does not fulfill the
commission's statutory balancing obligation. The majority
pushed the law as far as it could without Apple baulking. Apple
just wanted the case to go away. Beyond a certain point, it
didn't care anymore how or whether the FTC justified its
decision. It is refreshing that Commissioner Wright dissented
in this case. It forced the majority to at least mount a
defense that was not embarrassing. But this is a much lower bar
than what the court would require.
Is there was any question at all that if more of these
cases were coming before a court, dissents like Commissioner
Wright's could become the blueprint for a court to potentially
overrule the majority. We would have better cases, better
dissents, and better argued majority opinions. I would stop
there. Thank you very much.
[The prepared statement of Mr. Manne follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[The attachment to Mr. Manne's testimony has been retained
in committee files and can be found athttp://docs.house.gov/
meetings/if/if17/20140228/101812/hhrg-113-if17-wstate-manneg-
20140228-sd002.pdf.]
Mr. Terry. Thank you very much. Mr. Yoo, you are recognized
for your 5 minutes.
STATEMENT OF CHRISTOPHER YOO
Mr. Yoo. I am grateful for the opportunity to testify at
this hearing, exploring the new challenges confronting the
Federal Trade Commission as it enters its second century. The
FTC now operates in a context that bears little resemblance to
the world that existed when it was first created. I would like
to focus my remarks on two of the most significant changes:
globalization and the growing importance of technology.
Focusing first on globalization, when Congress created the
FTC in 1914, the vast majority of the economy consisted of
local markets. Goods traveled only a short distance and rarely
crossed state lines. Since that time, commerce has become
increasingly national and international in focus. U.S.
companies routinely operate in a wide range of countries, and
business practices that once affected only domestic economies
now have ramifications that are felt around the globe.
The increasing globalization of the economy places new
demands on agencies charged with enforcing anti-trust laws and
consumer protection. Not only must they investigate conduct
that spans multiple jurisdictions, the fact that multiple
regulatory authorities have jurisdiction over the same matter
can force companies to incur duplicative compliance costs. To
the extent that substantive standards differ, companies faced
with inconsistent mandates may be forced to reduce their
practices to the least common denominator or forsake doing
business in a country altogether. As a result, regulatory and
harmonization has now emerged as a key element of trade policy.
Toward these ends, the FTC has developed increasingly close
relationships with other competition authorities both through
bilateral cooperation and through a global organization of
competition policy authorities known as the International
Competition Network. Such efforts help coordinate and
standardize the work in competition authorities and will
continue to grow in importance in the future.
The other big change is the increasingly central role that
technology plays in the modern economy. Innovation has emerged
as a key driver of economic growth. Products and services have
become increasingly sophisticated in their own right and have
become part of a larger and more tightly integrated economic
system. Technological change can also be very disruptive,
altering old patterns of doing business and creating new
business models and market-leading companies in the process.
Companies who find themselves disadvantaged by technological
change may be tempted to look to the government for relief.
The growing importance of technology will require the FTC
to expand its institutional capabilities. One key step in that
direction has been the creation of the office of Chief
Technologist. This position is only 4 years old, and the agency
is still exploring how it can best contribute to the FTC's
mission. In addition, the FTC's usual practice is to require
that every major decision be accompanied by an analysis by the
Bureau of Economics. The agency has not always adhered to this
practice in recent years and would be well advised to make sure
to follow this important procedural guideline in the future in
every major case.
The FTC will also have to determine what substantive legal
principles it will apply to high tech industries. The problem
is that our current understanding of innovation remains nascent
and largely unsettled. This creates the risk that enforcement
authorities will apply anti-trust law without a clear goal or
with a multitude of goals in mind. And the past has taught us
that unless anti-trust laws are applied with a clear focus on
consumer welfare, they may be abused to protect specific
competitors instead of consumers.
Under these circumstances, the FTC must adhere to the
principles that have emerged to guide its conduct since its
founding in 1914. These principles require that all decisions
be based on a solid empirical foundation, not speculation, and
must protect consumers, not competitors. In particular, the
agency should make sure that it does not embroil itself in
routine disagreements over price that are everyday occurrences
in any market-based economy. Indeed, both the Supreme Court and
enforcement authorities have long recognized that anti-trust
agencies are institutionally ill-suited to overseeing prices to
make sure they remain reasonable.
Consider, for example the FTC's growing interest in
standard essential patents. The debate presumes that patents
are being asserted in ways that harm consumers without a clear
understanding of how government intervention could also harm
consumers by discouraging innovation. Moreover the typical
remedy mandates uniform rates despite the fact that economic
theory shows that innovation is best promoted when innovators
are allowed flexibility in the business models they pursue.
Instead of directly overseeing the outcomes of negotiations,
the FTC already has ample authority to preserve the integrity
of standard-setting processes that are being abused in ways
that harm consumers.
Finally, some are calling for the FTC to exercise the
authority granted by Section 5 of the FTC Act to police unfair
methods of competition in ways that go beyond consumer welfare.
The past has taught us that attempting to use the anti-trust
laws to promote goals other than consumer welfare opens the
door to a wide range of intrusive government intervention that
often harm consumers.
In short, the lesson of the past 100 years is that the FTC
would be well served to continue to look to consumer welfare as
its guide. Any other approach opens the door to governmental
overreach and to allowing the law to be abused to benefit
individual competitors instead of consumers.
[The prepared statement Mr. Yoo follows:]
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Mr. Terry. Thank you very much. Mr. Lande, you are now
recognized for 5 minutes.
STATEMENT OF ROBERT LANDE
Mr. Lande. Chairman Terry, Ranking Member Schakowsky, and
members of the subcommittee----
Mr. Terry. Is your microphone on?
Mr. Lande. No.
Mr. Terry. And why don't you pull it a little closer too?
Yes, perfect.
Mr. Lande. Sorry about that. Chairman Terry, Ranking Member
Schakowsky, and members of the subcommittee, I am truly honored
to appear here today. The subject of my remarks will be the
overall scope of Section 5 of the FTC Act. I will discuss how
Congress intended this law to be interpreted in a broad and
flexible way. I will also discuss why any Section 5 anti-trust
guidelines should center around the goal of protecting consumer
choice rather than increasing economic efficiency.
As all the commissioners agree, Congress intended the FTC
Act to include more than just Sherman Act violations. The
legislative history makes it clear Section 5 was also intended
to prohibit incipient violations of the Sherman Act and conduct
violating the policies behind the Sherman Act. The Supreme
Court has accepted this interpretation.
There are a number of specific ways the commission could
carry out this congressional mandate that would be in the
public interest. I will briefly discuss one example, and there
are others in my written testimony.
Tying exclusive dealing violations that violate the Sherman
Act require a minimum amount of market power. I believe the
market power requirements should be relaxed whenever the case
involves a defendant with a significantly larger market share
than that of its victims. In these incipient tying or exclusive
dealing situations, incumbents may be able to significantly
disadvantage smaller competitors and potential entrants because
of their relatively larger market power.
Suppose, for example, a company wants to introduce a new
brand of super premium ice cream. Suppose an existing seller of
super premium ice cream has 30 percent of this market and also
30 percent of the other types of ice cream markets. Suppose the
incumbent firm tells stores that they have to choose between
the established firm's products and the newcomer's products.
Suppose the store agrees to exclude the newcomer's products.
These facts would be very unlikely to constitute a Sherman Act
violation. However if the incumbent's exclusionary strategy
succeeds, consumer choice in terms of varieties of ice cream on
the market could decrease substantially, and consumer prices
could increase substantially. If so, this conduct should
violate Section 5 as an incipient exclusive dealing or tying
arrangement.
Now, last year Commissioner Wright proposed that the
commission adopt Section 5 anti-trust guidelines. Unfortunately
this proposal contains a fatal flaw. It directly contradicts
congressional intent. This is because Section 5 prohibits
unfair methods of competition, a prohibition that, as I noted
earlier, Congress intended to be quite broad. The proposed
guidelines, however, would effectively eliminate the term
``unfair method of competition'' and substitute for it a very
different narrow term ``inefficient methods of competition.''
Contrary to what Congress intended, these guidelines would
reach less anti-competitive conduct than the Sherman Act. Its
proposed test of illegality is whether a practice ``generates
harm to competition as understood by the traditional anti-trust
laws and generates no cognizable efficiencies.'' Now, this test
is contrary to current law and narrower than current law.
The prevailing test balances of practices efficiency and
market power effects under a rule of reason. The current law
does not immunize conduct at least to a significant amount of
monopoly power simple because it results in cognizable
efficiency. Thus the proposed guideline would not apply to
conduct that currently violates the Sherman Act, the opposite
of the expansive law that Congress intended.
Now, Commissioner Wright certainly is correct that it would
be desirable if the FTC issues Section 5 anti-trust guidelines.
However bad guidelines would be worse than no guidelines. By
analogy, years ago, the United States wanted to negotiate arms
control agreements with the Soviet Union. A good arms control
agreement would have had many benefits. However, an agreement
that would have forced us unilaterally to disarm would have
been much worse than no agreement at all.
Similarly the suggested guidelines effectively would disarm
the Federal Trade Commission. Now, the commission instead
should formulate sound Section 5 guidelines that properly
reflect congressional intent. Now, I believe this can be
accomplished if the guidelines were written to protect consumer
choice, not economic efficiency. My written testimony explains
how anti-trust guidelines built in terms of the consumer choice
framework would be both faithful to congressional intent and
would enhance predictability for business. I welcome your
questions.
[The prepared statement of Mr. Lande follows:]
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Mr. Terry. Thank you, and, Mr. Ohm, you are now recognized
for your 5 minutes.
STATEMENT OF PAUL OHM
Mr. Ohm. Thank you, Chairman Terry, Ranking Member
Schakowsky, and members of the subcommittee. I am here to talk
today about consumer protection and in particular online
privacy and data security. My comments reflect not only my
scholarship but also the 10 months I spent as senior policy
advisor in the office of policy planning at the Federal Trade
Commission from 2012 to 2013.
I have three broad points I would like to make in my short
amount of time. Number one, we should understand that there is
a tendency within debates about the FTC to focus on a
hypothetical FTC, one that does not reflect the FTC as it
actually exists and operates. The FTC that really exists is one
that is informed, and recent scholarship really exposes this,
through a theory known as privacy on the ground as opposed to
privacy on the books.
The idea is privacy is a very complex, nuanced, textured,
contextual thing. We shouldn't want an agency that once and for
all declares the rules of the game. Instead we should want
something that is more tenable to technological innovation and
dynamism. And that is exactly what we have through this
structure set up by Congress and the way it has been executed
by the FTC.
An important component of this is documented in the
scholarship as a large cadre of privacy professionals, lawyers
here in D.C. and around the country, who read the FTC's
pronouncements as a kind of common law of privacy law. This
belies the notion that this is this opaque, progressive,
envelope-pushing agency that never reveals the rules of the
road for privacy. Quite the contrary, the privacy rules are
something that are studied, understood, and companies are made
to order their activities accordingly.
Number two, and I am sorry to use a very technical, legal
scholarship term, if it ain't broke, don't fix it. The Federal
Trade Commission, I left my year very, very impressed by the
efficiency and the way that this agency executes its privacy
mission. And I would urge Congress to help the commission
maintain the status quo, the tools and the resources it needs
to do the job well. By I can't resist giving you a few
recommendations for small fixes that you could make to Section
5 and other parts of the FTC authorization to help them do
their job better.
Number one, as I am sure you are all aware, there is
ongoing litigation against Windom in data security, and as I
say in my written testimony, there isn't a defender of Windom
out there that tries to defend the reasonableness of the data
security practices in that case. Quite the contrary, there are
some very, very creative jurisdictional arguments, to my mind,
far too creative jurisdictional arguments, that I certainly
hope the federal courts will decline.
But in the meantime, all of this activity and all of this
aggressive defense, which of course is the defendant's right,
has cast something of a cloud over the FTC's ongoing ability to
bring data security cases under Section 5. And I don't think I
need to tell the members of the subcommittee, this is a very
bad time to be taking away one of the few tools we have to
incentivize good data security. I think every American citizen
was impacted by some of the data breaches that occurred over
the holidays.
Companies are not living up to the standards and
expectations we have of them in securing our personal and
sensitive data. And they are not living up to these
expectations even though the FTC is on the beat. How much worse
will it be if the FTC's jurisdiction over data security is
called into question? And I would ask Congress to clarify what
is already in the statute, that data security falls within
Section 5.
And last but not least, number three, I would argue that
the definition of harm as it is currently defined in the word
unfairness in Section 5, could use a refresh. It was last
defined by the FTC in 1980. Congress memorialized this
understanding in the statute in 1994. And at that time, two
statements were made about harm that I think do not reflect the
way the Internet has changed the nature of privacy harm.
Number one, the statement says--and it is laudable that the
statement is still so relevant 23 years later. It says harm is
almost always monetary, and yet we have case after case
demonstrating nonmonetary yet significant harms from privacy
violations on the Internet. I would be happy to elaborate
during questions. And two, the statement says that harm under
unfairness in Section 5 is rarely merely emotional, injurious
primarily to emotional standards.
Again we have seen in many cases, for example, the FTC's
case in Designerware that harms to emotion may be quite
concrete, quite substantial, and the kind of thing that an
effective law enforcement agency like the FTC should have the
jurisdiction to bring cases against. Thank you very much for
having me.
[The prepared statement of Mr. Ohm follows:]
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Mr. Terry. Thank you. All well done. Thank you very much.
Very informative. Now it is our opportunity on this panel to
ask you questions, and I think one of the areas of great
discussion among those of us here who have never been on the
inside of the FTC but we look at the unfairness issue and
whether it appears so nebulous to us that it can morph into
anything you want it to be, and that seems to be what is
occurring now.
So I want to ask each and every one of you what is your
view and I know this is an unfair question in the sense that
you get about a minute to answer it. But what is your view? Is
the FTC expanding the use of the term unfairness? Are they
changing it? Do you have any specific recommendations to us on
a way to make it more consistent? Mr. Beales, we will start
with you.
Mr. Beales. I think that the definition that Congress wrote
into the law is a good one. It focuses on essentially a cost/
benefit test. And the issue is how good a job does the
commission do in conducting that kind of cost/benefit analysis
that is what the statute requires. But that is a conduct issue.
That is how do you go about using the standard as opposed to
what is the standard.
I think there is no question that the FTC has expanded its
use of unfairness. There was a long period, shortly after the
unfairness policy statement, where the commission was extremely
reluctant to use unfairness for anything, but I think it is a
useful legal theory. It is one that in many cases focuses much
more clearly on the right questions, and I think probably data
security is one of those where the issue is really what are the
costs, what are the benefits.
Mr. Crane. So, Chairman Terry, you are quite right that the
word unfair is quite nebulous and open-ended, and the question
is unfair as to whom. And I would suggest that the right answer
to that question is unfair as to consumers. And as Professor
Yoo suggested, one of the problems is that unfairness could be
turned into a protection for less efficient competitors who
simply cannot keep up because they are not as efficient. So I
would suggest that any guidelines that the commission would
issue on the meaning of Section 5 would make clear that a
minimum requirement for enforcement of Section 5 would be
unfairness to the welfare of consumers.
Mr. Terry. Thank you. Mr. Manne.
Mr. Manne. I think the statutory language is good, as I
suggested. And I think the balancing test that it contemplates
is appropriate. The problem, as I think Howard suggested, is in
its application. And there is at least two problems here. One
is we don't actually know for sure what the FTC is doing
because the vast majority if not the entirety with two minor
exceptions frankly of the cases where they have interpreted
Section 5, in particular in privacy and data security cases,
arise in dissent decrees with very little analysis by the
commission.
To call this common law is a little bit crazy. There is no
way you could discern clear principles, and let alone clear
principles that might have evolved over time from what the
commission gives us in its dissent decrees. So if they are
actually applying the statute correctly, we don't know.
But I think there is evidence, as the Apple case suggests,
that they are not applying it correctly anyway. They seem to
have somewhat abandoned or at least truncated collapsed into a
reasonableness test the entirety of the language in the
statute. And that may indeed in the background be analogous to
what the statute requires, but I am skeptical.
There is very little clear application of the specific
facts of any specific case to, sorry, the language of the
statute to the specific facts of each specific case. The
dissent decrees look the same. The remedies are the same, and
that can't be right. It can't be that every company that is
addressed by the FTC, no how big they are or what the problems
are, deserves exactly the same remedy and exactly the same 20-
year dissent decree.
Mr. Terry. Right, Mr. Yoo.
Mr. Yoo. We actually have a lot of studies of other
agencies who have applied similarly nebulous mandates, and what
they find is that even an attempt to distill common law
principles from them have revealed that the agency behaves in
an extremely unpredictable way, particularly under mandates
such as public interest mandates and unfairness mandates.
Attempts to distill from them a consistent point of view has
failed.
And what is interesting is when you have multi-factor
balancing tests where you are doing multiple things, the agency
can justify almost any decision it wants to make. Now, the FTC
actually historically solved this by focusing on consumer
welfare. By disciplining itself under the influence of the
courts to actually focus in a clear sort of way.
The problem is we don't always know what exactly benefits
consumers. I will give you a couple easy examples. We are often
suspicious of privacy and Internet companies who take personal
information. There is research by Catherine Tarkenton at MIT
that suggests that the ability to target ads allows Internet
companies to generate 65 percent more revenue. So the reality
is you are giving up a certain amount of privacy, but because
the companies get more revenue, they are able to provide
services that actually may be creating benefits that have to be
taken into account at any balance.
And what you will discover is you will see fights right now
in different spaces about patents about who should be paying
how much. The result is there is we are seeing that in fact
consumers benefit tremendously by devices versus services, and
that in fact there is an allocation that is very ambiguous
about how those go.
The last point I would like to make is to reinforce a point
that Geoff Manne made about use and consent decrees.
Technically those aren't law, and even worse they are often
done by the FTC in merger contexts where the issue is not the
particular privacy or competitive practices at hand, but do you
want the merger and are you willing to give up other things for
it. And the agency can use its authority, the fact that they
have the merging parties over a barrel to make them address
issues that aren't actually germane to the merger.
Mr. Terry. That is a concern. Mr. Lande?
Mr. Lande. I agree with Professor Crane that the unfairness
jurisdiction should not be used to protect competitors. I
certainly agree it should protect consumer welfare. The problem
is that is an ambiguous term. People define that differently.
Many people define that to me as nothing more than economic
efficiency, whereas I think consumer welfare should mean
consumer choice, that is, worrying about the significant
choices on the market.
That would actually have three components. In addition to
an efficiency component, it would have a concern with any
wealth transferred from consumers to firms with market power or
transferred from purchasers to a fraudulent firm, and it would
also have a tremendous concern with non-price competition as
Professor Ohm talked about earlier.
Mr. Ohm. So the answer is yes, I think the FTC is using its
unfairness capabilities and authorizations in slightly
different ways. But I think that is not because the FTC is
pushing the boundaries on what it does. I think it is a
testament to the changing nature of harm on the Internet. And
so with all of the wonderful innovations that the Internet
brings, it gives those innovations to people who would do
harmful things. You know, the news headlines are replete with
examples of this. As you all know, a few months ago, a father
received in the mail a flier addressed to daughter killed in
car crash, right.
These are things that were not possible before the rise of
the data collection, the big data techniques that are now
present, and we should expect that as harm begins to
proliferate, expand, and change the nature, that authorization
such as unfairness which after all reside on theories of harm
would expand as well.
Mr. Terry. All right, thank you very much. Mr. McNerney,
you are recognized for--Ms. Schakowsky is recognized for 5
minutes.
Ms. Schakowsky. Thank you, Mr. Chairman. I wanted to ask
Professor Ohm a couple of questions first. Currently the FTC
brings legal actions against companies that fail to employ
reasonable data security under Section 5, Unfair and Deceptive
Practice Authority. However, there is no comprehensive federal
law governing the collection or protection of consumer
information. So in your testimony, you recommended that
Congress consider making explicit the FTC's data security
enforcement authority which you state is ``already clearly
within the broad strictures of Section 5.'' So could you
explain that recommendation about clarifying----
Mr. Ohm. Again this a commentary on the cloud that has been
cast by litigation like Windham and Labbe MD where the FTC has
to devote some of its scarce resources to defending theories
that frankly I find a little too creative. And the federal
courts, as is their right, is taking a very, very careful look
at this. Congress could help us have a clearer data security
mandate by just clarifying----
Ms. Schakowsky. So maybe we could talk to you more clearly
about what language might be----
Mr. Ohm. Yes, I would appreciate it.
Ms. Schakowsky. OK, in order to implement the Children's
Online Privacy Protection Act, Congress explicitly granted the
FTC authority to promulgate regulations using the
Administrative Procedures Act. Outside of such authority
specifically granted by statute in this case, the FTC's
authority to promulgate rules regarding privacy and data
security is severely limited by what I believe to be the unduly
burdensome Magnus and Moss rule-making procedure.
So, Professor Ohm, are there tools that the FTC currently
does not have that would improve its data security enforcement
or deterrent capabilities such as APA rule making authority,
enhanceable penalties authority, or jurisdiction over nonprofit
entities like universities and hospital?
Mr. Ohm. Absolutely. I want to be clear. I think that in
data security in particular, we are better off with an evolving
standard like we have right now. I don't think any of us should
want the FTC to spend a lot of time promulgating data security
rules that will no longer be accurate the day that they are
enacted. It is such a rapidly moving target.
But on the other hand, enhanced APA authorities absolutely
would be greatly appreciated and bring a lot more certainly to
all as well as a higher ability to bring civil penalties.
Clearly the deterrent effect message is not getting across to
some companies. Providing the FTC with a larger stick in some
of these cases would be a good idea.
Ms. Schakowsky. And it seems to me and then having to do it
case-by-case like congressional authority, I think, is really
cumbersome.
Mr. Ohm. Absolutely yes. A broader set of authorities would
be very useful for the mission of the FTC.
Ms. Schakowsky. And finally would a federal breach
notification law that gives FTC explicit authority to bring
actions against companies for failing to timely notify
consumers and law enforcement officials of a breach improve the
FTC's ability to protect consumers? And what do you believe
would be the utility of such a measure alone compared to a
comprehensive bill that also included baseline data security
standards?
Mr. Ohm. I think we need both. We should celebrate the
laboratory of federalism that created the breach notification
in the beginning. But now with 48 conflicting standards, it is
probably time to federalize and pre-empt those laws and have
one uniform standard with the FTC playing a role. Baseline data
privacy legislation is an excellent idea, and I think the White
House's White Paper that laid out some of the principles, I
might go into that, is a great place to start.
Ms. Schakowsky. Thank you. And I missed the answers to all
the questions. I think I left. Mr. Lande, the question about
the anti-competitive conduct and Section 5, I wonder if you
could maybe repeat or expand on what you said while I wasn't
here.
Mr. Lande. Sure. The question was what is unfairness
authority, what I think unfairness authority is. And I started
by agreeing with Professor Crane that it is not to protect
competitors. We are all in favor of consumer welfare. The
problem is we often disagree about what consumer welfare is,
and many people when they say they want to help consumer
welfare, all they mean is they want to enhance economic
efficiency, which often has very little to do with the welfare
of real consumers, at least in the short run.
For me, I believe that unfairness really translates to the
consumer choice framework. That is ensuring that the choices
that consumers want are, in fact, on the marketplace, and
nothing artificial is done to remove those choices from the
marketplace. And if you unbundle that, it really has three
components. First, a concern with economic efficiency, second,
a concern with wealth that might be transferred from consumers
to firms with market power or from consumers to firms engaging
in fraud, a concern with that transfer or distributive effect,
and then finally a heightened concern with non-price
competition which Professor Ohm had talked about earlier.
Ms. Schakowsky. And I yield back.
Mr. Terry. Thank you. You may have heard the bells go off
or buzzer and we have time, I think, to get through everybody.
But if we don't, don't worry. We are going to adjourn, not
recess. So, Mrs. Blackburn, you are recognized for 5 minutes.
Mrs. Blackburn. Thank you, Mr. Chairman, and what I am
going to do is submit most of my questions to you. But I am
going to condense this a little bit. As you have heard from the
Chairman and from Ms. Schakowsky, we are all involved and
concerned about privacy and data security. And we have had the
working group. We have put a good bit of attention into this.
As we look at privacy legislation and data security
legislation, Mr. Beales, I am going to start with you and go
down the line. Number one, these are the questions I want you
all to answer for me. Is it appropriate that the FTC retain
privacy jurisdiction? Because we have the what takes place in
the physical world and the online world. Number two, are they
effective in their approach? Number three, should more of their
attention be placed on enforcement and education and less on
regulation? And the fourth piece I want to come from you all is
what would you like to see in a light-touch data security and
privacy bill? Mr. Beales.
Mr. Beales. Well, to try to address your specific
questions, I think it is appropriate that the FTC retains
privacy jurisdiction. I think they have been mostly effective
in that area. They have been more effective when they have been
focused on things that really are harms. It was the
consequences-based approach that led, for example, to the do-
not-call list that I think was a very successful answer,
intervention to address something that really was a privacy
problem and not an isolate example or a speculative case.
I think it should be enforcement-based, not rule-based.
That is a more sensible way to respond to the wide variety and
rapidly changing circumstances that we see in the privacy
environment. I am not sure beyond data security, and I think
the notion of civil penalties for data security breaches or
inadequate security procedures is one that has merit. Beyond
that, I am not convinced that a privacy law would make things
better, and there would be considerable risk of chilling really
useful, innovative ideas that nobody has even thought of yet.
I think 15 years ago when Congress started talking about
this, no one would have imagined that billions of people want
to post the details of their personal life for everybody to
see. But that is what Facebook is.
Mrs. Blackburn. OK.
Mr. Beales. And it has created huge value. If we tried to
regulate at the beginning, we may well have precluded it by
mistake.
Mrs. Blackburn. Thank you. Mr. Crane?
Mr. Crane. So my expertise is on the competition side, so I
think I should defer to other members of the panel.
Mrs. Blackburn. Sounds good. Mr. Manne?
Mr. Manne. I will use his time. So I think the core problem
here is, as I have been suggesting, when it comes to things
like privacy, when it comes to data security, contrary to what
Paul said, you know, maximum privacy or maximum data security
are not optimal for anyone. These are things, unlike say low
prices, that have both costs and benefits. And what is really
crucial is getting the appropriate balance, is understanding
how not to deter valuable things while yet still deterring
harmful abuses of information.
And I don't think that the FTC is doing a very good of this
yet, or if they are, they are not telling us how they are
getting there. And it is essential that we know so companies
can know how to respond, how to anticipate what may or may not
be a problem and so that Congress and the courts can ensure
that the FTC is doing its job.
I am wary of more enforcement particularly in the privacy
realm where honestly no one has really demonstrated that there
is a significant problem. You know, data security is something
else, right. Breaches where information is stolen, I get it.
Recently while the FTC was holding a hearing on privacy issues
and the Internet of things doesn't even exist yet, right. It is
not even really a problem. $27 million of bitcoin is being
stolen because of a data breach.
Mrs. Blackburn. My time has expired.
Mr. Terry. So we will just assume that will be a question
submitted to the three left. Mr. McNerney, you are recognized
for your 5 minutes. Mr. Bilirakis, do you have questions? You
will be after Mr. McNerney.
Mr. McNerney. Thank you, Mr. Chairman. Mr. Ohm, I would
like to know if you think it is possible to develop security,
data security standards either in the FTC or through the
private standards development process that would be applicable
to sectors of the industry or uniformly throughout the
industry.
Mr. Ohm. I am skeptical that you can have any meaningfully
detailed data security standard that applies to all industries.
However, if you tackle this on a sector-by-sector basis, I
think you absolutely could. I think the key is that you need to
focus on true compliance. You need to focus on things like
industry standards and reasonableness as opposed to a kind of
check-the-box mentality. But I have also witnessed how efforts
of Congress to bring about cyber-security legislation have not
gone so well. I absolutely think that trying to find some sort
of forcing mechanism to bring companies together to talk about
data security standards is a wonderful idea.
Mr. McNerney. Thank you. Mr. Yoo, you stressed that the FTC
should ensure it focuses on protecting consumers at all times.
Do you think the agency has the safeguards in place to ensure
that consumer protection comes first?
Mr. Yoo. They have the safeguards in place should they
choose to use them, and the things that the agency has
developed over the last century, a lot of internal processes
and substantive guidelines, makes sure that they place
consumers at the forefront.
But there are, I would put a couple cautionary notes. So
there is a tendency, for example, in data security. People are
talking about comprehensive legislation. That tends to lead to
inflexible rules, and so you see there is a tension in what
people are saying or the flexibility that people need at the
same time, but the need for umbrella legislation----
Mr. McNerney. So the flexibility should be with the
commission?
Mr. Yoo. Well, to an extent, but the problem that they
should have is what I would say is two things. One is if you
end up with that world, you have what we have in Europe which
is inflexible rules and no enforcement action whatsoever, which
is sort of the worst of all possible worlds.
The model that I would think is what the FTC did with
privacy policies is they brought people together and instead of
issuing rules, they allowed industries to get into a discussion
and actually formulate new policies, which I think were much
more beneficial.
Another problem with it, if you just go about it through
enforcement, there is a hindsight problem, which if there is
always more you can do. But after a problem has happened, you
will say well of course you didn't do enough. And in fact,
companies have to make the decisions before hand, not
afterwards. And so I think by bringing companies together to
talk about best practices, creating a forum, will be a much
more effective than even through enforcement action.
Mr. McNerney. Thank you. I have other questions, but I
think I am going to yield so that Mr. Bilirakis can----
Mr. Terry. All right, thank you since there are two minutes
left in the vote. Mr. Bilirakis.
Mr. Bilirakis. Thank you so very much. I appreciate it, and
I will go as quick as I possibly can. And I will submit the
other questions as well, but I have a couple here. The FTC--and
this is for the panel. The FTC has a responsibility to help
provide consumer protections by ensuring that up-to-date
information regarding scams and complaints are available to
consumers.
However the GAO has identified a number of instances in
which states felt frustrated with a lack of support from
federal officials in helping to combat fraud against the senior
populations. And the question is do you believe the FTC
currently has the ability to help facilitate this effort? Can
you discuss what impediments prevent greater support from
federal officials to increase cooperation with state
authorities in order to protect seniors from scams and abuses?
And how can the FTC help better protect seniors within its
current budget? And for the panel, whoever would like to start.
Mr. Ohm. I am happy to chime in. I don't know the details,
I apologize, of the GAO report specifically, but I do know from
my time at the FTC that focus on both state cooperation and
vulnerable populations including senior populations are at the
highest levels of priority per the current chairwoman, her
predecessor, the chairman. I have no doubt that they will work
within their resources to do exactly what you are talking about
and to enhance exactly what you are talking about. More
resources, of course, would probably be appreciated in this
vein as well.
Mr. Yoo. The problem is related to the globalization
problem I talked about before. State authorities have trouble
reaching conduct that spans multiple states. They face
enterprises that have much broader horizons, and that in fact
they are in a very difficult position. The FTC is absolutely,
just as they are cooperating with other authorities, can bring
people together in ways I think are extremely constructive.
The interesting thing, there is an ambivalence about
federal involvement personified by the do not call initiative.
That was initiated by state PUCs. It was the best headline
states PUCs had seen in decades, and then they federalized it.
And they were in fact, state, it is a very delicate
relationship you have that state authorities want help in an
era of declining state revenue. That is very, very important.
On the other hand, they want to make sure that the federal
doesn't actually displace the enforcement authority of the
states. Otherwise, the political benefit doesn't go to them.
And so there is a very strange dance organizations like the FTC
have to play.
Mr. Beales. I think the FTC has, I mean certainly in the
time that I was there, there was a very structured attempt to
share complaint information in particular with state
enforcement authorities. There is-the commission's complaint
database is accessible to other law enforcement agencies who
can join and get the same access that the commission staff has
to those complaints essentially. And I am also not familiar
with the GAO report as to, you know, as to what the particular
issue, but whether they are complaints about problems for the
elderly or anybody else, I mean there is or was a complaint
sharing mechanism that worked quite well and led to a great
deal of cooperation.
Mr. Yoo. I would just say quickly as I was starting to
answer Mrs. Blackburn's question, resource allocation is
important and something that I think, you know, Congress and
everyone else should be looking at, ensuring that indeed the
FTC is putting its resources where the low-hanging fruit is,
where there are obvious problems.
I don't know for sure. Again, I am not familiar with the
GAO report, I don't know that this is one of them. But if it
is, then I would like to see more resources there instead of
things like, as I was suggesting, you know, an Internet of
things, workshop to discuss potential possible privacy harms
that haven't really materialized and may not ever. You are
talking about very concrete sort of harms, and that is where
they should be directing their attention.
Mr. Bilirakis. Thank you very much, Mr. Chairman, and I
would like to follow up with you specifically on the GAO report
and give you some specific examples. Appreciate it very much. I
yield back, Mr. Chairman.
Mr. Terry. Thank you, and I want to thank all of our
witnesses for participating today. We anticipated at least a
good, solid two hours, but sometimes on Fridays, things speed
up for some reason. I just don't get it, and today was one of
those days. But I think we did a good job of getting your
insights on the record, and it is really appreciated. As
mentioned, we have the opportunity to submit questions, written
questions to you. We usually leave that open for a couple of
weeks for our staff to be able to help us with that and submit
those. And we give you a couple of weeks to reply. Would really
appreciate it. Again thank you for your time and your
testimony, and we are adjourned.
[Whereupon, at 10:47 a.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
The prepared statement of Hon. Henry A. Waxman
Today's hearing continues this Subcommittee's discussion on
the important work of the Federal Trade Commission.
The FTC is required to prevent business practices that are
anticompetitive and those that are deceptive or unfair to
consumers. The responsibilities given to the FTC are broad-and
rightly so, because our country needs an agency that can
address, with flexibility, a wide variety of commercial conduct
in order to safeguard consumers in the marketplace.
For the last 100 years, the FTC has been utilizing the FTC
Act and other federal antitrust and consumer protection laws to
conduct investigations, administrative proceedings, and
judicial enforcement of commercial behavior that may violate
the law.
The Bureau of Competition promotes vigorous competition and
ample consumer choice by preventing anticompetitive mergers and
other anticompetitive business practices in the marketplace. I
am particularly glad to see the FTC closely scrutinizing
potentially anticompetitive conduct in health care markets -
involving hospitals, pharmacies, medical device and
pharmaceutical manufacturers, and others.
The Bureau of Consumer Protection promotes fair and
transparent business practices by preventing scams, frauds, and
other unfair or deceptive practices. While such practices can
occur in any industry, the FTC is perhaps best known for its
work with Do Not Call, which our constituents benefit from
every day.
Today I would like to highlight the FTC's work on privacy
and data security. No comprehensive federal law governs the
collection, use, dissemination, or security of consumer data.
This makes the FTC is the principal ally of consumers in
ensuring that companies employ reasonable data security
measures for personal information and uphold their privacy
promises.
In looking forward to the Federal Trade Commission's next
chapter, our message should be more than: "Keep up the good
work." As it enters its second century, the Commission must not
be reluctant to adapt to changing markets, technologies, and
consumer threats. It must apply its existing authorities in new
ways and assume new roles, if necessary to preserve competitive
markets, consumer choice, and fair and transparent business
practices.
Congress must be an active partner with the FTC. We can
start by encouraging the Commission to assert its Section 5
authority to challenge anticompetitive conduct, in whatever
form it may take, and allow the FTC oversight over insurance,
or, at a minimum, the ability to study insurance.
In addition, we should enact comprehensive privacy and data
security laws that establish baseline standards of protection
for consumer data and strengthen the FTC's enforcement
authority. Furthermore, we should provide the agency with the
tools it needs to operate in the 21st century, in the form of
additional resources, general APA rulemaking authority, greater
authority to assess civil penalties, and enhanced jurisdiction
over non-profits and common carriers.
I am pleased to welcome the distinguished panel of
professors testifying before us today. I encourage my
colleagues to support those recommendations that will enhance,
not diminish, the ability of the FTC to protect consumers from
anticompetitive, unfair, or deceptive conduct.
Thank you.
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