[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]




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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

                              ----------                              
                                                                   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

                              ----------                              


                       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:]
    
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    [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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